DRAFT: SNLH 7 November 2016

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CASE STUDY

BLUEPRINT OF A POWER PROJECT

Omnia Energy Company Limited

MODEL ANSWERS

SESSION 1: EPC AND FINANCING

Part A: Construction

We need to engage with potential contractors for the construction of the project as soon as

possible. We have some ideas of who we might approach given the projects that we have worked

on before. Stultus has also worked on a couple of infrastructure projects in Glorinya so the team

there has some views on which contractors might work well in the area. However, we have not

yet decided which contracting model would be best suited for the construction phase of this

project.

Our aim is to get started on construction as soon as possible so we want any tendering process

to be quick and smooth. We are also concerned about the allocation of risk and we want to use

a model which puts us in a strong position if there are significant delays with construction. Please

could you prepare a memorandum giving us an outline of the different options we might pursue

and possible advantages and disadvantages of each?

The big picture:

It will be worth explaining to Omnia in general terms at the outset that the model of construction

for a project of this kind can be approached in many different ways; for example, the project

company could use a single turn-key contract that addresses all aspects of the project or a raft of

individual contracts which address different aspects and which are entered into with different sub-

contractors. If there are multiple contracts, the clear risk is that there could be gaps in the contract

cover and, as a result, it is likely that if Omnia chooses this route it will need to consider the

viability of entering into a “wrap” arrangement.

As a general point, construction contracts need to be robust - both (i) to satisfy the lenders that

completion of the project is viable and (ii) to facilitate the potential for onsale of the project.

In terms of allocation of risk, whatever structure is used, the construction contracts will need to

address liability for performance defects, construction delays and cost overruns. Omnia will want

to ensure, to the extent possible, that potential liability is passed on to the construction

contractors.

What should Omnia think about at the outset?

- The contractual matrix of the project as a whole (and, in particular, how risk is to be allocated

as between different players in the project). The commercial intention in terms of risk will be

key to the structuring of the construction arrangements.

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- The consequences of delays to construction. Delays can have knock-on effects on both ends

of the supply chain; for example, Omnia may have to defer taking delivery of feedstock

construction materials or it may end up defaulting on agreed completion milestones in the

offtake arrangements, which may make it liable for liquidated damages.

- The requirements of the lenders for a “bankable” project. We will come on to discuss

bankability separately, but for these purposes the lenders will be particularly focussed on the

timing for delivery of the Project; if it is not yet operational, revenue won’t be coming in. As a

result, Omnia should be concerned about certainty of timing and performance and whether it

can claim damages for any delays.

What are the key factors that drive the structuring of construction arrangements?

- Complexity: The scale and technical complexity of the infrastructure required to build the

power plant.

- Technology: The technology that is needed for the construction of the power plant and the

technical expertise of the various contractors in respect of that proven technology.

- Tax Liabilities: Potential tax liabilities. On larger projects, the principal contractor will often

enter into multiple construction contracts with separate onshore and offshore elements which

together form the entirety of the construction package. The onshore / offshore split is to

minimise local tax liabilities, which usually come in the form of local corporate taxes. As a

result, there is often an interface risk between the various agreements and it will be important

to ensure that there are no gaps in the contract cover. A common way to overcome these

issues is to “wrap” the various agreements by using an umbrella or guarantee agreement.

- Allocation of Risk: The allocation of risk and, linked to this, the “bankability” of the project.

Using a single engineering, procurement and construction contract enables the project

company to outsource all the risks associated with the engineering, procurement,

construction and commissioning of the power plant to the contractor, who would be

responsible for handing over a fully operational power plant. Other options include traditional

contracting and construction management structures which usually allow for cheaper pricing.

However, under these models there is no single point of responsibility and it is not possible

to outsource construction risks to the same extent. The inability to outsource risk will, in turn,

adversely affect the bankability of the project. There may also be timing issues in

circumstances where the design and construction phases cannot run concurrently. In

addition, the sponsors would need to draw on their own expertise and industry relationships

and be more active in managing the development and construction phases of the project.

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CONSTRUCTION MODELS: ADVANTAGES AND DISADVANTAGES

Traditional Contracting

The project company and the sponsors employ the main contractor who, in turn, employs several

sub-contractors. The project company has recourse to the sub-contractors by virtue of warranties

given directly to it by the sub-contractors.

Separately, the project company and the sponsors employ the professional team which designs,

engineers and devises the specifications for the project.

Advantages

Maintenance of control in relation to the design and engineering of the project.

Ability to pick the professional team which will take the lead on (and provide a high quality

service in relation to) the design and engineering of the project.

Potential for price and time certainty under the construction contract.

Tends to facilitate cheaper pricing because the onus is on the project company and the

sponsors to manage the process as between different contractors.

Disadvantages

There is no “one-stop shop” in terms of responsibility and liability.

Splitting the engineering and design risk from the actual construction risk means that if

there is an issue on the project at a later date, each contractor may try to suggest that

the other party is responsible. It can be very difficult to work out which party is actually

liable in these circumstances and whether the project company has appropriate recourse.

The split in responsibilities creates interface risk and means that a wrap is likely to be

required in the form of an umbrella or guarantee agreement - this is required to ensure

that the project company will have recourse to someone in the event of something going

wrong. That is, to ensure that no liabilities fall through the gaps.

In terms of timing, the design and construction phases cannot run concurrently, which

may delay things. There is no input from the contractor on “buildability” or engineering

issues during the design and engineering phases – this means there could be a situation

where a design issue is discovered when the contractor starts the building process which

could have been avoided if the contractor had been involved at the design stage.

Although the project company and the sponsors retain control over design and

engineering, they generally have little influence over the supply chain.

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Construction Management

Under the construction management model, the project company and the sponsors appoint the

contractors. The contractors then employ sub-contractors, with collateral warranties directed

back up to the project company - so, similarly to traditional contracting, the project company has

recourse to the sub-contractors.

As with traditional contracting, the project company separately appoints the professional design

and engineering team, but the difference from traditional contracting is that the project company

also appoints a construction manager. This will typically be an experienced operator in the

industry - for example, in offshore wind, DONG Energy or EON – which oversees the construction

process.

Advantages

Maintenance of control in relation to the design and engineering of the project, while at

the same time benefiting from the experience and expertise of the construction manager.

The construction manager will manage the contracts and deliver them in a way which is

similar to using an EPC contract. The construction manager can advise on “buildability”

of the design, which allows for a more compressed timeframe and programme where the

design, engineering and construction can run concurrently.

Experienced sponsors can draw on industry relationships and experience - this can

reduce overall costs of the project.

Disadvantages

The construction manager is essentially just a service provider. The service provided is

limited to managing the relevant contracts with the aim of completing on time and on

budget, but there is still little cost or programme certainty.

In practice, the construction manager is not taking on a single point of responsibility for

all the contracts - if anything goes wrong, the project company is unlikely to be able to

claim liquidated damages for delay or under performance warranties from the

construction manager itself. Instead, the project company will have to try to recover from

the individual contractors for losses, like in traditional contracting.

There is still an interface risk between the professional team and the contractors and

increased legal costs due to multiple contracts. The project company is also taking on

the insolvency risk of each member of the professional team and each contractor.

Despite the disadvantages, the market in offshore wind has evolved such that construction

management is the preferred model amongst contractors, due to the vagaries of working offshore

leading to significant cost overruns (under an EPC model, the EPC contractor would have to bear

the cost of such overruns). On the project company’s side, not having to pay the EPC risk

premium is viewed as a worthwhile trade-off to taking on the additional administrative burden and

the interface risk.

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EPC Contracting

EPC contracts are probably the most commonly used model in project financing.

Technically, “EPC” stands for “engineering, procurement and construction” contracting, but in

practice this type of contract covers everything.

The project company and the sponsors appoint the EPC contractor and pay the contractor a risk

premium to take on all liability. The EPC contractor then leads on all the main contracts. The

project company may still have some input as to specified engineers or specified designers.

Advantages

A “one-stop shop” for liability – the EPC contract essentially acts as a wrap of liability,

ideally with a contractor that has significant financial covenant strength and good credit

support.

This can give a lot of comfort to the project company – if a project is being handed over

to someone like Mitsubishi or Samsung, for example, the project company can let them

get on with the design, engineering and construction with some degree of oversight and

information flow, but does not have to worry much about the administration of the project.

Under an EPC contract, the project company can negotiate performance and delay

guarantees with liquidated damages – so, if there is an issue, whether with the design or

engineering, or the interface with the construction, or a delay in delivery, the project

company can claim directly from the EPC contractor.

Disadvantages

The process for putting an EPC contract in place is time consuming. Given the nature of

the liabilities that an EPC contractor takes on, it can take over a year from inception to

putting a tender pack together to going out to tender and then negotiating with three or

four different contractors.

Negotiating the price can be quite difficult and lengthy; the price is usually higher as

compared to other construction packages since the project company will be paying a high

risk premium to get the EPC contractor to accept such a large liability.

The project company and the sponsors tend to lose control over the engineering and

design process - this might not be a suitable model if, for example, there is a unique

technology or the project has specific site issues which the project company has the

capability to deal with.

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Splitting EPC Contracting

One common variation on the EPC contract model is to split the EPC contract. This would

typically involve splitting the EPC contract into an onshore construction contract and an offshore

supply contract, though the structure can also be more complicated depending on the deal.

Advantages

The main advantage for doing this is to minimise local tax liabilities. By splitting the

contracts, the project company can reduce corporate tax liability in the local jurisdiction.

The project company might also be able to reduce the stamp duty payable in the local

jurisdiction if it can reduce the onshore contract price. For example, if the overall price of

the contract is 1 billion, but that can be reduced to three contracts with two offshore, this

might reduce the remaining onshore contract price to 200 million, and the project

company will only have to pay stamp duty on the onshore portion.

Disadvantages

Splitting the EPC contract can re-introduce interface risk. A way to deal with this would

be to have a guarantee or wrap agreement, which effectively looks like an EPC contract,

with the guarantor agreeing to take on any liability that falls between the gaps between

the onshore contractor and offshore contractor.

The drafting for a guarantee or wrap agreement can be technically demanding –

depending on the jurisdiction, it might be that you cannot even refer to the guarantee or

wrap agreement in the underlying onshore and offshore contracts. Notwithstanding the

difficulty, the tax savings can sometimes be so significant that it is worth doing.

EPC Management Contracting

EPC management contracting is another variation on the EPC contract – it acts as a hybrid

between the construction management model and the EPC contract model.

The project company contracts separately with the works contractors and the EPC management

contractor.

Advantages

This model retains the benefits of the construction management model in that the project

company retains some level of control and flexibility. At the same time, the project

company might ask the EPC management contractor to go further than carrying out a

construction management role, by taking on responsibility for the design and engineering

and interface.

Responsibility for the overall programme tends to remain with the project company, so

that the project price will be cheaper than an EPC contract – if the project manager tries

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to transfer even the risk of time delay to the EPC management contractor, then the price

is likely to go up.

Disadvantages

In addition to the project company retaining the overall programme risk, it will also have

to bear the risk of recovery and the administrative burden.

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Part B: Bankability

Question 1

We have been discussing the timeline for the project with our relationship lenders and we are

keen to get to financial close as soon as possible – indeed, we are under some pressure from

government officials to meet relatively tight deadlines. Our relationship lenders have told us that,

although they are keen in principle to provide a portion of the funding for the project, they have

never invested in a project in Glorinya before and their due diligence will take some time.

Section A

The lenders have indicated, in particular, that they are concerned about the construction phase

and the likelihood of construction actually being completed. Is there anything that Omnia, AEH

or Stultus might be able to offer the lenders to ease their concerns and to speed up the process

to get to financial close more quickly?

What are the lenders concerned about?

One of the key questions for the lenders is whether the project will complete on time and to budget.

As a result, the lenders will be particularly focussed on both technical and legal due diligence in

relation to the construction arrangements. This sort of due diligence can take considerable time

to complete.

One way of addressing the lenders’ concerns and speeding up the process to financial close will

be to allocate the risk of a failure to complete or to keep to budget to other players in the project.

So, for example, risks may be allocated to the sponsors, guarantors within the sponsor group or

(as already discussed in the context of the first question) to contractors or sub-contractors through

contractual arrangements.

So, what can be done in this context?

- Equity Support: Stultus and AEH could agree to give pre-completion equity support to Omnia.

In practice, lenders often insist that construction risk is mitigated by sponsor completion

support. Such support may take the form of one of the following:

o EQUITY COMMITMENT - A commitment to provide additional equity, if required, to

cover cost overruns. This could be included in the sponsor support arrangements

entered into in connection with the project. Note that if this is offered, the lenders are

likely to expect to have control in relation to any amendments to the sponsor support

arrangements. AEH and Stultus will need to consider whether it is preferable only to

offer equity contributions as and when an issue arises.

o COMPLETION GUARANTEE - A “completion guarantee” to cover costs incurred in

achieving completion – something which commits the sponsors to finishing the

project. These guarantees are usually undertakings from the sponsors to cover all

of the project company’s debt service obligations until defined project completion

milestones are proven to have been met through a process of physical and economic

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testing. If agreed project milestones have not occurred by a longstop date or in the

event of a “fundamental” event of default, the lenders will typically be able to

accelerate the debt and call on the completion guarantees for repayment. This sort

of guarantee is clearly very onerous for the sponsors so AEH and Stultus would need

to weigh up the benefit of potentially speeding up the due diligence process as

against the downside of having a potentially large financial commitment going

forward.

o PCG / LC - Note that lenders might expect sponsor obligations to be supported by a

parent company guarantee or a letter of credit issued by a third party bank – all of

this creates extra costs for the project.

- Hedging: Generally, any third parties should be encouraged to hedge downside scenarios

and to manage risks in the most efficient way possible.

- Risk Allocation: A key driver of the structure for any project financing is the acceptable

allocation of risk for all the players in the project. It will need to be clear that the contractors

are bearing their share of the risk associated with the project.

In this context, Omnia should consider the following:

o It may be preferable for Omnia to have in place a single turnkey EPC contract or,

where this is not possible due to the size and / or complexity of the project, a single

principal contractor with overall responsibility for the deliverability of the construction

works.

o There should be contract price certainty (that is, a fixed lump sum price with very

limited flexibility for the contractor to impose price increases).

o There should be a fixed, achievable programme with robust completion testing and

an acceptable delay liquidated damages regime.

o The contractors must be reputable with a proven track record in designing and

building plants of a similar size and nature.

o Contractors should also be able to procure appropriate credit support in respect of

construction and defects remediation obligations.

o The lenders will want to ensure that they (or their representative) can enter into a

Direct Agreement with the relevant contractors providing for a standstill period in

relation to the contractors’ rights to take enforcement action against the project

company, step-in and cure rights and the right to novate agreements to a replacement

project company.

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Section B

The lenders keep mentioning the “bankability” of the project and have indicated that there will be

a lot of scrutiny of the proposed offtake arrangements with the Glorinyan Electricity Transmission

Company. We are currently negotiating the offtake arrangements (which are based on the

Glorinyan Electricity Transmission Company’s standard form power purchase agreement), but it

seems like there is not much room to change the terms. Can you give us an idea of the sorts of

issues that the Lenders might be concerned about in terms of the offtake arrangements and the

ways in which we might address these?

We often talk about a project needing to be bankable in order for it to reach financial close.

This begs the question of what is meant by “bankability”?

In truth, it is a fluid concept, but it is all to do with risk. In essence, it involves an assessment of

the risk which is inherent in a project – that is, does the way in which the project is structured and

the contractual matrix and risk allocation between the various players represent an acceptable

overall risk to the lenders. If risk is open-ended and not capable of quantification or analysis, this

may mean that the project is not considered to be bankable.

The way to think about achieving “bankability” is to see it as an exercise in risk allocation between

the key players in the project (being the sponsors, the project company, the lenders, the host

government, the offtaker, the fuel supplier, the contractor and the operator). Clearly, risks are

best allocated to the parties which are best able to manage or mitigate the relevant risks.

Why are the lenders so concerned? In short, because the funding is needed to build the project

before it starts to produce revenue, the bulk of the funding is not coming from the owners and

repayment is only possible once the currently theoretical project starts producing revenues. The

success of the project will largely be driven by the performance of the power plant (which, in turn,

is dependent upon the technology used to create it).

Certainty of revenue stream?

One of the key elements for the lenders in determining “bankability” is the security of revenues

flowing in to the project company. In practice, the sole recourse for the lenders in terms of general

debt service and ultimate repayment of debt is the revenue stream generated from the offtake

arrangements. As a result, the lenders will be focussed on the terms of the power purchase

arrangements, particularly if these are based on the standard form of the offtaker. It is the

revenues which will enable the project company to cover its operational costs, service (and

ultimately repay) its debt and provide a return to sponsors. On this point, the lenders and the

sponsors should be largely aligned.

From a practical perspective, it will be important to think about the sorts of provisions that the

lenders will expect to see in the offtake arrangements early on in the process. These sorts of

points should be fed into the negotiations now so that the drafting does not need to be “re-opened”

when lenders’ counsel come on board. Your role in advising Omnia is to ensure that the project

is “bankable” and so these points should be considered as early as possible.

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What will the lenders expect to see?

- Structure of Revenues: The first question that the lenders will have is whether the revenue

stream is in fact fixed and certain. The lenders will have an issue if there is no “capacity”

charge payable even where energy is not dispatched. In effect, the capacity charge is a

means of passing through fixed costs to the offtaker even where energy demand is low.

It is unlikely to be acceptable to the lenders to have a model where the only revenue

stream is dependent upon the amount of energy actually delivered and taken by the

offtaker. There are two structures which are generally accepted by lenders for mitigating

the risk that the offtaker may not dispatch the generating facility, as follows:

o Take or Pay: The offtaker pays a fixed tariff comprising a capacity charge (being

a fixed amount that is paid for available capacity) and an energy charge (being

an amount paid in respect of the energy actually delivered). This allows the

project company to cover its fixed costs with the capacity charge – including debt

service, fixed operating costs and an agreed equity return.

o Take and Pay: The offtaker must take, and pay a fixed tariff for, all energy

delivered. If energy cannot be physically taken by the offtaker and output is

“curtailed”, energy will be calculated and paid for on a “deemed” delivered basis.

So, the lenders will be looking to see a fixed tariff – a fixed amount of income per kWh

generated to adequately cover project costs.

- Offtaker Payment Support: Linked to the structure of revenues is the ability of the offtaker

to actually make the required payments. Depending on the jurisdiction and the

creditworthiness of the offtaker, the lenders may expect to see a guarantee to support the

offtaker’s payment obligations. The same may apply in relation to fuel supply

arrangements.

- Change in Law / Change in Tax: The power purchase agreement should explicitly state

which party bears the risk of the law or tax regime changing after the date of the

agreement in such a way as to diminish the economic returns of the transaction for such

party. In order for a power purchase agreement to be bankable, most lenders require the

offtaker to take this risk.

- Force Majeure: The power purchase agreement should excuse the project company from

performing its obligations if a force majeure event (being an event which is beyond the

reasonable control of such party) prevents performance. The allocation of costs and the

risk of loss associated with a force majeure event will depend on the availability of

insurance and the degree of political risk in the region. It is worth noting that this is a

particularly difficult area to negotiate because of the matrix of risk. For example, the fuel

supplier will expect to be afforded similar protections to the project company in relation to

force majeure. In practice, the aim should be to try to “back to back” the force majeure

provisions so that a failure of the fuel supplier to perform its obligations will constitute a

force majeure event for the project company under the power purchase agreement.

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- Termination: The power purchase agreement should set out very clearly the basis on

which either party can terminate. Termination by the offtaker may leave the project with

no access to the market and should therefore be limited to very significant events. The

power purchase agreement should provide that if it is terminated for any reason, then in

the case of transfer of the facility to the offtaker, the offtaker must provide a termination

payment at least equal to the full amount of the project company’s outstanding bank debt

and, if it is the offtaker which has defaulted, a return on equity.

- Foreign exchange: In order to avoid subjecting the project company to currency risk, the

power purchase agreement should be either denominated in or linked to an exchange

rate of the currency of the project company’s debt and there should be no limitation or

additional approvals required to transfer funds to offshore accounts as required.

- Assignment: The power purchase agreement should allow for the assignment of rights to

lenders and the lenders will expect to be provided with notice of any default and to have

the ability to cure the relevant default – generally, these sorts of things are dealt with in

Direct Agreements.

- Transmission and Interconnection Risk: The power purchase agreement should indicate

which party bears the risk of connecting the facility with the grid and transmitting power

to the nearest substation.

- Dispute Resolution: Typically, power purchase agreements provide for offshore arbitration

in a neutral location under rules which are generally acceptable to the international

community – for example, UNCITRAL, LCIA or ICC.

Separately, can you let us have your views on what might affect the bankability of the project more

generally?

Lack of previous investment experience – the mighty due diligence monster…

In this context, one of the key elements that will feed in to “bankability” is the fact that the lenders

have not invested in Glorinya before.

This means that the lenders are likely to be more nervous about the unfamiliar political landscape

and the potential challenges associated with investing there. More than ever, the lenders will be

focussing on detailed technical, financial and legal due diligence and it is likely that a full risk

matrix will be required.

Risk matrixes typically address:

- each of the individual risks faced by the project;

- how likely it is that each risk will occur;

- the likely consequences if the risk does occur; and

- the mitigations or solutions that are available.

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In this context, it will be important to seek detailed advice from local counsel who will be best

placed to help explore political risks inherent to the project and to offer possible solutions and

mitigations in relation to those risks. That is, local knowledge will be crucial.

It is important to remember that project financing is very different from corporate lending where

the borrower’s full credit (i.e. all of the assets on the borrower’s balance sheet) will be available

to meet the debt obligation. In a project financing context, the borrower is usually a special

purpose vehicle with assets limited to those of the project and, during the construction phase,

contractual rights. In corporate lending, the lenders assess the credit risk of the institution, not

the risk that the project will generate insufficient revenues to meet debt service. It is for this reason

that the lenders will be focussed on carrying out extensive due diligence on all aspects of the

project.

The role of the Government of Glorinya?

Note that a key area of focus for the lenders in this sort of project will be the support which the

Government of Glorinya is intending to give to the project – don’t forget that the Government of

Glorinya is heavily involved in both the fuel supply arrangements and the offtake arrangements

for the project. As a result, the whole project rather stands or falls depending upon the support

(or lack thereof) of the Government of Glorinya. For this reason, it will be worth explaining in

detail to the lenders the incentives which the Government of Glorinya is prepared to provide

pursuant to the Lightbulb Programme.

It would also be in the interests of Omnia to enter into a concession agreement or an

implementation agreement (or equivalent) with the Government of Glorinya which sets out the

key parameters in relation to the project and affords some protections to Omnia. The lenders are

likely to expect this to include the following:

- Support: Evidence that the Government of Glorinya is invested in the success of the

project and is “on board” from a policy perspective – this will be demonstrated by

government support in getting all required consents and licences for implementation of

the project (including, in particular, any permits in relation to occupation and use of land).

- Authorisations: A contractual requirement for the Government of Glorinya to use all

reasonable efforts to support Omnia in obtaining all required authorisations, including the

provision of advice as to the content of those authorisations. This will include a

requirement for the Government of Glorinya to assist with any interactions with other

government entities or associations, including any applicable regulators.

- Access: A contractual requirement for the Government of Glorinya to ensure that access

to the project site is not hindered and that the roads and related infrastructure are of an

adequate standard.

- Direct Agreements: Facilitation of entry into Direct Agreements with the lenders or a

representative of the lenders in relation to fuel supply arrangements and offtake

arrangements in order to give the lenders greater comfort in a situation where the project

runs into difficulty. Direct Agreements should provide for a standstill period in relation to

the relevant counterparty’s rights to take enforcement action against the project company,

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step-in and cure rights and the right to novate agreements to a replacement project

company.

- Counterparty Risk: The Government of Glorinya should be required to ensure that the

Glorinyan Electricity Transmission Company remains in existence so that the power

produced at the power plant can be sold and the revenue stream for the project is thereby

protected.

- Nationalisation Risk: There should be some sort of comfort (for both Omnia and the

lenders) that the project will not be nationalised and that the Government of Glorinya will

not do anything which results in discrimination against the project.

- Financial Protections: From a financial perspective, there should be (i) a guarantee to the

effect that there will be no import tariffs on imported supplies and (ii) a guarantee to the

effect that the availability of foreign currency and the free transfer of currency out of the

country will be permitted. In practice, the lenders may require the financing documents

to contain an event of default in circumstances where it becomes unlawful for them to

receive payment in relation to the debt or where foreign exchange becomes unlawful.

What happens on termination?

Another big focus for the lenders will be what happens on termination of any agreements by the

Government of Glorinya or any related entities (including, for these purposes, the fuel supplier

and the offtaker). As already indicated, the lenders will expect there to be termination provisions

which provide that if the arrangements are terminated and the power plant is transferred to the

offtaker, the offtaker will make a termination payment which will at least cover repayment of the

debt to the lenders.

The financing package…

Another key factor which affects bankability is the level of control that will be afforded to the

lenders under the finance documents.

The points to consider in this context are as follows:

- Representations / Undertakings / Events of Default: The package of representations,

undertakings (both positive and negative) and events of default in the financing

arrangements will need careful consideration. In most cases, the lenders will expect to

have control over the exercise of material discretions under key project agreements and

many of these provisions will deal with consequences of failure to perform under key

project documents (including, for example, revocation of a key authorisation or permit).

There are also likely to be significant controls over what the sponsors can do and when

dividends can be granted to the sponsors.

- Repayment Risk: The main focus for lenders will be on repayment risk. In this context,

they will be focussed on cash sweeps of surplus reserves, limitations on the amount of

debt incurred by the project company, the requirement for sponsors to fund alongside

them and limitations on dealings with related parties.

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- Project Milestones: The lenders will be keen to have stringent conditions to drawdown,

particularly if there are multiple potential draw downs. So, for example, conditions

precedent to drawdown will often include requirements for the project company to meet

certain critical milestones by certain dates.

- Financial Covenants: The financial covenants will also be crucial for the lenders. Typically

in a project of this kind, the lenders would expect to see the following:

Debt to Equity: This is the ratio of overall debt a company has versus how

much shareholder equity it has. For a typical project financing, the ratio

will be in the region of 80:20 which means that there is a much higher

percentage of debt compared with many other forms of financing.

Debt Service Cover Ratio: This ratio is based on how much net earnings

of a company are versus how much it will cost to service its debt

obligations. The ratio is usually around 2:1. It is likely that if the ratio

falls below 2:1 then there will be a mechanism to stop distributions to

sponsors and if it falls below a lower level (say 1.8:1) there will be an

event of default.

Loan Life Cover Ratio: This ratio measures the net present value of

money available for debt repayment compared with the amount of senior

debt the company has. If the level of cash is not sufficient to pay the

debt then this will likely lead to an event of default under the financing

arrangements.

- Security: The security package will need to be all encompassing and robust (in spite of

any local law issues which may arise in terms of taking security). Remember in this

context that the lenders only have recourse to the project assets and cannot go after the

sponsors if things go wrong. Lenders will want security over all physical assets,

assignment of contractual rights (including insurance), a strong negative pledge and

consequences for breach of the terms of any security.

- Direct Agreements: Lenders will expect to enter into Direct Agreements with third parties

(as already discussed). This will help to provide comfort in circumstances where

contractual arrangements might otherwise terminate.

The role of the sponsors?

It is worth just noting that the lenders will also be focussed on the role of the sponsors.

Lenders often insist on a certain level of equity being provided up front (which demonstrates the

sponsors’ commitment to the project) and a share retention obligation so that the lenders know

exactly who they are “in bed” with and for how long. Typically, the lenders would expect there to

be lock in arrangements for a number of years following the commercial operations date of the

project.

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Summary of “bankability” issues

So, in summary, the key questions on bankability from the perspective of the lenders are as

follows:

- As a starting point, what are the political risks that might affect the project and how has

the project company sought to mitigate these?

- Is there anything inherently risky in the structure of the deal? For example, is investment

in this area unprecedented? Is the technology used for the project tried and tested? Is

the infrastructure required to support the project up and running and adequate?

- Will the project complete on time and to budget? The key here will be due diligence on

the construction arrangements (both technical and legal) and a clear assessment of the

allocation of risk. The more risk that is taken by other players in the project (including the

sponsors), the more bankable the project will be.

- Will the project earn fixed and certain revenues? The key here will be due diligence on

the fuel supply arrangements and the offtake arrangements and a clear assessment of

the allocation of risk in this context.

- What sort of control will the lenders have over key decisions? What control will the

lenders have if the project is in trouble? The key here will be careful negotiation of the

financing arrangements so that the project is not unduly hampered and can operate

effectively but so that enough control and oversight is offered to the lenders to enable

them to get comfortable with funding and providing the funding on the best pricing terms.

Remember the local landscape

It is important to remember in this context that one size will not fit all.

Bankability is a fluid concept and the sorts of protections that are achieved in relation to projects

in one jurisdiction simply may not be achievable in another jurisdiction. Trying to force all projects

to take a particular form or to represent a particular risk profile is likely to result in projects being

thwarted. This is why a lot of emphasis will be placed on detailed technical and legal due diligence

so that lenders can get comfortable with all the potential risks and are able to quantify them.

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Section C

In your experience, how have the financing arrangements in relation to these sorts of projects

been structured?

Typically, where international lenders have not funded a project in a particular jurisdiction before,

the appetite for risk will be lower. This means that where the debt requirements for funding a

project are large, there will need to be a split of the funding between different types of financial

institutions.

In some cases, there will be both senior debt and mezzanine debt, with the mezzanine debt sitting

between the senior debt and the equity. That is, the mezzanine debt will enjoy better pricing terms

(including in relation to the margin on interest) but is subordinated and will rank second in terms

of repayment to senior debt, though it will rank above equity both for distributions of free cash and

in the event of liquidation.

Sometimes, the project company may access the capital markets by issuing bonds which are

taken up by financial institutions such as pension funds or insurance companies which are looking

for long-term investments. One potential downside of this approach is that it can be difficult to

get waivers from bondholders if required as they tend to be passive investors.

So, what might the financing look like in practice?

- Types of Lenders: It is likely that for a financing of this kind there will be multiple tranches

of debt advanced by a mixture of international lenders, local lenders, bilateral agencies

(including Export Credit Agencies) and multilateral agencies (including entities like the

World Development Bank).

- Documentation: In terms of documentation, there may be one facilities agreement

evidencing each tranche of debt or, perhaps more typically, several facilities agreements

the inter-relationship between which is governed by a Common Terms Agreement. One

of the reasons for this is that public agencies often lend on relatively standard terms and

they have specific finance contracts for these purposes which include a “check list” of

things that they expect to see in all the financing in which they participate.

- Intercreditor Relationship: An important element in this context will be the intercreditor

relationship between the different lenders. There will be a lot of commercial

considerations to work through, including voting rights on everyday matters (and

associated veto rights), voting rights on enforcement and security sharing arrangements.

- Drawdown and Repayment: A particularly important issue is the profile of draw down and

repayment in order to ensure that different entities fund equally (if that is the commercial

intention). This means that conditions precedent to drawdown will need to be governed

by the Common Terms Agreement and there will need to be a mechanism which provides

for simultaneous draw down in relation to different tranches of debt. Separately, the

triggers for prepayment will need to be considered in this context and the allocation of

funds for the purposes of prepayment (both in terms of voluntary prepayment and

mandatory prepayment).

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Documentation?

Most English law syndicated facilities agreements are on, or heavily based on, LMA terms.

However, there are no specific LMA terms for project finance or infrastructure finance so many of

the LMA provisions will require detailed consideration and negotiation in order to work for

particular projects.

In particular, an LMA document will need to be tailored quite significantly to cater for (i) the

financing and documentation structure which is being used (including the possibility of a Common

Terms Agreement), (ii) the conditions precedent which are required for each draw down, (iii) the

cashflows, accounts and payment waterfalls, (iv) information and reporting requirements, (v)

financial covenants, (vi) the full covenant package and how this links in to the requirements of the

project and performance under the project documents and (vii) local law issues.

Note that the LMA has also developed a range of “Developing Market Agreements” and

agreements for use in East Africa, Nigeria and Zambia (designed also to be used in Uganda,

Kenya and Tanzania). These are English law facility agreements designed for transactions with

borrowers located in developing markets. The restrictions in these agreements tend to follow the

style of the LMA leveraged facility agreement, but with carve outs that are left blank. The

mechanics are generally tailored to reflect that the obligor group may not be companies

incorporated in England and Wales and to address certain issues that may arise more frequently

in developing countries (such as permitting and authorisation issues).

Are there any specific structuring issues that we should be raising with the lenders now?

It’s all in the security…

A key point to discuss early on is the security structure that the lenders are expecting to see.

Typically, lenders will expect to take security over all of the project assets, including in respect of

all contractual rights so that the lenders can take remedial action if the project fails.

Lenders are also likely to want control over all cash inflows and outflows of the project company

and the financing documentation will usually include a waterfall for allocation of the project

company’s cash inflows to the various project costs.

In this context, it will be important to establish the following early on:

- How will the security be held? Will it be held through a trust structure whereby a Security

Trustee is appointed by the lenders to hold the security in their favour? If a trust structure

is contemplated, does this arrangement work under local law? Certain jurisdictions do not

recognise trust structures and so other arrangements are required (including, for

example, a parallel debt structure where debt is deemed to be owed to a Security Agent).

Also, some jurisdictions require that the Security Trustee has a certain domicile.

- Are there any quirks of local law which will have an impact of security? Security

documents are generally governed by the law of the asset. So, for example, security over

shares in a company will be governed by the law of the jurisdiction of incorporation of that

company. The sorts of things to think about are the following:

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o Are there any hidden costs associated with taking security?

o What are the registration requirements for perfecting security?

o Are there any local law limitations on taking security?

- Are there any assets which need to be excluded from the ambit of the security package?

For example, there can often be quirks around any attempts to take security over

machinery and construction equipment which is owned or leased by third party

contractors.

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Question 2

AEH is keen to appoint Livia Operations Limited (“Livia”) as the operator of the power plant once

it is built. Livia is a subsidiary of AEH and has extensive experience in providing operation and

maintenance services across the world. Would this be of benefit to the bankability of the project?

What do you think the lenders’ views would be?

The benefits of having an operator…

As an operator, Livia would have responsibility for (i) operating the power plant at maximum

efficiency and in accordance with the requirements of the offtake arrangements and (ii)

maintaining the quality of the project’s assets. As a result, the effect is that the operator is

responsible for mitigating operating and procedural project risk.

Having an operator assures the lenders that:

- the project will be run at the level required to generate forecasted revenues which are

needed to repay the debt;

- the asset value of the power plant will be maintained over the lifetime of the project; and

- a separate entity is accountable for any default in the operation of the power plant under

the terms of negotiated operation and maintenance arrangements.

Is there any issue with a related party?

Both cash flow security and the maintenance of project value are likely to be key concerns for the

lenders when assessing the bankability of the project. As a result, they will be particularly

focussed on the operation and maintenance arrangements.

If Livia is a subsidiary of AEH, a well-known company with international operations in the energy

sector, Livia is likely to have a proven track record of providing operation and maintenance

services (including to AEH’s existing power plants across the world) and the necessary expertise

to operate the power plant built for the project – something which will improve the bankability of

the project.

In addition, the fact that Livia is a subsidiary of AEH means that it has a vested interest in the

project being both successful and profitable and so the lenders may actually be happier to have

Livia involved on the operation and maintenance side rather than a third party contractor. The

matrix of risk allocation actually becomes a bit simpler.

Set against the points raised above is the risk of Omnia entering into arrangements with Livia

which are not on arms’ length terms because Livia is a related party of AEH. In practice, this can

be mitigated by ensuring that all arrangements which are entered into with Livia are in fact entered

into on arms’ length terms.

In this context, Stultus (as the joint venture counterparty and the other sponsor) will act as a nature

arbiter of whether the terms are in fact on arms’ length and this should help to provide comfort to

the lenders.

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From a practical perspective, one way to mitigate the “related party” risk is to ensure that

supervision of the operation and maintenance contract is carried out by personnel at Omnia who

are not connected with AEH.

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Part C: Political Risks

Question 1

Louise mentions that the team is quite worried about the political risk in Glorinya. She explains

that the Project is underpinned by some concessions and incentives that Omnia managed to

obtain from the Government of Glorinya in the context of the Lightbulb Programme. However, in

the light of elections coming up next year in Glorinya and a possible change in policy as a result,

Louise has asked for your view on what the team can do to protect the Project if the Government

of Glorinya tries to go back on its promises once the Project is up and running.

We touched on this point in the context of looking at bankability (both in terms of protection of

offtake arrangements and more generally). One of the key elements of bankability of a project

centres on political risk and lenders will be particularly nervous about this if they have not invested

in a particular jurisdiction before.

How can Omnia mitigate against political risk?

- Due Diligence: An obvious practical way to mitigate against political risk is to ensure that

enough due diligence has been carried out up front so that the team is fully cognisant of

all the potential risks.

- Local Knowledge: Part of the due diligence will involve ensuring that there is access to

local knowledge. For this reason, the sponsors might consider bringing on board another

joint venture partner (perhaps with a minimal shareholding) which is a domestic entity

within Glorinya. This may be useful to ensure that there is a sponsor which has local

knowledge and might also add legitimacy to the project from the perspective of local

people. In this context, it may also be useful given that the intention is for the local

population to form part of the workforce which will operate and maintain the power plant.

In some projects, host governments specifically require there to be a domestic investor.

- Assessing potential Road Blocks: In terms of local knowledge, it will be worth finding out

whether there are any local “vested interests” which sit at odds with the general policy

aspirations under the Lightbulb Programme. It is not unheard of for projects to be delayed

significantly as a result of politicians and other officials in certain jursidictions having

vested interests in business or policies which are at odds with the aims of particular

projects.

- Implementation Agreement: Omnia should seek to enter into an implementation

agreement with the Government of Glorinya and other relevant counterparties which

seeks to protect, through contractual arrangements, all of the concessions and incentives

which have been obtained in the context of the Lightbulb Programme.

- Change of Law / Change of Tax: Most notably, all the contractual arrangements should

address which party will bear the risk if there is a change of law / change of tax which

affects the project (including if there is a change to import taxes or arrangements in

relation to the movement of currency). Omnia should seek to ensure that this risk is

passed on to the Government of Glorinya or other relevant counterparties given that (i)

Omnia itself will have no control over any changes in law and (ii) the landscape becomes

very different for the project as a whole if there are significant changes in law. Even if

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this cannot be fully achieved, having a specific regime to address change in law / change

in tax will at least provide certainty for the contracting parties (and for the lenders).

- Stabilisation Clauses: Linked to the point raised above is that Omnia could seek to include

in the contractual arrangements with the Government of Glorinya a stabilisation clause

which sets out how any changes in law or regulation following the execution of the

documentation in relation to the project are to be treated and the extent to which any

changes will modify the rights and obligations of the sponsors and Omnia itself.

There are different types of stabilisation clauses, as follows:

o Freezing Clauses: These clauses fix or freeze for the term of the project the

applicable domestic legislation or regulations affecting the project to those in

effect as of the date of the relevant documentation. Under these clauses,

legislation adopted after the date of the relevant documentation does not apply

to the project unless the sponsors agree.

o Economic Equilibrium Clauses: Under these clauses, changes in law occurring

after the execution of the relevant documentation apply to the project and to the

sponsors except that the host government must usually indemnify the sponsors

from and against the costs of complying with the new laws. For example, the

host government may impose new emissions standards concerning a power

plant, but the costs of modifying the plant’s design or re-fitting the plant will be

borne by the government. So, these clauses are intended to preserve the

economics of the project. However, the scope of the clause will depend upon the

parties’ relative negotiating positions and the host government’s need for the

proposed investment.

o Hybrid Clauses: A combination of the freezing and economic equilibrium clauses.

Under these clauses, sponsors are not automatically exempted from the

application of the new laws. Rather, these clauses provide that the sponsors may

be granted an exemption or afforded compensation in certain defined

circumstances.

Note that stabilisation clauses are beneficial to investors and are perceived as helping

host governments to attract foreign investment. However, they can prevent host

governments from taking the actions necessary to protect their citizens’ rights and enforce

national laws that apply elsewhere in the country. Domestic investors generally do not

like these clauses because foreign investors appear to received better terms.

- Comfort Letters: Omnia, AEH and Stultus could seek to obtain a comfort letter from the

Government of Glorinya in relation to its support for the project and its current intention

not to change its policy in relation to the project (including pursuant to the Lightbulb

Programme). However, comfort letters are not legally binding and so their value is limited

largely to moral and reputational value. The weight to be attributed to this value is

therefore dependent to a large degree upon local politics.

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- Political Risk Insurance: Depending on the political climate and the nature of the political

concerns, another point worth mentioning is that Omnia could seek to put in place an

insurance policy in relation to political risk. Clearly, a balance will need to be struck

between the benefit of the policy and the cost of obtaining the relevant insurance. These

sorts of policies generally provide cover to ensure repayment of debt to the lenders in the

following sorts of circumstances:

o The project is damaged or destroyed by political violence, such as revolution,

insurrection, civil unrest, terrorism or war.

o The Government expropriates or confiscates assets of the project.

o The Government frustrates or repudiates contracts entered into in connection

with the project.

o Inconvertibility of foreign currency or the inability to repatriate funds.

As with any insurance, the precise scope of cover will be governed by the terms of the

insurance policy. There is an interesting point here around sanctions – insurance

companies do not want to be in a position where they have to make a payment under a

policy if that payment would result in the insurance company being in breach of applicable

sanctions. You will need to look at those sorts of clauses quite carefully to ensure that

they are not so wide as to render the terms of the policy ineffective in practice.

- Export Credit Agency Funding: One method of mitigating political risk is to seek financing

to support the project from Export Credit Agencies. These are public agencies and

entities that provide government-backed loans, guarantees and insurance to corporations

from their home country that seek to do business overseas in developing countries and

emerging markets. Financing can take the form of guarantees in relation to a portion of

the senior debt or actually advancing funds alongside senior lenders. ECAs often also

provide political risk insurance to investors in overseas markets. Basically, they act as

an intermediary between national governments and exporters to issue export financing.

o In the United Kingdom, the ECA is the Export Credits Guarantee Department

(ECGD), although it goes by the operating name of “UK Export Finance”. One

point to note is that ECAs are often focussed on anti-bribery and anti-corruption

procedures and will expect to see documentation which provides them with

comfort that these risks have been mitigated.

o Other examples include:

Infraco in Africa – seeks to alleviate poverty by mobilising investment into

sub-Saharan infrastructure projects. They fund teams of experienced

project developers or invest directly into projects which need financial

commitment. This sort of support reduces the risks associated with early

stage project development, ensuring that a project develops from a

concept to a bankable investment opportunity.

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KfW – German government-owned development bank which provides

export finance, including in support of construction contracts. This might

take the form of guarantees to support construction risks.

FMO – Dutch development bank which provides facility support to soften

tariffs.

o Separately, there is the World Development Bank which is a multilateral agency

that funds, in particular, renewable energy projects in developing countries. The

WDA is generally more focussed on risk than other ECAs and is driven by policy

considerations which mean that investments can be hard to come by. However,

the WDA does have a guarantees programme through which it aims to mobilise

private investment for strategic projects and sector support, mitigate key

government-related risks to enable financial viability and bankability, enhance

credit quality of project companies, reduce costs and improve financing terms for

projects and governments and ensure long-term sustainability of projects.

Generally, a guarantee from the World Development Bank will improve the overall

credit quality of the investment and help to reduce risks which are beyond the

control of private investors.

- Governing Law: What is the governing law of the contractual arrangements? If local law

is to be used, local advisers will need to explain in detail all the potential risks associated

with the application of that law and any quirks or uncertainties in the legal rules or the

legal system itself which may create difficulties in terms of enforcement of any provisions

of the contractual arrangements.

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Question 2

Separately, Louise tells you that even though all consents and licences required for the Project

have supposedly been obtained, there is potentially a problem in relation to access to the Project

site. Apparently, the roads providing access to the site have not been completed yet and there is

a concern about whether the land permits that have been obtained in relation to the Project are

sufficient to facilitate necessary access to all parts of the site. In addition, a group of locals from

Natalia has started protesting against the Project on the basis that it could cause damage to the

local environment. Louise asks you to brainstorm what steps might be taken to address these

concerns.

Land and permitting issues – solutions?

The project will depend upon obtaining all necessary permits and licences for construction and

operation of the power plant. In this regard, local legal advice will be required to determine (i)

exactly what permits are necessary, (ii) the form which these permits should take and (iii) whether

there are any quirks or other issues associated with the permits.

One of the key permits will be the permit or other relevant authorisation required for the ownership

of and / or ability to occupy the land which forms the project site. Linked to this is the ability to

access that site through suitable infrastructure. Many projects can be delayed or, ultimately,

thwarted by infrastructure which does not support the construction and operation of the project.

Sometimes, it can take months or even years for permits to materialise and lots of money can be

poured into projects that do not end up happening. In this case, we are told that all necessary

permits have been obtained subject to the point in relation to land. This demonstrates the

importance of ensuring that there are protections in relation to authorisations and access to the

site in an implementation agreement entered into with the Government of Glorinya.

Here, advice of local counsel should be sought as to the nature and extent of the land permit and

whether it is fit for purpose. To the extent that it is not, assurances should be sought from the

Government of Glorinya that any required extension to the permit will be forthcoming. This should

be dealt with contractually – perhaps in an implementation agreement or other form of concession

agreement. In practice, the lenders will require evidence of these sorts of binding permits to be

delivered as conditions precedent to funding so it will be important to ensure that these sorts of

issues are sorted out as early as possible in the process. Where the law governing the permits

is unfamiliar, there is likely to be increased scrutiny of the terms of the permits and this is why

local knowledge will be key.

A legal opinion should be sought as to the binding nature of the land permit. It will be important

to ensure that the project company is getting the interest in the land that it is expecting to get.

How to deal with protesters?

Local protesters could cause all sorts of problems for the project in the local area. One way to

address this may be to have discussion groups with members of the local community and with

officials to explain how the project is intended to operate and to address any environmental

concerns.

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In practice, environmental aspects will form part of the due diligence process and a detailed and

technical environmental impact assessment will need to be carried out. The lenders will not

consider the Project to be bankable unless it is environmentally sound and this should be

communicated to local protestors.

It may also be worth explaining to the local community that the intention is to source part of the

work force for the power plant from the local area. This will be in line with the policy of the

Government of Glorinya and is likely to be one of the “quid pro quos” for the concessions

negotiated in the light of the Lightbulb Programme.

The project may have added legitimacy if a local partner is involved alongside the sponsors.

The project company should consider whether political risk insurance is required given the

indication that the project could create unrest in the local area.

Note that if UK Export Finance is involved, there will be a focus on certain key risks including, in

particular, environmental risks. UK Export Finance tends to impose quite stringent social and

environmental impact standards. This can lead to significant delays to projects as a range of

consultants are required to write detailed technical reports in respect of, among other things,

environmental impact assessments.

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SESSION 2: DISPUTES AND TERMINATION

Part A: Termination

As you know, Excel has now commenced construction work in relation to the project. Things were

initially running quite smoothly and we have been pleased with the progress made. However,

Excel has now missed a number of what are each on their own relatively minor delivery targets

under the EPC contract, but, in aggregate, this has substantially increased Omnia’s costs in

relation to the project. As a result, the relationship with Excel has substantially deteriorated.

A number of colleagues within AEH are now of the view that it would be better if Excel could

simply be replaced with one of AEH’s preferred EPC contractors.

Does Excel’s failure to meet its delivery targets provide us with grounds to terminate the EPC

contract?

As a general rule, the specific parameters for termination of a significant commercial contract will

be contained within the contract itself – at the negotiation stage, the parties will have focussed on

the termination regime in a lot of detail and so it will generally be difficult to argue that either party

should be able to terminate the arrangements in circumstances which are not specifically provided

for under the terms of the contract. In part, this is because common law (at least under English

law) provides only very limited grounds for the termination of a contract and those grounds do not

include insolvency or material breach (unless “material” for these purposes is interpreted as

repudiatory).

Having said this, there can be limited circumstances under general law whereby a party can

terminate contractual arrangements that it has entered into.

For example, under English law, a party can treat a contract as having been discharged if:

- the party in default has repudiated the contract before performance is due or before it has

been fully performed and, in these circumstances, the party in default has made clear

that it does not intend to honour its contractual obligations; or

- the party in default has committed a breach of a fundamental term of the contract.

It is unlikely that these sorts of conditions have been met through Excel’s failure to meet minor

delivery targets.

What should Omnia do at the outset?

The first thing that Omnia should do is look at the termination provisions contained within the EPC

Contract and consider whether there are any grounds upon which Omnia can terminate the EPC

Contract within the contractual framework.

That is, Omnia should assess the legal grounds on which it can terminate the contract, consider

the practical and procedural implications of termination and comply with any procedural

requirement for terminating provided for within the EPC Contract.

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It is worth noting at the outset that, under English law at least, there is generally no requirement

for a party to act reasonably in exercising a contractual power to terminate. A party exercising a

termination right has expressly agreed that right in the contract itself and so need not act in good

faith or consider the other party’s interests, unless the contract says that it must do so. The only

question then is whether the conditions laid down in the contract for exercising the termination

right have in fact been met.

What do the termination provisions say?

Condition 41 of the EPC Contract sets out the termination regime.

- Termination for Omnia’s convenience:

Condition 41(a) gives Omnia the right, at any time, to terminate Excel’s engagement for

any reason whatsoever by giving notice. Essentially, this means that Omnia is at liberty

to terminate the EPC Contract whenever it wants and whether or not Excel has actually

committed a default (sometimes known as “termination without cause”).

In these circumstances:

o Excel must (i) vacate the site and cease all further work, (ii) remove construction

equipment from the site, (iii) repatriate personnel and leave the site in a clean

and safe condition, (iv) terminate contracts with subcontractors or, if required,

assign or novate rights and obligations to Omnia or its lenders, (v) notify Omnia

of the location and status of materials being procured for the works, (vi) deliver

the parts of the works executed up to the date of termination, (vii) procure that

any authorisations obtained in connection with the EPC Contract are transferred

into the name of Omnia and (viii) deliver to Omnia all documents prepared by

Excel in connection with the works.

o Omnia must pay to Excel (i) that part of the contract price which is attributable to

the parts of the works which have already been executed, (ii) the costs and

expenses reasonably incurred by Excel or any subcontractors in demobilising

employees from the site and (iii) amounts to be paid to subcontractors in

connection with the termination of the relevant subcontract. This is expressed as

being the sole compensation and remedy of Excel in these circumstances.

Although this termination right provides an “out” for Omnia if the team feels strongly

enough about removing Excel from the role of EPC Contractor, termination without cause

does not afford to Omnia any compensation for default of the EPC Contractor. Rather,

Omnia will be “on the hook” for making payments to Excel to cover costs.

- Termination for Excel’s default:

Condition 41(b) sets out the circumstances in which Omnia can terminate for the default

of Excel. The termination rights break down into two categories:

o Condition 41(b)(i) - Termination with no cure period:

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Omnia can terminate immediately upon the occurrence of certain specified

events by delivering a written notice to Excel specifying the relevant default. The

list of events include relatively serious breaches of the EPC Contract and other

events that could have disastrous consequences (such as insolvency).

o Condition 41(b)(ii) - Termination with a cure period:

Omnia can deliver a written notice of intended termination specifying any material

breach by Excel of its obligations under the EPC Contract. Omnia can then

terminate the EPC Contract immediately upon notice unless the breach is cured

by Excel to the satisfaction of Omnia (i) within five days of receipt of notice where

the breach relates to a failure to pay money or (ii) within 30 days of receipt of

notice where the breach does not relate to a failure to pay money.

If Omnia terminates the EPC Contract for cause:

o Excel must (i) vacate the site and cease all further work, (ii) terminate

subcontracts or assign or novate them to Omnia or its lenders, (iii) notify Omnia

of the location and status of any materials procured for the works, (iv) deliver the

part of the works which has be executed up to the termination date, (v) procure

that any authorisations obtained in connection with the EPC Contract are

transferred into the name of Omnia and (vi) deliver to Omnia all documents

prepared by Excel in connection with the works.

o We will look in more detail at what Omnia can do in these circumstances in the

context of the next question, but the difference here is that Omnia is entitled to

complete the works and, subject to certain parameters, seek compensation from

Excel for having done so.

Do the series of small breaches give Omnia a right to terminate for cause?

The real question here is whether Omnia has a right to terminate the EPC Contract for Excel’s

default (sometimes known as “termination for cause”). So, the question is whether the failure to

meet lots of minor delivery targets is a category of breach which gives rise to termination for

default under the terms of the EPC Contract.

- Failure to meet a series of minor delivery targets does not obviously fall within any of the

categories of significant default which are listed in Condition 41(b)(i). We do not know

from the extracts of the EPC Contract which have been provided what the “Key Delivery

Milestones” are and when they need to be completed by, but it is relatively safe to assume

for these purposes that a series of small delays would not necessarily amount to a failure

to meet a Key Delivery Milestone. Similarly, it is unlikely that a series of minor delays in

reaching minor targets will give rise to the conclusion that Excel has repudiated the EPC

Contract given that Excel is continuing to perform its obligations under the EPC Contract.

- In terms of termination with a cure period, Omnia would need to be able to specify a

“material breach” by Excel of its obligations under the EPC Contract. It is really a question

of fact whether the cumulative effect of missing minor delivery targets could be

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considered to be a “material breach” of obligations under the EPC Contract. An argument

could certainly be constructed to the effect that the aggregate effect of the breaches is

“material”. However, the argument is likely to be finely balanced and not without

ambiguity. Making an argument of this kind would need to be considered in the context

of an assessment of the potential risks associated with attempting to terminate the EPC

Contract in these circumstances, which we will come on to.

- Even if the cumulative effect of the breaches were to be considered “material”, since the

breaches do not relate to the payment of money, Omnia would technically need to give

Excel 30 days from the date of any intended notice of termination to cure the relevant

breach. In this context, there is a question over whether the breach can actually be cured

because it is a failure to meet a delivery target which happened in the past. There is an

argument to say that this sort of breach can never be cured.

- Rather unhelpfully, the EPC Contract does not explicitly provide for what happens when

a material breach is not, in fact, capable of remedy. You could argue in these

circumstances that no cure period should apply. However, the safest option may be to

wait until the expiry of the cure period before terminating. A well drafted clause would

provide that no cure period should apply to a material breach which is not capable of

remedy.

What are the risks to Omnia if it terminates the EPC contract on the basis of Excel’s failure to

meet its targets?

What are the risks of unjustified termination?

Perhaps the biggest risk for a party which is intending to terminate a contract is that there may

not in fact be any right to do so.

There is certainly a risk that Excel may claim that Omnia is unjustified in terminating the contract

given that the failures to meet delivery targets were each, in and of themselves, minor breaches.

In these circumstances, if Omnia refuses to perform its primary duties arising after the purported

termination, Excel could bring a claim against Omnia for repudiatory breach of the EPC Contract.

If successful, Omnia would then be liable to Excel for the losses suffered by Excel as a result of

the repudiation of the contract.

An important point to remember in this context is that a right to terminate is often not clear cut and

is commonly disputed. Accordingly, a party which wishes to terminate a contract should always

take care to explore the validity of the legal grounds for so doing before taking action. There

could be significant consequences for getting it wrong.

Excel’s right of termination

Condition 41(c) affords to Excel a limited right to terminate the EPC Contract.

Excel can serve notice on Omnia if Omnia has failed to pay any sum which has remained due

and payable under the EPC Contract for a period of 20 days or more (except where there is a

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bona fide dispute as to the amount payable). If Omnia fails to make payment within 20 days of

notification from Excel, then Excel can terminate the EPC Contract.

In these circumstances, Omnia will be “on the hook” for the costs and expenses of Excel in the

same way as if Omnia had elected to terminate the EPC Contract without cause.

This right to terminate is important in this context. If Omnia treats the EPC Contract as having

been terminated but is ultimately unjustified in purporting to terminate the EPC Contract, its failure

to continue to perform obligations (effectively meaning a failure to make payment as required

under the terms of the EPC Contract) could give rise to a separate right for Excel to terminate the

EPC Contract.

Are there any other potential risks associated with termination of the EPC Contract by

Omnia?

- Appropriateness of Termination: Termination may not actually be appropriate if the parties

want or need any form of ongoing relationship. Purporting to terminate the contract for a

series of relatively minor breaches could end up being a case of “throwing the baby out

with the bath water”. It may be that simply threatening to terminate the EPC Contract

could encourage Excel to up its game in terms of performance of its obligations under the

EPC Contract. Alternatives to the finality associated with termination could include

renegotiating the contract to reflect changes in the commercial circumstances or, if

necessary, dispute resolution of some kind.

- Commercial Issues: Omnia will need to consider all the commercial issues associated

with termination of the EPC Contract. For example, how easy will it be to find an

alternative EPC contractor? Would this cause a significant delay to the project? Would

this result in significantly increased expense?

- Practical Risks: Will Excel actually vacate the site? Will the site be left in a clean and

safe condition? Is there a risk that contracts with important subcontractors will be

affected? Do subcontractors have the right to terminate in these circumstances and, if

so, can replacements who are willing to work in the jurisdiction be found?

- Impact on Project Arrangements / Consequential Defaults: It should be noted that any

delay in construction could result in defaults under the associated offtake arrangements

and also events of default under the financing arrangements. As a result, taking a

decision to terminate the EPC Contract cannot be made in isolation. The expectations of

the lenders may need to be managed and the impact on the timetable for take over of the

facility will need to be considered very carefully.

- Bankability: How will the termination of the EPC arrangements affect the ongoing

bankability of the project? It is important to remember in this context that the lenders will

probably have conducted due diligence on the existing EPC arrangements and will need

to be comfortable with revised arrangements. The lenders may even have a veto right

over whether Omnia can, in fact, terminate the EPC Contract. Some of this may be

mitigated if the sponsors have put in place cost overrun guarantees and other equity

commitments in the event of delays to the project.

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- Equity Support: Note that the sponsors may be “on the hook” to provide equity support

for cost overruns or for completion of the project if a completion guarantee has been

offered in favour of the lenders.

What else could Omnia do instead?

Without wishing to focus in any detail on the application of English law, it may be worth exploring

whether there are any other remedies for breach of contract that Omnia could consider rather

than the draconian approach of termination.

For example:

- Damages: Could Omnia pursue a claim in damages in respect of the breaches of contract

which have been committed by Excel? This will, of course, depend upon the detail of the

EPC Contract and the common law rules of the law which governs its application. In

these circumstances, Omnia would typically need to prove that any increased costs

sustained by it were directly caused by Excel’s failure to meet the required delivery

targets. Omnia may also need to prove that the loss suffered is not too remote and that

it has tried to mitigate and minimise the losses caused by the breaches of contract in so

far as it reasonably can.

- Specific Performance: A possible alternative to claiming damages might be to seek

specific performance, which is a court order requiring the party which is in breach to

perform its obligations under the contract. Specific performance is only awarded where

it can be shown that damages would not be an adequate remedy to compensate the

claimant and that it would not cause excessive hardship to the defendant to require

performance of its contractual obligations. It may be that damages are considered an

adequate remedy here since Omnia’s increased costs can be compensated with a

payment, but Omnia may also be concerned about future delivery targets (and, in

particular, the risk of a delay to completion of construction and take over of the facility).

However, the EPC Contract is likely to contain a liquidated damages regime in respect of

delay to cover this.

Is there a limit on liability?

Condition 35(a) of the EPC Contract provides that the aggregate liability of Excel for any losses,

expenses, damages, claims or actions in relation to the EPC Contract will not exceed a specified

“Maximum Aggregate Liability”. This does not apply where Excel has been fraudulent or has

committed wilful misconduct, wilful default or gross negligence.

Condition 35(b) of the EPC Contract provides that neither party will be liable for consequential

losses (including loss of profit, revenues, opportunity, etc.). This does not apply where the

relevant party has been fraudulent or has committed wilful misconduct, wilful default or gross

negligence.

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Part B

Anti-bribery

I’ve just received a call from a colleague who is managing the Excel relationship. He says that

the UK press are reporting that Excel has recently made a small facilitation payment to a

Glorinyan government official in connection with the project. If these reports are correct, we think

Excel may be in breach of (i) a provision in the EPC contract under which Excel covenants to

comply with all applicable anti-bribery laws and (ii) Omnia’s internal policies on anti-bribery.

Surely this breach would now allow us to terminate the EPC contract?

Has there been a breach of the EPC Contract?

The starting point here is to look at the provisions of the EPC Contract itself on anti-bribery and

ascertain whether there has, in fact, been a breach of the terms of the EPC Contract.

Condition 43 of the EPC Contract provides that Excel must not breach any relevant anti-bribery

laws whilst providing services to Omnia and must inform Omnia in the event that there is a breach.

So, the key question here is whether Excel has, in fact, breached any relevant anti-bribery laws.

The clause is not particularly well drafted because it is unclear what is meant by the term “relevant”

here, but a logical conclusion is that Excel needs to have breached an anti-bribery law which is

actually applicable to it. This is relatively wide in that it can be construed as covering any law

which is applicable to Excel, rather than just anti-bribery laws which operate in Glorinya.

It does not appear that the clause has been drafted widely enough to result in a breach of the

EPC Contract if Excel does something which breaches Omnia’s internal policies on anti-bribery

(unless that thing is also in breach of any anti-bribery laws applicable to Excel). In an ideal world,

the ambit of this clause would be expanded to allow for a breach in circumstances where Excel

does anything which breaches Omnia’s internal anti-bribery policies and procedures. This is

particularly important both to protect Omnia and because this is likely to be something which

lenders are particularly focussed on (especially ECAs and other bilateral agencies).

Look at the applicable laws…

UK BRIBERY ACT 2010

So, just by way of example, the UK Bribery Act 2010 may be relevant here because (i) Omnia is

a company incorporated under the laws of England and Wales and (ii) to a certain extent, the

Bribery Act has extra-territorial application.

It is beyond the scope of this case study to delve into the detail of the Bribery Act.

However, very broadly speaking, there are four key offences under the Bribery Act:

- BRIBING ANOTHER: A person offers, promises or gives a financial or other advantage

to another person either (i) intending to induce or reward that recipient for the improper

performance of a function or (ii) where the person offering, promising or providing the

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financial or other advantage knows or believes that the acceptance of the advantage in

itself constitutes the improper performance of a relevant function or activity.

- RECEIVING A BRIBE: There are a number of specific offences related to receiving bribes,

but this is broadly intended to cover a situation where a recipient requests, agrees to

receive or accepts a financial or other advantage in return for a relevant function or activity

that is performed improperly.

- BRIBING A FOREIGN PUBLIC OFFICIAL: This is a separate offence of bribing a public

official. A person is guilty of an offence if his intention is to influence the official in their

capacity as a foreign public official. There is no requirement for any improper

performance of a relevant function. Foreign public officials include government officials

and those working for international organisations. The offence does not cover accepting

bribes – only offering, promising or giving bribes.

Although ostensibly relevant, the first three offences will not apply to Excel because an

offence is only committed if it takes places in the UK or, where it does not take place in

the UK, a person’s acts or omissions done or made outside the UK would form part of

such an offence if done or made in the UK and the person potentially committing the

offence has a close connection with the UK. In this context, Excel would only have a

close connection with the UK if it were incorporated under the law of any part of the UK.

- CORPORATE OFFENCE OF FAILURE TO PREVENT BRIBERY: A relevant commercial

organisation is guilty of an offence if a person associated with it bribes another person,

intending to obtain or retain business or a business advantage for that commercial

organisation. The offence can be committed in the UK or overseas.

o A “relevant commercial organisation” includes (i) a body incorporated under the

law of any part of the UK and which carries on a business anywhere and (ii) any

other body corporate (wherever incorporated) which carries on a business, or

part of a business, in the UK.

o A person is associated with a relevant commercial organisation if it performs

services on that organisation’s behalf. It does not matter in what context the

services are performed (and so can cover employees, agents or subsidiaries).

Has Omnia itself committed an offence under the Bribery Act?

Although beyond the scope of this case study, Omnia itself may have in advertently committed an

offence if Excel can be said to be “associated with” Omnia for these purposes on the basis that

Excel is performing services for Omnia. Accordingly, even if the scope of the legislation does not

extend to Excel and even if Excel has not committed an offence, its actions may mean that Omnia

itself has committed an offence.

Defence: Omnia will have a defence to the corporate offence of failure to prevent bribery if it can

show that it has in place adequate procedures designed to prevent bribery. We know that Omnia

has implemented internal policies on anti-bribery, but are they adequate? Do they provide for

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how Omnia should select its commercial partners – for example, does Omnia conduct due

diligence or background checks before entering into arrangements with commercial partners?

Has Excel committed an offence under the Bribery Act?

Excel will only be a “relevant commercial organisation” for these purposes if it carries on a

business, or part of a business, in the UK. If it does not, then the scope of the legislation will not

apply to Excel itself. If it does, then Excel may have committed an offence by failing to prevent

its employees from providing bribes to another person, intending to obtain or retain business or a

business advantage for Excel. The Bribery Act does not define what is meant by “part of” a

business, but guidance suggests that a common sense approach should be taken in assessing

whether an organisation has a demonstrable business presence in the UK.

Note that under the Bribery Act, the eradication of facilitation payments is a “long-term objective”

which requires collaboration between governments and other international bodies given

difficulties faced in some jurisdictions. As a result, there is a public interest test to be applied

before a prosecution is brought to ensure that the Bribery Act is enforced in a just and fair manner.

The key point to take away here is that the application of anti-bribery legislation is technical and

complicated. In addition, the fact that legislation has extra territorial effect means that entities can

be subject to lots of different anti-bribery legislation at the same time.

Given the above, it is very important to focus on the detailed drafting of anti-bribery provisions.

Given that this clause only bites where Excel is in breach of relevant anti-bribery laws, Excel might

argue that there needs to be proof that a breach has been committed before there is a breach of

the EPC Contract – that is, Excel may claim that it needs to have been successfully prosecuted

under applicable law before it is deemed to have breached the anti-bribery clause.

If the clause were drafted better, it would state that Excel should not offer, give or promise any

form of financial or other advantage to any third parties to induce or encourage them to improperly

perform a relevant function or to influence that third party to act in a particular way in its public

capacity.

What about other applicable law?

Omnia would also need to consider any anti-bribery laws in Italy and in Europe more generally

which may apply to Excel as an Italian incorporated entity. To the extent that Excel has breached

any laws which apply to it, there would also be a breach of Condition 43 of the EPC Contract.

Local law advice should also be sought in Glorinya to determine whether Excel has breached any

anti-bribery laws which apply to foreign incorporated entities doing business within the territory.

If there has been a breach, does the breach entitle Omnia to terminate the EPC Contract

for default?

Let us assume, for these purposes, that Excel has in fact committed a breach of relevant anti-

bribery laws. The question then is whether this would allow Omnia to terminate the EPC Contract.

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Condition 43 itself does not give any indication as to the consequences of breach other than that

Excel must inform Omnia of any breach. Accordingly, Omnia must look at the termination

provisions contained within the EPC Contract and assess whether or not there is a right to

terminate for default in these circumstances.

It does not appear as though a breach of anti-bribery laws gives rise to one of the rights to

terminate immediately under Condition 41(b)(i). This is perhaps an oversight in the EPC Contract

given the significance of compliance with applicable anti-bribery laws and the fact that Excel could

actually have caused Omnia to be in breach of applicable anti-bribery laws.

The question then is whether this constitutes a material breach by Excel of its obligations under

the EPC Contract. Given the potential repercussions of a breach of anti-bribery laws, there are

good arguments to suggest that this should be considered to be a material breach by Excel of its

obligations. Not only has Excel itself committed a criminal offence, but it may have caused Omnia

to commit one as well. In addition, there are lots of issues associated with Excel’s actions,

including bad publicity, reputational damage and a general negative impression of the project.

This is also likely to have significant implications in terms of how the lenders view the project.

There are likely to be undertakings and representations in the financing arrangements in relation

to anti-bribery and corruption, breach of which may lead to an event of default under the financing

arrangements.

It is worth noting that Condition 41(b)(ii) provides for a cure period of 30 days before Omnia can

terminate. The same considerations apply as were discussed in connection with the previous

question. That is, this is not a breach which can be cured and so there is a debate to be had

about whether the cure period in fact needs to run.

Reputational risks?

There is a very interesting commercial question in terms of whether it is, in fact, possible for Omnia

to refrain from terminating the EPC Contract. There are significant risks associated with

continuing to do business with a company that has made a facilitation payment – both from a

reputational perspective and from the perspective of the bankability of the project as a whole.

If we do terminate, would any costs incurred by Omnia in putting in place a new EPC contractor

(which will be substantial) be recoverable from Excel?

In order to answer this question, Omnia must focus on the detailed provisions of the EPC

Contract. The contractual termination regime will typically include provisions setting out the

consequences of termination by either party. Again, it will be difficult to argue that any other

calculation of compensation should apply given that the parties have specifically agreed on the

consequences of termination.

Under the EPC Contract, upon termination for default (with or without a cure period), Omnia may

(i) enter the site and expel Excel from it, (ii) complete the works or any part of them itself or by

engaging any third party, (iii) take over and use without payment any construction equipment or

materials which are on the site in connection with the works and for such reasonable period as

Omnia considers expedient and (iv) if it so chooses, pay subcontractors to complete their work at

the site.

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Condition 41(b)(v) provides that Omnia is entitled to compensation in these circumstances.

If Omnia chooses not to have the works completed, it may (i) reject the works and ask for a

reduction in the contract price by the aggregate of an amount proportionate to the part of the

works rejected and an amount for ancillary additional costs arising as a result of rejection or (ii)

accept the facility as having attained take over subject to a fair and reasonable reduction in the

contract price. In these circumstances, Excel shall pay or allow to Omnia such reduction in the

contract price, together with costs, expenses, losses and damages suffered by Omnia as a result

of termination of the EPC Contract.

If Omnia chooses to have the works or any part of them completed, it must draw up and notify

Excel of a provisional statement containing its fair and reasonable estimate of the amount which

will be payable (and such amount will be payable immediately) and, within 60 days after

completion of the facility, draw up an account setting out (i) the costs and expenses associated

with carrying out the works (less the unpaid balance of the contract price payable to Excel as at

the termination date), (ii) the costs and expenses of rectifying any defects, (iii) any delay liquidated

damages which have accrued but not been paid at the date of termination in circumstances where

termination has happened after the date for takeover (which is not applicable in this case) and

(iv) all other costs, expenses, losses or damages incurred by Omnia as a result of termination.

So, Omnia can engage a third party contractor to complete the works and then claim back the

costs of completing the works from Excel (less amounts owed to Excel up to the date of

termination in respect of the contract price for works already completed). It is difficult to say

whether this provision is really intended to operate at a very early stage in the construction

process such that Excel would be responsible for the costs of putting in place a new EPC

Contractor and completing the project essentially from scratch. This is the sort of provision which

could well end up being disputed.

It should be noted for these purposes that Condition 35(a) of the EPC Contract (which applies the

Maximum Aggregate Liability on losses) does not apply to Excel’s liability under Condition 41(b)

in relation to termination with cause and associated compensation.

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Part C: Disputes

You will not be surprised to hear that in the end we decided to terminate the EPC contract with

Excel. This has been communicated to Excel in writing approximately three weeks ago. We have

also made clear that we will request that Excel pays an amount equal to the costs that we will

incur for putting in place a new EPC contractor.

Excel claims that by terminating the EPC contract, we have committed an unjustified termination

which was in itself a repudiatory breach. Efforts to settle the matter with Excel have not been

successful. Excel’s continued failure to attend meetings at agreed times frustrates the settlement

process. In light of these difficulties, we are now contemplating proceeding straight to arbitration.

Rather surprisingly, however, this morning we have received a notice from Excel threatening to

commence legal proceedings in the courts, should the matter not be settled within the next week.

Could we please arrange for a telephone call tomorrow morning to discuss whether under the

EPC contract we are able to proceed straight to arbitration and whether Excel can commence

court proceedings?

What does the EPC Contract say?

Clause 8 of the EPC Contract provides quite clearly that the parties will unconditionally and

irrevocably agree to the submission of any disputes as set out in Condition 42 of the Conditions

of Contract and will not claim, invoke or permit to be invoked any right it may have under the laws

of any state or jurisdiction to prevent, delay, binder or nullify or in any other way obstruct the

submission of any dispute as set out in Condition 42 of the Conditions of Contract.

So, prima facie, there is a defined regime in the EPC Contract for the settlement of disputes.

Condition 42 provides as follows:

- Amicable Settlement: In the first instance, the parties must seek to resolve the dispute by

mutual agreement. If the dispute cannot be settled through consultation within 10 days

after the date of the initial referral to mutual consultation, the dispute must be referred to

a committee comprising the CEO of Omnia and the Chief Operations Manager of Excel.

The committee must convene within seven days of notice of a dispute and provide an

opinion within 20 days of notice. If a unanimous decision is reached within the 20 day

period, that decision will be final and binding on the parties.

- Arbitration: If the parties cannot resolve a dispute through amicable settlement, there will

be a further consultation period of 20 days and if the dispute is not resolved within that

time, the dispute may be referred to arbitration in Singapore under the Singapore

International Arbitration Centre Rules. The arbitration will be in front of a tribunal of three

arbitrators, administered under the Singapore International Arbitration Centre Rules.

Before looking at whether Omnia can proceed straight to arbitration in these circumstances, it is

worth considering why the parties may have decided on these two methods of dispute resolution

in the first place.

540146577 40

What issues should be considered when deciding on a dispute resolution method?

- Privacy: Court proceedings are usually in public, whereas most other forms of dispute

resolution such as arbitration and negotiation can be held in private. This is important in

terms of the reputation of the project as a whole. A public spat between an EPC contractor

and an operator is unlikely to have a positive impact.

- Speed: The speed at which a dispute is resolved can obviously have huge implications

on the rest of the project. Litigation through the courts is unlikely to be the quickest

solution, particularly given all the formalities and procedures that need to be followed.

- Cost: Litigation is generally expensive and there are risks around how costs are allocated.

The usual rule is that the losing party pays the costs of the winning party, whereas in

other forms of dispute resolution, each party may agree to pay its own costs regardless

of the outcome.

- Technical Issues versus Legal Issues: There is a question as to whether certain matters

would be better determined by a technical expert such as an engineer, though this

obviously depends upon the issues being disputed.

- Finality / Enforceability of decision: The parties may prefer to litigate where it seems

unlikely that an amicable settlement will be reached, particularly if they want a conclusive

and binding outcome. However, litigation is also open to an appeals process. Where an

amicable settlement is reached, it will not generally be legally binging unless the parties

formalise the decision in a settlement agreement. Even then, the terms of the settlement

agreement may be difficult to enforce.

Given the factors mentioned, there are obvious benefits to the parties in having chosen amicable

settlement and arbitration as the principal methods of dispute resolution – not least, the fact that

these methods are private.

Can Omnia proceed straight to arbitration?

The EPC Contract contains a multi-tiered dispute resolution clause. This is a clause which

provides for dispute resolution by two or more methods, usually with a more informal and

conciliatory method preceding a more adversarial method such as arbitration or litigation. A key

point to consider when looking at a clause like this is whether the conciliatory method is in fact a

pre-condition to the more adversarial method or whether an element of choice is involved.

Condition 42 of the EPC Contract appears to provide for amicable settlement to be a pre-condition

to arbitration in that the ability to move to arbitration arises when the parties have already failed

to resolve a dispute through discussions.

The key principles which help to ensure that Condition 42(a) is actually enforceable as a pre-

condition are as follows:

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- Certainty of Procedure: There is a sufficiently detailed procedure setting out what the

parties must do, including in respect of the appointment of a management committee.

- Certainty of Timing: There is a clear time period running from the service of notice of a

dispute so the parties know exactly when time begins to run.

- Mandatory Application: Condition 42(a) is drafted such that the amicable settlement

procedure is compulsory and is a pre-requisite to moving to arbitration (a right which only

arises if the parties have been unable to resolve the dispute through conciliation).

It is clear that Condition 42(a) is intended to be operative and capable of being given legal effect;

the process is well defined and the parties’ commitment to the process is unequivocal. So, Omnia

must go through the amicable settlement procedure set out in Condition 42(a) before proceeding

to arbitration in accordance with Condition 42(b). Whether Omnia has done so will be a question

of fact.

There is a clear benefit to attempting to settle the dispute amicably before moving to arbitration.

If a settlement can be reached, there may be chance of preserving the commercial relationship

between the parties. Reaching a mutual agreement will also save time and cost and ultimately

mean there is less long term impact on the project. The process is also conducted in private and

is confidential.

It appears as though Omnia has attempted to settle the matter with Excel through meetings and

that Excel has frustrated this process by refusing to turn up to those meetings. More information

will be required from Omnia to determine whether the requisite procedure has in fact been

followed and whether the relevant time periods have elapsed for the purposes of keeping within

the four corners of the EPC Contract. In practice, the parties should have appointed a

management committee to consult for at least 20 days in an attempt to reach a unanimous

decision.

Condition 42(a) does not deal with what happens if one party does not agree to follow the

amicable settlement procedure. If Excel keeps failing to turn up to meetings, there is not much

that Omnia can do. It may be worth demonstrating that attempts have been made to appointment

a management committee and to convene a meeting between the relevant individuals. If Excel

refuses to co-operate and the relevant time periods have passed, Omnia should be entitled to

proceed to arbitration.

What are the benefits of arbitration over litigation?

General speaking, arbitration can be better for contracting parties than litigation for the following

reasons:

- It is flexible and the parties can select a seat of arbitration, the set of procedural rules that

they wish to apply, the arbitrators themselves and the venue where the hearings will take

place. This can have obvious advantages in a situation where a project has connections

with multiple jurisdictions.

540146577 42

- The ability to select arbitrators is an advantage over litigation because the parties can

appoint a panel of arbitrators who are experienced technical experts if the matter in

dispute so requires.

- Arbitration is generally seen to confer neutrality to the dispute resolution process because

parties can choose a neutral seat for the arbitration. For example, in the EPC Contract,

the parties have elected for Singapore to be the seat for arbitration. This means that

neither party has a “home ground” advantage.

- Arbitration is confidential and conducted in private. Arbitral proceedings are not open to

the public. This is very important in a project context as a public spat between contracting

parties who are developing a project can have very negative implications. It is, however,

open to the parties to agree to disclose certain aspects of the arbitration if they wish to

do so and if the institutional rules that they have chosen stipulate that they may do so.

- Arbitral awards are legally binding on the parties and are widely enforceable. As a result,

arbitration is a way of overcoming the difficulty of enforcing a foreign court judgment in

certain jurisdictions.

Can Excel commence court proceedings?

Excel has threatened to commence legal proceedings. It is assumed for these purposes that this

means that Excel wishes to conduct litigation through the courts.

For the reasons already outlined, it is unusual in an international project financing context for

litigation to be chosen as a method of dispute resolution given the potential harm that can arise

to the project as a whole as a result. Court proceedings could be extremely damaging for the

project. In addition, it is surprising in these circumstances that Excel wishes to commence court

proceedings given the nature of the issues which would be litigated and their potential reputational

implications for Excel (in terms of bribery allegations).

Condition 42 of the EPC Contract does not provide for litigation as a method of dispute resolution

and Clause 8 of the EPC Contract explicitly provides that the parties agree that disputes will only

be resolved in accordance with Condition 42. Technically, however, the parties do not have to

agree in the contract itself to litigate in order to have recourse to the court system. This is different

from arbitration where there has to be a valid arbitration agreement in order to proceed to

arbitration. The arbitration agreement does not have to be contained in a separate agreement –

rather, it can be contained in the principal contract as in Condition 42(b) of the EPC Contract.

So, whether or not Excel can commence court proceedings will depend on whether the matter in

dispute falls within the ambit of the arbitration clause in the EPC Contract. If it does not, then

Excel could argue that the parties had not agreed that the specific matter in question should be

resolved by arbitration and that litigation is still open to it as a method of resolving the particular

dispute in question.

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How should the arbitration agreement be drafted?

Given the risk of one party asserting that litigation is still open to it as a method of resolving

disputes, arbitration agreements should be drafted (i) to be unambiguous and (ii) so as to ensure

that all conceivable disputes are covered.

UNAMBIGUOUS

The following elements are required in order to create a valid and unambiguous arbitration

agreement:

- clear choice of procedural rules;

- legal seat of arbitration, being the legal jurisdiction which will determine the validity of the

arbitration agreement and the law that governs any challenges to the arbitral award;

- the law governing the arbitration agreement, which should be specified in the underlying

contract or in the arbitration clause itself;

- the language in which any arbitration proceedings are to be conducted;

- the composition of the tribunal and the express provisions for selection of the members

of the tribunal (noting that the institutional rules which have been selected may contain

provisions relating to the qualification, number and nationality of the arbitrators); and

- provisions relating to confidentiality of the proceedings and the award, if so desired by

the parties and if not already provided for in the institutional rules governing the

arbitration.

COVERING DISPUTES

The definition of “Dispute” in the EPC Contract is wide and covers “a dispute or difference between

the parties as to the formation or construction of the contract or as to any matter or thing arising

under or in connection with the contract or its subject matter, including any claim in tort, under

statute or for restitution based on unjust enrichment or for rectification or frustration”.

As a result, this should cover the dispute between Omnia and Excel.

Clause 8 of the EPC Contract clearly provides that the parties agree to submit to the resolution

of any “Dispute” in accordance with Condition 42. Further, the parties essentially agree not to

frustrate this process.

Given that Condition 42(b) contains all the elements of a valid arbitration agreement, it is likely

that the courts would reject any attempt by Excel to commence litigation proceedings in the courts.

The courts, especially English courts, are generally reluctant to interfere where there is a valid

arbitration agreement, and tend to give effect to the parties’ wishes. For example, the English

courts only tend to intervene where the arbitrators cannot act in the way of enforcement or

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procedural steps, or if there would be a substantial injustice otherwise. The UK Arbitration Act

1996 provides a limited list of circumstances under which the courts may interfere.