You are on page 1of 18

Economic Cost of Poor Contract Enforcement Legal Perspectives

Syed Ahmad Hassan Shah HASSAN KAUNAIN NAFEES Legal Practitioners & Advisers

Perspective
Parties ! ! Private Party local or foreign Government

Nature ! ! ! Concessions BOT, BLT, BOO, BOOT, O&M, TOR PPP more, better, affordable and timely Privatization complete or strategic management or equity stake

Time Period ! Post award issues breach of performance obligations

Typical Project Structure


Sovereign Guarantee
GOVERNMENT

Shareholders Agreement
SPONSORS

Designated GoP Entity

OFFTAKER

Concession Agreement

International & Domestic

SUPPLIER

PROJECT

OPERATOR

O&M Agreement

MLAs, Commercial Banks Security Trustees Insurers

LENDERS

CONTRACTOR

Operation & Maintenance Agreement

The 3 Rs
! Risk ! Responsibility ! Reward ! Identification of Risk: ! Project Risk, Political Risk, Economic Risk etc. ! Allocation of Responsibility: ! Initial mitigation measures ! Determination of party obligations ! Sharing of Reward: ! incentive for efficient and economical performance cost plus, rate of return, security for payment

Key Concern #1

! Inadequate or incomplete knowledge or omission to consider relevant information breeds uncertainty of outcome

Identification of Risks (1)


Pre-construction Risks: ! Site availability Completion Risks: ! Cost overruns !Technology !Design !Price increase Operating Risks: ! Technical ! Market/Demand ! Inflation ! Obsolescence Security Financing Risks: ! Interest Rate ! FOREX ! Debt/Equity Availability ! Competition ! Financial Close

Identification of Risks (2)


License & Regulatory Risks: ! Consents & Approvals Legal Risks: ! Choice of Law ! Jurisdiction ! Governing Law ! Enforcement of Security ! Change in Law

! Sovereign Immunity ! Integrity Pact Other Risks: ! Political ! Economic ! Environment ! Force Majeure

Allocation of Risks
Risk Type Pre-Construction (Site Availability) Cost overruns (machinery, material) Security Risk Consequence Delay in Start, cross-over impact on other obligations Mitigation Measure Who should procure land? Allocation Government or Investor or Joint Investor

Increase in Project cost Fixed price? (financing); decrease in Turnkey? returns, cash flows & profits Liquidated Damages Stoppage, delays, closure On ground security; Insurance; compensation Reconciliation, mediation, arbitration

Government

Dispute Risk

Long deliberations, indecision, stoppage, delay, closure

Joint

Political Risk

Increase in equity, Arbitration; financing, erosion of return, compensation abandonment, expropriation

Government

! Economic Costs not limited to: ! Mere contract value, or ! Accounting Costs of an entity ! These include Opportunity Costs cost of resources of all interconnected parties money that could have been made by all parties ! Every breach if not remedied is monetized

Key Concern #2

Law: Dynamic yet Certain


! Predictability of law and regulation on credible and consistent basis procedural as well as substantive ! Judicial Review of executive action independently, without bias, no extraneous considerations ! Integrity Pacts exposure to exploitation by public or political authorities, corruption

Key Concern # 3 Legal Certainty

Minimal Discretionar y Procedural Requirement

Rational & Acceptable Decision Making

Legal Certainty

Typical Dispute Resolution Mechanism


! Bilateral discussions and negotiations ! Expert Determination ! Arbitration ! Enforcement of Award through Court

Some Decisions of the Apex Court


! McDonalds Case ! Pakistan Steel Mills Case ! The LNG case ! Makro Habib Case ! Safe City Project Case

! Reko Diq Case

Some BIT Decisions Consequences of Contempt for Contractual Rights

Some BIT Decisions


Rumelli Case ! ! Turkish Investor in Kazakhastan telecom sector Once Kar-Tels project was on ground, local partner Government sought expulsion of investor and gain full benefit Claim before ICSID expropriation of investment Amount of claim: USD 227m Granted USD 125m

! ! !

Some BIT Decisions


Cargill Case: ! ! US Investor in Mexico production & distribution of high fructose corn syrup Anti-dumping duties on HFCS imports, expropriation of 27 sugar mills, increase in MFN tariffs, a 400% discriminatory tax on HFCS containing drinks Led to no HFCS use in soft drinks by all Mexican bottling plants. HFCS revenue fell 80% within 3 days of imposition of the tax; in 2002 HFCS imports from USA fell by 90% then virtually ceased Claim before ICSID for loss of business due to discriminatory measures Amount of claim: USD 124m approx Granted USD 80m approx

! ! !

Some BIT Decisions


! ! ! Azurix Case: US Investor in Argentina 30 year concession for distribution of portable, treatment and disposal of sewerage Argentina imposed change in law - non application of the tariff regime to the Concession for political reasons; the Province did not perform its obligations under the contract; lack of support for concession prevented investor from obtaining financing; and that political concerns were always privileged over the financial integrity of the Concession. With no hope of recovering its investments, investor gave notice of termination of the Concession and was forced to file for bankruptcy. Claim before ICSID for loss of business due to discriminatory measures Amount of claim: USD 290m approx Granted USD 165m approx

! ! !

Concluding Concern
If we have paid enough for the wrongdoings of our politicians or the bureaucracy must we now turn to pay for the follies of our courts?

You might also like