16.35 judy wilson (blake, cassels & graydon llp in association with dr. saud al ammari law firm)

Building an Effective Legal

Framework for the Mega

Project Transaction

Judy Wilson

Blake, Cassels & Graydon LLP

in association with

Dr. Saud Al Ammari Law Firm

Outline

1. Managing within rigid procurement processes

2. Particular legal issues (related to technical and

commercial risks) that have been significant

challenges/innovations for mega projects

Managing within Rigid

Procurement Processes

Managing the Rigid Procurement Risk

General Comments

– Poor execution of mega project procurement is a risk for BOTH the Owner and

the bidders

– Owners and Bidders often underestimate the degree to which the procurement

can influence the transaction for years after the procurement is complete

– Poor choices made during the procurement process impact both the commercial

“partnership” of the owner and the successful bidder AND the success of the

project implementation

– Parties rarely acknowledge the value of a meticulous (but lengthy) procurement

process

��Managing the Rigid Procurement Risk

Rush to Issuance of the Procurement Documents and the Hurried

Procurement

– The failure of projects, including mega projects, (for example, projects that

exceed budget and/or schedule, or that provide a product that does not meet the

owner’s expectations) is often traceable to a “poor” procurement process

– Most common mistakes include poor scope of work definition in the technical

specifications (or ambiguous scope of work) often because the procurement

documents are rushed into the market

– Governments all over the world often share a desire to demonstrate progress on

a project by issuing the procurement documents prematurely

– Best solution is (i) patience before a rush to issuance, (ii) if patience is not

possible, then an in-market period that allows progressive issuance of key

documents (i.e. not all documents need to be issued with the initial package)


Poor Design of Evaluation Criteria

– One of the most common mistakes that runs the risk of “mis-matching” the

successful bidder to the project and owner

– Often the owner will emphasize price without taking into account its significant

concerns over project schedule, strategic importance of the project, or complexity

of the project

– Inappropriate use of past precedent documents is often the cause of this problem

and it often relates to the “race to issuance”

– Best solution is (i) clear identification of owner’s priorities for the project, (ii) a

conscious matching of evaluation criteria to the priorities and (iii) setting the

submission requirements to reflect the owner’s priorities and the associated

evaluation criteria


Poor Design and Execution of a Complex Procurement Process

(and the risk of bid failure)

– Procurement documents (RFPs etc.) must be specifically designed for mega

project procurements and include such features as technical bilateral

consultation, commercially confidential meetings, commercially confidential

requests for information and similar tools

– Procurement processes should not be fishing expeditions (with the attendant

reputational risk)

– Pursuit costs for these transactions are high and therefore the procurement

process is scrutinized more carefully


Failing to Achieve “Commercial Balance” (and the risk of bid failure)

– The old style of one-sided government contracts presents genuine risk to the

owner in mega project procurements

– Mega projects involve such significant risk that a failed project can ruin even the

largest international company. These are “bet the company” transactions

– Company boards will withdraw from competitive procurements if the lack of

reasonable commercial terms makes the transaction a risk to the well being of

the company

– It is genuinely a possibility that an unreasonable commercial deal will cause

either bid failure or a lack of interest in the market

– The two best tools for an owner to avoid these risks are (i) listen to the bidders,

and (ii) ensure that the advisory tem has a good sense of what is “market”


Responsiveness During the “In Market” Period (and the risk of bid

failure)

– Mega project procurements should learn from PPP transactions and include a

“feedback loop” from bidders to owner

– This is intended to drive the procurement toward “best value” and the appropriate

and most efficient allocation of risk in the project agreement

– Best practice requires (i) owners to be responsive to serious concerns raised by

bidders and (ii) bidders to make the effort to participate and to effect change to

the commercial documents during the in market period


Poor Resourcing

– Mega project transactions require a greater commitment of resources to

complete the procurement process than other procurements

– Owners often underestimate the resources they will need to get the transaction

to commercial close

Particular Legal Issues –

Challenges and Opportunities


Challenges/Opportunities

“Off-market” Transactions

– Owners (particularly in their first mega project or their first in a particular asset

class/sector) tend to underestimate the extent to which there are “accepted”

approaches to mega projects (including “accepted” allocations of risk) that have

to be understood and addressed

– A different allocation of risk can be acceptable to the market, but it usually must

be justified based on project specific concerns

– Owners and bidders should make significant effort to understand the global

markets and commonly accepted allocations of risk



Reliance on Information Provided by the Owner During the

Procurement Process

– Owner must decide whether bidders will be permitted to rely on information

provided (for example, soils information, various pre-project studies)

– Generally, bidders are required to conduct their own due diligence and NOT rely

on information provided by the owner

– In some circumstances bidders are permitted to rely on certain portions of the

information and given “reliance” letters by various firms

– Note that a reliance letter is only as good as the insurance or assets that stand

behind the reliance letter

– Note that there is an increasing trend for owners to take greater responsibility for

owner information in order to avoid the pricing of a significant contingency

– Example: contamination and transit files.



Compliance with/Changes to Applicable Law

– Project Co/Contractor normally obliged to comply with the applicable law at all

times when carrying out its obligations under the Project Agreement and

applicable law is usually defined broadly

– The sharing of risk arises in the determination of whether Project Co/Contractor

will get a variation/change order (or a right to a delay in hitting substantial

completion) if the applicable law changes

– This risk was once a straight “flow through” to the owner in most cases (i.e. the

owners risk). More often now this risk is shared, with some “changes in law”

being regarded as a cost of doing business. For example, changes in the

general law are often regarded as a cost of doing business in the jurisdiction and,

therefore, are often risks borne by Project Co/Contractor

– There is significant variability in the allocation of this risk but there are some

“lessons learned” from P3 transactions



Site Conditions

– Project Co/Contractor often obliged to take the site on an “as is, where is” basis

subject only to contamination that was not disclosed to or readily inferable by

Project Co/Contractor

– Geotechnical risks usually stay with Project Co/Contractor (subject to reliance

letters and contamination or fossils and artifacts)

– However, some of these risks are now being tailored to asset classes so the

owner can avoid contingencies. For example, it may not be possible for bidders

to do proper due diligence on municipal road allowances in linear projects

(transit, highways)



Major Delays in Construction

– Often, any delay that does not cause a delay in the critical path is at Project

Co/Contractor’s risk, irrespective of the cause of the delay

– Delays that impact the critical path are a shared risk usually depending on the

cause of the delay

– Agreements often enumerate specific events that will give Project Co/Contractor

a right to claim relief (for example, a breach of contract by the Owner)

– The enumeration of these events is often revised to be project specific. For

example, events for which relief is given could include contamination, force

majeure events, discriminatory changes in law, and discovery of artifacts, fossils

or species at risk.

– One major trends in mega projects (and, for example, in P3 projects) is the

extent to which the risk of “unpredictable events” is a shared risk rather than a

risk absorbed by the owner. This is certainly the case in P3s and may spill over

to the mega project.

Particular Legal Issues -


Access to the Site

– Owner is obliged to provide a non-exclusive right to access the site to Project

Co/Contractor

– Owner has a right to allow other contractors on the site to carry out work

provided the other contractors do not interfere with Project Co/Contractor’s work

– A failure to provide access or a delay in providing access is at the owners risk

– However, as “sites” become more complex, providing access may also be more

complex.

– For example, in the United States and Canada, providing guaranteed access to a

municipal road allowance for transit can be very complex, particularly in the

presence of a non-municipal/regional transit authority



Permits, Licenses and Approvals

– Normally these are Project Co/Contractor’s risk and responsibility, subject to

specific permits, licenses and approvals to be obtained by the owner

– Risk that licensing or approval bodies will be slow is Project Co/Contractor’s risk

– For mega projects, the inherent controversial nature of the project (they can be

“high impact” projects) introduces the concept of “political risk” that will often

have to be accounted for in provisions related to permits, licences and approvals



Subcontractors

– Project Co/Contractor’s risk, subject in some circumstances to force majeure and

similar events that affect subcontractors

– However, the ability of Project Co/Contractor to manage its subcontractors is

often in conflict with the owner’s right to approve subcontractors

– The usual compromise is the owners right to approve “Key Subcontractors” but in

a mega project even “minor” subcontractors can be carried out significant work

valued in the tens of millions



Interference by Third Party Contractors Engaged by the Owner

– Normally the owner’s risk, subject to Project Co/Contractor’s obligation to

cooperate

– The nature of the project and the site impacts this significantly

– Transit projects, for example, may have significant risk over a very large/long site



Force Majeure Events (remote and uninsurable risks)

– Project Co/Contractor normally would get relief to the extent that such events

delay the achievement of substantial completion or interfere with Project

Co/Contractor’s ability to carry out maintenance and rehabilitation

– Note that this is not the traditional (very broad) definition of force majeure

– Force majeure events are usually a enumerated list of events.



Insurable Events Beyond the Control of Project Co/Contractor

– Usually an enumerated list

– Note that the relief is not extensive because of Project Co/Contractor’s ability to

insure against these risks

– Note the increasing importance of project insurance in determining allocation of

risk