Ngo-Martins Okonmah
Lagos

Construction claims when asserted as an investment

In collaboration with the International Construction Projects Committee of the IBA, Milan Arbitration Week hosted a webinar on ‘Construction claims when asserted as an investment’ on 7 February 2022, during the week of its annual conference.

The speakers at the webinar were Pierre Tercier, emeritus professor of the University of Fribourg and honorary chairman of the ICC International Court of Arbitration; Troy Harris, associate professor of the University of Detroit Mercy School of Law; and Simon Hughes QC of Keating Chambers in London.

We share highlights of the speakers’ presentations below.

Typical construction claims

Professor Pierre Tercier kicked off the webinar by providing a helpful introductory overview to typical construction claims.

In particular, Tercier identified the key actors/participants in construction disputes, including the employer – which may be a developer, a government or state entity or investor or end user – and the contractor or subcontractor engaged to perform the work, as well as banks/lenders which play a key role in financing construction projects. Although the typical construction arbitration dispute is between the employer and contractor, a variety of other types of disputes can arise between various participants. Tercier also explained common forms of contractual structures, including build-only, turnkey and construction management contracts.

He also looked at the typical construction claims that may be brought by either the contractor or the employer.

The most common contractor claims against the employer relate to requests for extensions of time or variation, loss and expense, non-payment by the employer, force majeure events or termination. To trigger these rights, the contractor must generally comply with any notice requirements, maintain adequate contemporaneous records and comply with production obligations.

Common employer claims are claims for delay or defects in the works. If a claim for delay is made, liquidated damages are usually the available recourse. The employer may also choose to terminate the contract, with the employer generally benefiting from contractual termination rights which are broader in scope than those of the contractor.

Tercier also considered the most common reasons for construction disputes, referring to a 2019 survey conducted by Queen Mary University of London and Pinsent Masons,¹ as well as a 2020 survey conducted by the global consultancy firm HKA.² While there are many causes for construction disputes, late performance and design issues have been reported as the most common causes for construction disputes. Poor contract management, poor contract drafting, changes in scope, incomplete design and deficiencies in workmanship have also been reported as causing a large number of disputes.

Lastly, Tercier said a word about the difficulties typical to construction disputes, including the technicalities of facts, variety of contractual provisions and governing laws at issue, and the variety of authorities competent to resolve the disputes.

Resolving construction disputes by commercial arbitration

In his presentation, Professor Troy Harris focused primarily on the pros and cons of resolving construction disputes by commercial arbitration as opposed to court litigation.

As to the pros of commercial arbitration, Harris considered the enforceability of awards, the neutrality of the arbitral forum, the choice of forum and party autonomy. The enforceability of arbitration awards is considered particularly crucial in jurisdictions such as the United States, which has no treaty with other jurisdictions
for the enforceability of court judgments, whereas arbitral awards obtained in the US can be enforced in jurisdictions that are signatory to the New York Convention. The advantage of neutrality in arbitration is evident where international contractors operate in foreign markets with employers that may be well connected locally. The principle of party autonomy is another advantage in arbitration, as it permits a range of choices that allow parties to shape the process, subject only to minimal due process or natural justice restraints. The principle of party autonomy is significant to addressing many of the perceived disadvantages of international arbitration. As such, it is therefore arguable that the advantages outweigh the perceived disadvantages of arbitration, as the disadvantages can be anticipated and countered at the drafting stage.

However, one must also consider the cons of commercial arbitration, which Harris identified as: the lack of appellate review of the merits of awards; limited exchanges of information in arbitration; the difficulty of joining non-parties to the arbitration agreement; and the difficulty of consolidating related arbitrations.

There are concerns about the lack of appellate review in arbitration, as complex and high-value disputes are at the mercy of the arbitrator’s determination, without the potential of further appellate review on the merits. While such concerns may not arise in investment treaty arbitration, where annulment proceedings are available under arbitral/institutional rules, such as the International Centre for Settlement of Investment Disputes (ICSID) Rules, for the most part, it is considered that arbitration is final with limited grounds of appeal. Harris suggested that parties can, however, utilise party autonomy and tackle any such concerns at the contract drafting stage by permitting an appellate merit review. Harris made this suggestion with the caveat that an appellate arbitrator may not necessarily be in a better position to correct an erroneous award, and suggested that appointing qualified arbitrators may be the most effective means of preventing a bad award.

Another perceived disadvantage of arbitration is the limited exchange of information when compared to requirements under litigation. In particular, the US standards of discovery are considered highly limited. However, parties can again offset such concerns in the terms of the arbitration agreement. This is particularly key for construction disputes which are often very document intensive. Parties should consider their document production expectations when drafting their arbitration agreement, taking into account the type of documents each side is expected to maintain during the project life cycle and afterwards.

The difficulty of joining non-parties and consolidating multiple complex arbitrations, where the institutional arbitral rules do not make specific allowance for such situations, may also be a deterrent to choosing arbitration. This is particularly relevant in construction disputes, which typically involve multiple parties and multiple contracts. However, this concern can again be anticipated and addressed during contract drafting.

The best way to address the perceived disadvantages of arbitration and the concerns that may arise is by already considering the kind of disputes that are likely to arise when drafting the arbitration agreement.

Construction claims asserted as investment claims

In his presentation, Simon Hughes considered what happens when construction claims are asserted as investment claims, and examined the intersection between commercial claims and bilateral investment treaties (BIT) claims through the lenses of specific case law.

In considering a treaty claim, the threshold questions to be determined are whether: (1) the contractor qualifies as an ‘investor’ of the home state and therefore benefits from the host state’s obligation to protect investors of the home state; (2) the BIT in question confers upon the contractor, as an investor of the home state, protection such that contravention by the host state gives rise to a right of action; and (3) the basis on which the investment dispute is to be resolved as provided in the relevant BIT.

The protections accorded an investor in a BIT are different from the interests protected under commercial contracts. A BIT will routinely provide that the host state will not treat investors or their investment less favourably than the host state’s own investors – the National Treatment Provision – or those of any third country – the Most Favoured Nation Provision.

However, questions have been asked on whether construction contracts can be regarded as ‘investments’ for the purposes of treaty claims. In the seminal decision of Salini v Morocco [ICSID Case No ARB/00/4], the tribunal considered this question and developed indicators in identifying a sufficient ‘investment’ for the purposes of a treaty claim. The tests laid down are: (1) contribution: whether the contractor is making a contribution to the host state; (2) duration of the contribution: eg the project in question having been implemented over a certain duration; and (3) risk: whether the contractor has taken on operational risk in the host state.

Based on the test laid out, Hughes observed that construction contracts may qualify as an investment for purposes of bringing a treaty-based claim. However, to successfully advance ‘construction claims’ as an investment, great care must be taken to ensure that claims and remedies are laser-focused on the language of the BIT (ie, the specific protections afforded). This was illustrated in Vivendi v Argentina [ICSID Case No ARB/97/3], where the tribunal held that a treaty cause of action is not the same as a contractual cause of action; conduct contrary to the relevant treaty standards must have occurred. Therefore, care should be taken in presenting treaty claims, as the fundamental basis of the claim is the decisive indicator in determining the tribunal’s jurisdiction in an investment dispute.

Notes

1 Queen Mary University of London and Pinsent Masons, International Arbitration Survey – Driving Efficiency in International Construction Disputes (2019).

2 HKA, CRUX Insight, Engineering and Construction: A Regional Analysis of Causation (2020).