April 2015

Introduction Welcome to the April 2015 edition of Train times, our global rail newsletter which reviews the issues impacting the rail industry.

This edition provides insights on:

Rail projects around the world: an updateA look at rail projects across the Americas, Asia-Pacific, Europe, the Middle East and Africa Page 2

Constructing railways in the UAE: Liability for defective work An in depth look at contractor’s liability for defective work Page 4

Trouble on the line for the Welsh Government? Commentary on the Welsh Government’s announcement regarding the establishment of a not for dividend wholly owned subsidiary companyPage 7

Developing India’s railwaysReview of the development of India’s railways and the Ministry of Railways’ preferred models. Page 8

We hope you find Train Times an informative and useful read.

Should you have feedback or suggestions for future topics, please contact infrastructure@clydeco.com. Similarly, to hear more from our global projects & construction group, email us providing your area(s) and region(s) of interest.

Train Times April 2015

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Rail projects around the world: an updateRail projects continue to be a focus around the world, some examples of current and upcoming projects are set out below

UKHS2 is the proposed high speed rail link for England, linking London to the Midlands and North of England. Plans for HS3 have already been mooted, to reduce travel time in the Midlands and North of England

USAMetropolitan Transportation Authority’s (MTA) East Side Access project - expansion of the Long Island Rail Road, the busiest commuter railroad in the USA (due to complete in December 2022)

KenyaLamu Port-Southern Sudan-Ethiopia Transport ( Lapsset) transport corridor , flagship project of Kenya’s 2030 Vision

TanzaniaMemorandum of understanding signed for Standard Gauge Railway, a central rail line to Bujumbura

BrazilSalvador Metro – line 1 partially opened in 2014, the rest of line 1 and line 2 are currently under construction

IndiaDiscussions taking place for highspeed rail link between New Delhi and Chennai

UKCrossrail is high-frequency, high-capacity rail line currently under construction for London and the South-East (project due to begin services in late 2018). Plans for Crossrail 2 are already underway – this will be a high-frequency, high-capacity rail line running through London and into Surrey and Hertfordshire

QatarDoha Metro is a key part of the Qatar Rail Development Program (due to complete in time for 2022 World Cup)

Bahrain, Kuwait, Oman, Qatar,Saudi Arabia, UAEGCC railway project underway across the Middle East

ItalyProposed high-speed railway station in Naples, Italy as part of project to improve public transport in the area (due to complete February 2017)

China/ThailandChina and Thailand have agreed to build two dual-track rail lines to connect northeast Thailand’s Nong Khai province, Bangkok and eastern Rayong province (due to complete in December 2017)

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Train Times April 2015

Constructing railways in the UAE: liability for defective workBy Mark Blanksby and Alexa Hall

Unless defined by contract, a “defect” is not a term of art; it relates to the concept that works do not conform to contract requirements. Defects encompass defects in workmanship and materials, and design defects. In relation to defective work, a contractor will, depending on the nature/extent of the defect, potentially (1) assume obligations to its employer pursuant to the defects liability clauses of its contract, (2) be liable to its employer in damages for breach of contract, and (3) be liable to its employer under the decennial liability provisions of local law.

Contractual defects liabilityMost industry standard construction contracts contain “defects liability” clauses. These clauses oblige a contractor to return to site and remedy any defects in its works that are notified by (or on behalf of) an employer within a certain time period calculated from the date on which the works are certified as complete in a taking-over certificate. In a rail project, the defects liability period may be 24 months or longer. The employer frequently withholds a portion of the contractor’s retention money until the expiry of the defects liability period.

A contractor does not ordinarily have the “right” to return to remedy a defect unless the contract expressly confers that right. Consequently, without a defects liability provision, an employer is entitled to employ others to rectify any defects that may arise after the date of taking over and claim the cost of doing so from the contractor. Such clauses are therefore often said to benefit the contractor: they afford the contractor a “grace period” during which it possesses a first (and depending on the wording, exclusive) right of refusal to rectify defects that are not apparent at the date of taking over. It is in a contractor’s interest to ensure that any defects are dealt with promptly once it is given notice of them. Doing so, avoids the risk of being back charged with remedial works costs which potentially exceed those which it would have incurred in remedying the defects in question itself (and any dispute arising in relation to which contractor is responsible for the defect).

However, it is important to appreciate that the expiry of the defects liability period does not release the contractor from all liability for defects. This simply constitutes the end of a period during which the contractor is contractually obliged to return to site and make good defects. An employer remains entitled to pursue the contractor for breach of contract.

Liability in damages for breach of contract A defect ordinarily constitutes a breach of contract. The existence of a contractual defects liability period does not limit the employer’s rights in respect of that breach, absent express words to the contrary. Therefore, unless the defective work is removed/remedied before taking over, the employer is entitled, subject to the contract, to pursue an action for breach of contract against the contractor.

The period during which the contractor may be liable for defects will be determined by reference to the applicable limitation period prescribed by law, namely the period of time within which an action must be commenced. Federal Law No. 5/1985, as amended by Federal Law No 1/1987 (UAE Civil Code), Article 473 provides that a claim is time-barred after a period of 15 years unless a specific provision of the law provides otherwise. In relation to breach of contract, UAE Federal Law No. 18 of 1993, the Commercial Transactions Code, Article 95 provides the non-defaulting party with a time limitation period of 10 years from the date of breach to issue proceedings. In consequence, a contractor

responsible for defective work in breach of contract will be liable to its employer for a period of 10 years from the due date for performance. In the context of defective work, this will usually be the date of the taking over certificate (commencement of the defects liability period).

This 10-year limitation period therefore runs in parallel with the defects liability period and potentially, as set out below, overlaps with a decennial liability period.

The employer shoulders the burden of proving that the contractor is responsible for the defective work. If successful, its remedy is damages, which by virtue of the general principles applicable to the calculation of compensation under UAE law, will likely constitute substantiated costs of reinstatement, or where the defect is irreparable, an award to reflect the diminution in value of the project in question.

A contractor’s liability for defective work in breach of contract may be curtailed or extinguished by virtue of any liability limitations or exclusions contained in the contract.

Decennial liabilityDecennial liability applies if the subject matter of the contract in question is the construction of buildings or other fixed installations, the plans for which are made by an architect to be carried out by a contractor under its supervision. Pursuant to the UAE Civil Code, Article 880, the architect and the contractor will be jointly liable, for a period of 10 years from the time of “delivery” of the work (unless the contract prescribes a longer period), to compensate the employer for a total or partial collapse of the building/installation constructed and for any defect which threatens the stability or safety of the building.

It is important to distinguish decennial liability from the forms of liability described above.

Importantly, decennial liability is applicable by law in the country where the site is located irrespective of any choice of law clauses contained in the contract.

Another distinguishing feature is that liability only arises where a total or partial collapse of a building or fixed installation occurs and/or a defect threatening the stability or safety of a building is discovered during the decennial

liability period. The terms “fixed installation” and “building” are neither defined in the law, nor considered in any detail by the local courts. Decennial liability under Article 880 also applies only to structures which are intended to be in place for 10 years or more. The distinction therefore lies between those works that are considered to be “permanent” structures with an intended installation life of 10 years or more, and those which are considered to comprise “temporary” structures (i.e. those that will be removed/demolished on or after completion or aren’t intended to remain in place for 10 years or more).

Applying this principle in the context of UAE rail infrastructure development, means that contractors constructing, by way of example, elevated metro stations, underpass structures which support those stations, depot areas or elevated viaducts will fall within the ambit of Article 880. Contractors engaged to procure rolling stock will not (as rolling stock does not comprise “structures”).

Decennial liability is strict; it is imposed jointly and severally on a contractor and architect regardless of fault/breach of contract. The contractor and designer remain liable even if the structural defect/collapse is the result of a defect in the land, or if the employer consented to the defective construction. A contractor engaged under a design and build contract is equally likely to be liable.

The 10-year decennial liability period ordinarily runs from the date of the taking-over certificate - the date of “delivery” of the works under Article 880.

Any agreement which seeks to exempt this liability is void and unenforceable (UAE Civil Code, Article 882).

Any claim on the basis of decennial liability must be commenced within 3 years of the discovery of the collapse or defect (UAE Civil Code, Article 883). Applying this limitation period may result in shortening the decennial liability period if the collapse occurs/defect occurs during the first 7 years, or extending the decennial liability if the collapse occurs/defect is discovered in the last 3 years.

The employer’s remedy will be the measure of damages required to compensate it for the total/partial collapse of the structure, namely the substantiated costs of replacing the structure.

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Train Times April 2015

ConclusionA 10-year limitation period relating to legal liability for the consequences of defective performance generally exists in relation to a contract governed by UAE law. This is not replaced by either the defects liability period or decennial liability.

In relation to the former, the defects liability period is a supplementary contractual remedy available to the employer which operates alongside the limitation period for claims in breach of contract. As to the latter, decennial liability constitutes a supplemental liability in law for the particular events of total or partial collapse of a building or fixed installation.

Generally decennial liability falls outside the scope of standard CAR and PI insurance available in the UAE, and so, unless particular cover can be obtained, contractors and architects commonly retain this residual risk. It is for this reason that rail infrastructure providers operating in the UAE should continue to be aware of decennial liability.

Decennial liability is also a facet of other key Middle East jurisdictions in which large-scale rail projects are being or are to be performed. Decennial liability provisions are found at Articles 711 to 715 of the Qatar Law No. 22 of 2004, Articles 692 to 697 of Kuwait Law No.67 of 1980, and Article 76 of the Government Tenders and Procurement Law of the Kingdom of Saudi Arabia.

Mark Blanksby Partner, DubaiT: +971 4 384 4553 E: mark.blanksby@clydeco.com

Alexa HallAssociate, DubaiT: +971 4 384 4872 E: alexa.hall@clydeco.com

Trouble on the line for the Welsh Government?By David Moore - first published in Railnews

The Welsh Government recently announced the establishment of a not for dividend wholly owned subsidiary company. This company will initially provide advice and technical expertise but its role could be extended and the prospect of the Wales & Borders franchise (currently operated by Arriva Trains Wales) being run on a not for dividend basis has been floated.

It will be interesting to see whether the cheers outweigh the groans. Those cheering will point to Directly Operated Railways’ operation of the East Coast franchise which they see as a success, arguing that profits earned by rail companies could, in the world of not for dividend operation, be invested in such things as improved trains and better services. Those groaning will see this as a way of undermining a system which has delivered significant growth, safety improvements and improvement to services. They may also mention that a system which is derided by some in the UK is envied in other parts of the world.

We all know the arguments and can probably guess with some accuracy which side of the debate different groups will fall but if the Welsh Government is persuaded by the arguments in favour, how would they achieve their aspiration?

The most direct route would be to award the franchise to the newly formed company when the existing franchise expires, without troubling the market with a competition. This would avoid un-pleasantries such as bid costs and uncertainty. The alternative route is for the not for profit company to bid with others in the competition to secure the franchise.

Granting the franchise to a not for profit company without a competition would involve a significant change in policy, which is of course entirely possible. It would also need to be legal.

Rail franchising is undertaken in the context of both domestic and European legislation and particularly in relation to the latter, the Department for Transport and the Welsh Government do not have a free hand. Of particular relevance are the rules on the competitive procurement of public passenger transport services by rail.

Those who see this as meddling from Europe will want to know that the tide is against them as from December 2019 public service rail contracts will be subject to mandatory tendering and train operators will be entitled to offer “competing commercial services”. The rail market in Europe is moving closer to rather than away from greater competitive tendering.

To secure the franchise it seems likely that the not for dividend company would have to bid with others and so follow the bidding rules imposed on others. This raises issues for the government (can it run a fair competition when it is also bidding for the franchise?), the not for profit bidder (is it prepared to lose and incur the wasted bid costs?) and the other bidders (will they bid if they perceive there to be an uneven playing field?).

Whatever the merits of public over private operation once the franchisee has been selected, if the road to securing a franchisee is too bumpy the government may be persuaded that public sector bidders are not such a good idea.

David MoorePartner, LondonT: +44 (0)20 7876 4955 E: david.moore@clydeco.com

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Train Times April 2015

Developing India’s railwaysBy Michael Horn and David Moore

India has one of the largest rail networks in the world, comprising over 115,000km of track and 7,000 stations. It carries over 8 billion passenger and 1 billion tons of freight a year.

In 1951, almost a century after railways were introduced into India, the network was nationalised but in a bid to encourage economic growth and improve ailing infrastructure newly-elected Prime Minister Modi has signalled a new era of foreign direct investment and the involvement of the private sector in the development and operation of India’s railways.

Parts of the network are now quite old (about 25% of the 130,000 railway bridges are over a century old) and it is reported that at least USD 93 billion over five years is needed to maintain and modernise the existing network. But the new government wants to go further and build high speed lines between key centres, each of which could cost in the region of USD 10 billion. With almost all of the network’s revenue spent on operating the system and paying social costs little is left to upgrade the infrastructure.

The government has acknowledged that it does not have the resources to upgrade the system so public private partnerships are to be adopted to utilise private finance (including foreign private finance).

The Ministry of Railways’ preferred modelsThe Ministry of Railways has proposed five models to implement rail connectivity and capacity augmentation projects. Details regarding each scheme are sparse but conclusions can be drawn from the description of each scheme.

Non-Government Private Line Model - the owners of large industrial facilities (such as ports, mines and logistics parks) could develop a railway, primarily for goods movements. Under this approach the private sector would develop and operate the railway with little input or assistance from the Ministry of Railways, although Indian Railways could enter into arrangements where it uses the infrastructure

to transport good using its own wagons and locomotives in return for the payment of access charges or user fees.Railways are rarely economically viable so this approach would only work where the private sector is satisfied that the revenue generated will pay all the costs and leave an acceptable return for the investors. If such a scheme exists the Ministry of Railways might be interested in promoting it, or working with the private sector to do so, to derive financial benefits from the scheme itself.

Joint Venture Model (JV) – under the joint venture model the public and private sectors will work together to develop a scheme. The Ministry of Railways could enter into a development agreement with the joint venture which develops the scheme in accordance with the terms of the development agreement. If this approach were to be adopted it is likely that funding would be provided by the Ministry of Railways with the railway (once developed) being transferred to the Ministry of Railways to be operated by it or Indian Railways. The development agreement would legislate for issues such as acquisition of land, the specification of the railway and the standards to which it has to be built, timing, procurement of subcontracts and payment.

Build, Operate and Transfer Model (BOT) – a BOT is a traditional PPP model where the private sector builds and operates a scheme for a number of years and then transfers it to the public sector at the end of the concession period (which may be 30 years or more). The private sector also finances the scheme, raising finance which is then repaid over the life of the concession utilising the revenues generated by the scheme. Such revenue could comprise fares, freight charges or access charges (to pay for access to the track or other infrastructure) as well as revenue from other commercial activities, such as retail activities.

Capacity augmentation through BOT annuity model – this model is similar to the BOT but with the project company being paid for the system it provides on an availability basis (i.e., provided the system is available the contractor will be paid) rather than by reference to the revenues generated by the scheme. This should relieve the contactor of any revenue risk which can be a significant impediment to securing finance for a scheme.

Capacity Augmentation with funding provided by customers – under this arrangement, a customer and the Ministry of Railways will agree the basis on which the latter would develop a scheme with funding for the scheme being provided by the customer. The customer would deposit the required funding in an escrow account to be expended by the Ministry of Railways on the railway project in accordance with the agreement between the customer and the Ministry of Railways. The customer would be entitled to earn an agreed rate of return equivalent to 7% of the disbursed amount along with interest up to a maximum of the freight charges in any year.

Although these five headings are fairly vague, it is clear from other information released by the Ministry of Railways that it sees a role for the private sector in developing high speed railways (above 250kmh) and in upgrading the existing network to semi-high speed operation (above 120kmh).

Michael HornPartner, SingaporeT: +65 6544 6553 E: michael.horn@cldyeco.com

David MoorePartner, LondonT: +44 (0)20 7876 4955 E: david.moore@clydeco.com

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Train Times March 2015

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