Strategic management of risks and claims in nuclear construction projects 18 May 2016, Hong Kong
Contents Legal Risk Management Pays Off 5 Risk Management at the Contract Stage 7 Risk Management During Project Implementation 11 Dispute Management 15 2
Shearman & Sterling s Global Nuclear Group Dedicated nuclear energy lawyers Nuclear projects, finance & development group Developed many IPP models under US and English law 140 year history advising financial institutions FOAK nuclear projects and transactions around the world Advising lenders on developing their policy and investing into nuclear projects Nuclear disputes Advising on the world s largest nuclear arbitration Focus on delivering practical, bankable and deal-making solutions for our nuclear industry clients based on experience and lessons-learned 3 Presentation name Month DD Year
Our International Arbitration Practice Shearman & Sterling has a multicultural, multilingual 100 lawyer team fully dedicated to international arbitration, with extensive experience in international arbitration. Clients have entrusted us with their most critical and complex international disputes for the past 40 years. We offer assistance, representation and advice at all stages of the arbitration process. This includes the early assessment and management of claims, pre-arbitral negotiations, the conduct of arbitral proceedings, advocacy at trial, and the challenge and enforcement of arbitral awards. We also appear before national courts to prosecute or defend applications for interim measures in support of arbitration, such as injunctions, attachments and orders preserving evidence. We stand apart from other firms for our ability to address highly complex issues of international arbitration law and have been repeatedly singled out as the firm to go to for seriously problematic cases. More importantly, we stand out for our ability to achieve success for our clients, having secured the two largest awards ever rendered in the history of international arbitration, namely a USD 50 billion award for the majority shareholders of the former Yukos Oil Company in an investment arbitration brought against the Russian Federation, and a USD 2.47 billion award on behalf of The Dow Chemical Company in a commercial arbitration arising from a failed joint venture. We are also representing Areva in an ICC arbitration in Stockholm against Finnish utility company Teollisuuden Voima Oyj in relation to the construction of the OL3 nuclear power plant. This case involves numerous interrelated and complex claims, including the assessment of their compounded effect in terms of delay and disruption suffered by the project. Claims are referred to experts for adjudication, and then to the arbitral tribunal for final resolution. This is the largest construction dispute currently pending with over USD 7.2 billion at stake No question: it's a top arbitration practice. Chambers Global, 2015 Acts for contractors in arbitration proceedings arising from construction and infrastructure projects across the region. They give good and prompt advice and are good at giving more than one solution to a problem." Chambers Global, 2015 Energy Arbitration: We have extensive experience across the energy sector, including oil & gas matters (upstream and downstream), nuclear power, hydroelectric power, and renewable energy projects disputes. We act for multinational corporations, sovereign States and State-owned companies. Construction Arbitration: We represent owners and contractors in international construction and engineering arbitrations arising from projects throughout the world. Our principal focus is on high value, complex multi-claim disputes concerning oil & gas facilities, power stations, and process plants. M&A and Joint Ventures: We have handled many of the world s largest disputes relating to mergers & acquisitions and joint ventures, shareholder agreements, representations and warranties, price adjustment mechanisms, and preemption rights. General Commercial Disputes: We represent clients from many business sectors in their commercial disputes, notably matters arising from sales, supply, distribution and agency agreements. Investment Treaty Arbitration: We represent clients in numerous arbitrations arising under bilateral and multilateral investment treaties. Partners of our firm also regularly serve as arbitrators in investment treaty arbitrations and as legal experts in relation to complex issues of international investment law. Shearman & Sterling LLP s large team is without question the leader in Paris. It manages an exceptional investment and commercial caseload featuring high-profile oil and gas, telecoms, construction and corporate disputes. Legal 500 EMEA, 2015 4
Legal Risk Management Pays Off
Risk management as a way of avoiding disputes Disputes takes time Disputes cost money Disputes tie up management resources, engineering resources and other human resources Parties tend to underestimate time, cost and complexity of disputes It is often difficult to find constructive solutions when a difference has escalated into a dispute Prevention is better than cure 6
Risk Management at the Contract Stage
Nuclear, Power and Process Plant Disputes: Where do the Disputes Arise? Concept Design and Pre-Contract Issues [Client] History of development of concept design Early design development Risk assessments Feasibility of design schedule Understanding of regulatory interface and licensing regime Integrated project programming Early Contract Performance Framework documents and document handling Licensing processes Interfacing with regulator Design and procurement of long-lead equipment Progress of basic system design Development of detailed baseline programme Excellent understanding of the requirements and focus of major international financial institutions Early Delays and Disruption Impact of site conditions on planned design and construction activities Changes from upstream system design and impact on downstream civil basic and detailed design Impact of delayed design approvals on downstream works Re-sequencing of design and construction activities Downstream Problems Delays to delivery of major equipment Changes to and redesign of key structures Changes to regulatory / licensing framework Unanticipated construction and installation problems Subcontractor mobilization delays Site inspections / work holds Reporting on progress and on projected delays to completion On-going and future problems Design of I&C architecture and key I&C equipment Reporting on progress and on projected delays to completion Withholding of progress payments and levying of liquidated damages Testing and commissioning Resource rationalization, pacing, demobilisation Suspension and termination Multi-Phase Arbitration
Proactive risk management at the stage of contract negotiation Dispute avoidance perspective on contract negotiation and contract drafting Tender requirements Understanding the project and the counterparty The contract should be a roadmap for the project Clearly defined scope of work, areas of responsibilities, rights and obligations Clear risk allocation (risks allocated to the party best able to control/manage the risk and/or sustain the consequences) Minimize interface risks (EPC turnkey does not solve all interface issues) Clarity on responsibility for design changes Work now, fight later provisions for changes to scope of supply 9
Proactive risk management at the stage of contract negotiation Owner/operator liability vis-a-vis the regulatory authority Clear allocation of responsibility for the management of interface with regulatory authority Procedures for document review and approval Treatment of liquidated damages clauses for delay/caps Regime governing plant rejection and consequent compensation Treatment of milestone achievements and corresponding payments installments (the importance of project cash flow cannot be underestimated) Dispute resolution mechanism THE CONTRACT SHOULD NOT ONLY BE SEEN AS A SET OF RIGHTS AND OBLIGATIONS IT SHOULD BE VIEWED AS THE BASIS FOR A PARTNERSHIP BETWEEN SUPPLIER AND THE OWNER 10
Risk Management During Project Implementation
The importance of procedures for contract management Signing the agreement is only the beginning not the end Do not neglect the contract management function Competent team Ensure continuity and preservation of the paper trail Design changes Manage design change procedures Strict adherence to contractual change procedures Document review and approval by owner/operator Management of interface with regulatory authority Primary responsibility with owner/operator "mailbox" problem? Role of main contractor? Internal document management - everything will be scrutinized 12
Theoretical (but realistic) example of NPP construction dispute: Example 1 THE CONTRACTOR S CLAIM CLAIM Death by a Thousand Cuts The Contactor advances a global disruption claim based on a multitude of breaches by the Owner of its document handling obligations: Hundreds of thousands of design-related documents for review and approval by the Owner and Regulator Late comments on documents Commenting out of sequence Raising comments on later revisions that could have been raised on earlier revisions Unnecessary and inappropriate focus on form rather than substance Educating the Owner s personnel through the design review process Inadequate resources at Owner and Regulator level to cope Massive disruption and ripple effect to all downstream activities
Theoretical (but realistic) example of NPP construction dispute: Example 2 THE THE OWNER S OWNER S CLAIM CLAIM Poor Planning and Misreporting of Progress ISSUE The Owner claims the Contractor s performance problems are caused by poor scheduling, and has deliberately misreported progress. Contract schedule was not feasible, and its feasibility had not been properly assessed before the contract Contract schedule did not reflect the under-developed state of the concept design Contractor has failed to understand the contractual requirements in terms of scheduling and progress reporting Contractor's baseline programme was defective and unachievable During the Project the programmes were not properly updated, with inaccurate progress recorded and incorrect as-built data This meant the contractor had no real handle on project issues and priorities Accusations of deliberate misreporting of progress, manipulation of the programmes and misstating delays to completion and their causes
Dispute Management
Our International Arbitration Practice: Dispute Avoidance and Dispute Management We are very frequently engaged by owners and contractors alike in connection with on-going projects. Among other things, we advise our clients on: assessing claims dispute avoidance and dispute management techniques negotiation, mediation, expert determination and other forms of pre-arbitral alternative dispute resolution compliance with pre-arbitral steps setting a clear strategy for potential arbitration The reason why our clients engage us early on during the course of their projects is to help position themselves for the best possible outcome, both for the project itself and in terms of any future arbitration..
Early Dispute Avoidance and Management Disputes that might arise, disputes that will arise Issues spotting / Red flags Early dispute management and dispute avoidance techniques Managing the escalation of disputes in a controlled way Compliance with the contract to protect rights Organising resources internally to manage disputes When to involve lawyers
Do not let the dispute resolution clause become the midnight clause An effective dispute resolution clause is your guarantee that you will be able to enforce your contractual rights Balanced and properly worded dispute resolution procedures may assist the parties in managing the escalation of disputes in a controlled way Mitigate the dangers of unresolved conflict Multi-tiered dispute resolution clauses Mediation, Dispute Resolution Board, Dispute Adjudication Board etc. 18
Contacts
Nils Eliasson Partner Practice Nils Eliasson Partner, International Arbitration Hong Kong T +852 2978 8000 nils.eliasson@shearman.com Beijing T +86 186 1420 1488 Bar Admissions Hong Kong Sweden Education University of Lund, Dr. jur. University of Lund, Master of laws University of Utrecht, Certificate in Comparative and International Law Languages Swedish, English Nationality Swedish Nils Eliasson is a partner in Shearman & Sterling s International Arbitration Group. He acts as counsel or arbitrator in commercial and investment treaty disputes conducted under the auspices of the Hong Kong International Arbitration Center (HKIAC), International Chamber of Commerce (ICC), Singapore International Arbitration Center (SIAC), London Court of International Arbitration (LCIA), CIETAC, Vienna International Arbitration Center (VIAC), German International Arbitration Institute (DIS) and the International Arbitration Institute of the Stockholm Chamber of Commerce (SCC)), as well as in ad hoc proceedings under the UNCITRAL arbitration rules. Nils Eliasson experience includes disputes related to construction, engineering, energy, oil and gas, infrastructure, joint ventures, mergers and acquisitions, license disputes, telecommunications, and real estate. He has also handled investment treaty arbitrations under various bilateral investment treaties and the Energy Charter Treaty. Nils Eliasson has been described as a lawyer with increasing visibility in commercial and investor-state arbitrations in China. Praised by clients as a smart, personable practitioner in Chambers Asia-Pacific, he is also singled out for his expert knowledge of the energy industry and various international rules. The publication observes that he is frequently mandated by Chinese clients, who appreciate his excellent legal assistance and services, and state that he is refreshing, really engaged in the arbitration field. Pending or recent international arbitrations in which Nils Eliasson has appeared as Counsel include the representation of: A French-German consortium in two ICC arbitrations in Stockholm against a Finnish utility company. The dispute arises from an agreement for the construction of a nuclear power plant in Finland. Finnish law governs and the language of the proceedings is English. EUR 5.8 billion at stake A Chinese State-Owned Enterprise in an SCC arbitration governed by Swedish law arising out of a series of engineering services contracts for the design and construction of a petrochemical plant. USD 1.8 billion at stake. A Chinese State-Owned Enterprise in an SCC arbitration governed by Swedish law arising under a long-term gas supply agreement. Over USD 2 billion at stake. A Chinese company in HKIAC arbitration proceedings against a US company concerning a joint venture and technology transfer. Over USD 150 million at stake. A European energy company in an investment treaty arbitration against a European State under the Energy Charter Treaty and the ICSID Convention. Over EUR 1.4 billion at stake. 20
Our International Arbitration Group
Our International Arbitration Practice Nuclear & Construction Arbitration We have represented owners and contractors in over 70 international construction and engineering arbitrations, arising from projects throughout the world. Our principal focus is on complex multi-claim disputes involving highly technical issues such as design changes, additional work, unforeseen or adverse physical conditions, force majeure, delay claims, cost overruns, defective works, late payment, and a host of other design and construction-related questions. We have acted as Counsel in arbitrations arising from projects such as nuclear power plants, electric power stations, solar fields and wind farms, hydroelectric projects, oil & gas facilities and process plants, industrial plants, infrastructure, urban development projects, and specialized equipment. Shearman & Sterling is ranked as the No.1 law firm for international arbitration by the PRC Minsitry of Commerce (MOFCOM) We list below some examples of our relevant experience. Representation of Areva in an ICC arbitration in Stockholm against Finnish utility company Teollisuuden Voima Oyj in relation to the construction of the OL3 nuclear power plant. This case involves numerous interrelated and complex claims, including the assessment of their compounded effect in terms of delay and disruption suffered by the project. Claims are referred to experts for adjudication, and then to the arbitral tribunal for final resolution. This is the largest construction dispute currently pending with over EUR 5.8 billion at stake. Representation of a Chinese State-Owned Enterprise in an SCC arbitration governed by Swedish law arising out of a series of engineering and construction contracts for the design and construction of a petrochemical plant. USD 1.8 billion is at stake. Representation of an international contractor consortium in an ICC arbitration against a Middle Eastern State. The dispute arises from a contract for the construction of a major infrastructure project in the Middle East. Claims are referred to an expert Engineer for determination, and then to the arbitral tribunal for final resolution. The law of the Respondent State applies. Approximately USD 1 billion is at stake. Representation of Erdenes Oyu Tolgoi LLC, a Mongolian Stateowned company, in complex negotiations with global mining company Rio Tinto with regard to the massive Oyu Tolgoi mining project in Mongolia. Representation of an Asian engineering and construction contractor as Claimant in an ICC arbitration in New York against a North American owner. The dispute arose from an agreement for the construction of a coal gasification facility in the United States. New York law applied. What the team is known for excellent track record representing states and private entities in arbitrations relating to construction projects. Chambers Europe, 2014 This is an excellent team - the lawyers are extremely clear and structured, and not overly adversarial in their approach. Chambers Europe, International Arbitration, 2014 Clearly firmly established at the top end of the market, this large and experienced team of arbitration specialists is considered a formidable opponent. Chambers Global, 2010 22
Our International Arbitration Practice Nuclear & Construction Arbitration Representation of an international joint venture as Respondent and Counterclaimant and in an ICDR arbitration in New York initiated by a North Asian company. The dispute arises from an agreement for the construction of a chemical plant in North America. Issues include delay and defective works. New York law applies. Representation of a Chinese-European joint venture in a dispute with a European construction contractor subject to arbitration in Zurich under the Swiss Rules of International Arbitration. The dispute concerned claims for additional work alleged to have been performed in the construction of part of an industrial plant in China. English law applied. Representation of a North American contractor in payment and defects disputes against an Asian owner arising from the construction of power facilities in Taiwan. The contract provided for ICC arbitration in Geneva, and was governed by Taiwanese law. Representation of a North Asian project company in a dispute with North American and North Asian construction contractors subject to ICC arbitration in Singapore. Issues arising included delay, disruption and extra work claims. The dispute arose from the construction of a combined cycle power plant in the Philippines. New York law governed. Representation of a project company owner in a dispute against a contractor consortium subject to UNCITRAL arbitration in Stockholm. The dispute arose from the construction of a 2x600 MW coal fired power plant in Indonesia. Issues included liability for delay, applications for extensions of time, and the validity of the assessment of liquidated damages. English law applied. Representation of a North African energy company as Respondent in an ICC arbitration in Paris initiated by a European construction contractor. The dispute arises from an agreement for the construction of an oil & gas production facility in North Africa. The law of the North African Respondent's State applies. Over USD 1 billion is at stake. Representation of a South East Asian owner as Claimant in ICC and SIAC arbitrations in Singapore against a North Asian contractor arising from the construction of a 37 storey tower block in Manila. Issues arising included construction delay, liability for unforeseen events, and various financing claims. The law of the Philippines governed both cases. Representation of a consortium of European construction companies as Claimants in an ICC arbitration in Paris arising from the construction of a hydro-electric project for a Middle Eastern Government. The sum in dispute was around USD 1 billion and over 40 individual claims were raised. This stellar team is very well organised and incredibly responsive. Chambers Global, Europe-wide, 2011 This group's impressive caseload continues to grow by the year and covers a diverse crosssection of industries. Chambers USA, 2014 23
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