Between the years 1973 and 2017, the world’s consumption of energy has more than doubled. This shows the mounting need for energy sources. As a result, there has been a higher demand for the construction of energy facilities. In close relation with this, construction arbitration has come to be the go-to when it comes to settling disputes that arise from the construction of these facilities.
In this article, we’re going to be considering five key issues of risk that come up in energy arbitration and how they can be addressed.
Time is a very important aspect in the construction of energy facilities, and the consequences of delays in projects like this are far-reaching.
Risks pertaining to time are usually the responsibility of the contractor, because at the start of every project, when the contract is being drafted; a proposed start and finish date is usually set, and allowances are made for unexpected occurrence and unforeseen circumstances. These aside, it is expected of the contractor to execute a project within the confines of the agreement, except something totally out of his power or jurisdiction comes up, such as owner-caused delays or a force majeure.
Disputes have arisen with regards to what could be suitably called a force majeure. However, with the break out of the covid-19 pandemic, contracting parties have been forced to pay close and deliberate attention to their terms of contract, and to make provisions for such an occurrence.
Several types of conflicts occur in to construction arbitration.
One of which is:
1. Owner claim for liquidated delay damages
There is a liquidated damages clause in construction contracts that is available to compensate the owner of the project if the contractor fails to present a completed project within the stipulated timeframe. This clause levies from the contractor some monetary sum that is relative to an agreed fraction of the total contract price. This money is the estimated calculation of the losses the owner is liable to suffer because of delays in the completion of the project. The provision for this clause is for compensation (for the owner), and not punishment (for the contractor).
The idea behind the clause is to cut short the complicated process of identifying each and every one of the delays and ascertaining the losses accrued, as is the generally practiced.
Presenting a completed project executed within the confines of the budget is the responsibility of the contractor.
Most energy facilities require large budgets. Therefore it is up to the contractor allocate these resources accordingly, with deliberate evaluation and planning and to plan for any changes that might come up with regards to cost.
Two major risks are encountered when it comes to quality in construction arbitration.
The first is that the contractor may present a project that is carried out completely outside the terms of contract.
The second is that the constructed facility, although carried out according to contractual dictates is not fit for the intended purpose.
To resolve disputes pertaining to quality, an arbiter, usually in person of the project engineer is called. He it is that then evaluates the work done, and has the power vested in him, contractually, and by applicable law, to issues certificates on the quality.
The entirety of the work to be done is usually spelled out at the beginning of the project, usually before the allocation of funds. Many things are factored in at this moment, including the detailed functionality of the facility as well as the route to take in its construction. All these will be presented formally.
The risk allocation here goes to the contractor, who is expected to deliver a completed project, promptly as per agreement. However this might be viable in a theoretical situation where the project owner spells out the scope of the project in documented form, including the technical aspects. But this, oftentimes do not occur.
All these are addressed with the inclusion of clauses that gives room for adjustments and the right allocation of risks.
5. Political, economic and social
Project owners and contractors alike are both prone to risks associated with political, economic and social factors on an energy project. These factors are jointly related, as a change in one most often results to a synonymous change in the others.
Recovering from the losses these risks pose depends on the prior agreement of the parties. A decision has to be made, at the start of the project, as to whether risks, stemming from political, economic or social factors should be left as they occur, or whether it should be allocated among them.
It is evident, that disputes that arise with regards to the construction of energy facilities are very similar to any other type of dispute in construction arbitration. The only difference with energy arbitration is that international players are involved and the schedule is strictly production driven.
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