CONSTRUCTION & ENGINEERING SEMINARDEON GRIESSEL

2

> Common law (Roman Dutch law)

> Locatio conductio operis faciendi

distinguished from

> Purchase and Sale

LEGAL NATURE OF CONSTRUCTION AND ENGINEERING AGREEMENT

3

> There is no intention to sell

> Parties: contractor & employer

> Contractor is commissioned to deliver a finished product of work for remuneration

> Contractor’s core obligation: handing over the works

> Employer’s core obligation: payment of contract price

> To these are added ancillary provisions stemming from either:

> the common law re locatio conductio operis (implied terms); or

> the terms of the contract between them

LOCATIO CONDUCTIO OPERIS FACIENDI (LETTING & HIRING OF WORK)

4

> If the contractor designs, he takes design responsibility

> Vis major & casus fortiutus serve as an excuse for late completion

> Contractor must execute work in proper and workmanlike manner

> Materials used must be of sound quality & fit for purpose

> Damages for breach of contract: the cost to have the work remedied or completed by someone else

> Contractor bears risk during construction phase

> Employer bears risk as soon as he approves the works/takes over the works

LOCATIO CONDUCTIO OPERIS FACIENDI (LETTING & HIRING OF WORK)

5

> contractor has a lien for:

> enrichment enjoyed by employer

> moneys owing to contractor by owner

> employer must give occupation of the site for works to be carried out

> accessio: if the plant is affixed to the land it automatically belongs to the owner

LOCATIO CONDUCTIO OPERIS FACIENDI (LETTING & HIRING OF WORK)

6

> Very different common law basis

> There must be an intention to sell

> Could be for sale of things not yet in existence eg a machine yet to be manufactured

> Common law remedies

> Actio empti if there is a contractual warranty which is breached (powerful remedy)

> cancellation

> damages

> Aedilian actions (lesser remedies) where there is no contractual warranty

> price reduction

> restitution

PURCHASE AND SALE (DISTINGUISHED FROM LOCATIO CONDUCIO OPERIS)

7

> Risk passes from the seller to the purchaser as soon as the sale is perfecta, in other words as soon as agreement is reached on price, the thing sold and the intention to buy and sell

> Avoid combining agreements for “works” and agreements for “supply” into one contract as this does not recognise the differences in the common law basis of each

PURCHASE AND SALE (DISTINGUISHED FROM LOCATIO CONDUCTIO OPERIS)

8

> EPC (fixed price turn key) not re-measurement, not EPCM

> bankability of agreement (FIDIC Silver Book plus more)

> delay liquidated damages sized with reference to obligations under funding documents

> performance liquidated damages (sized with reference to obligations under funding documents)

> accompanied by O&M agreement

> pass-through provisions

> EPC agreement subject to Financial Close and Equity Close

REQUIREMENTS OF BANKS IN PROJECT FINANCE MATTERS

9

> parent company guarantee by contractor

> advance payment guarantee

> performance bond by contractor

> compliance with technical standards

> should the performance bond reduce on completion?

> Supervisory Control and Data Acquisition (SCADA) software clause (for power generation plants, fabrication plants, etc)

> unforeseeable difficulties clause

REQUIREMENTS OF BANKS

10

> Schiffren clause (absent in FIDIC)

> Conventional Penalties Act and liquidated damages clause

> Typical security arrangements (advance payment, advance payment guarantee, performance bond, retention moneys)

> Design clause regulating design responsibility and design liability

> Employer’s requirements (scope document)

> Section 37(2) of OHS Act and mandatary agreement

> Pass-through provisions (REIPPP)

> Site data clause

TYPICAL CLAUSES IN EPC CONTRACTS

11

> Intellectual property rights (technology not to infringe IP rights of third parties)

> Warranties re design, workmanship and materials

> Performance warranties relating to yield of plant

> Early warning clause (absent in FIDIC)

> Termination for convenience by Employer

> Testing & completion

> Insurance (broker’s input required)

> Dispute resolution

TYPICAL CLAUSES IN EPC CONTRACTS

12

> An advance payment by employer to contractor

> Reducing advance payment guarantee given by contractor to employer

> Performance bond given by contractor to employer: may or may not reduce on completion of plant and valid for defects liability period

> Retention amounts withheld by employer from payments to contractor

> Parent company guarantee by contractor

TYPICAL SECURITY ARRANGEMENTS (MITIGATES THE RISK OF BREACH OF CONTRACT/INSOLVENCY OF THE COUNTERPARTY)

13

> Purpose: to back up project company

> Content (general overview)

> BEE obligations

> Economic development obligations

> Anti-corruption clauses

> Commercial Operation Date (COD) arrangements

> Reporting obligations and giving of notices

> Minimum acceptance capacity of facility

> Performance testing

> Commissioning of facility

PASS-THROUGH PROVISIONS (REIPPP)

14

> Compliance with the Codes

> Compliance with Power Purchase Agreement (PPA) and Implementation Agreement (IA)

> Personnel clauses

> Termination points

> Granting DoE access to information

PASS-THROUGH PROVISIONS

15

> In international project finance deals a subsidiary of the offshore parent is often also the contractor

> In many instances the engineering/technology comes from overseas

> Large parts of the plant are often imported and make up a big part of the cost of the plant

> With planning, one could capture profit in a low tax jurisdiction depending on transfer pricing and the shareholding structure

> One can reduce taxable income of the local contractor subsidiary

> Could charge the local project company for engineering and the major supply from offshore

STRUCTURING ISSUES: INTERNATIONAL EPC CONTRACTS

16

> Project company still pays the same price

> EP (offshore) vs C (local)

> Bank/Employer on the horns of a dilemma:

> the risk of split responsibility vs fully wrapped EPC

> Performance warranty: who gives?

> Split EPC structure has been approved by an off-shore funder in REIPPP project

STRUCTURING ISSUES: INTERNATIONAL EPC CONTRACTS

17

> details: scenario A

EXAMPLES TYPICAL OF ON-SHORE OFF-SHORE EPC STRUCTURES

18

OFFSHORE

Offshore Parent

Low tax jurisdiction subsidiary

Project Company

local contractorsubsidiary

Minority/BEE

Minority Shareholder

ShareholdingShareholding

Co-Ordination Agreement

Minority Shareholder

Construction contract

Offshore Engineering and Procurement contract

Offshore

Onshore

19

> details: scenario B

EXAMPLES TYPICAL OF ON-SHORE OFF-SHORE EPC STRUCTURES

20

Construction contract

Offshore Parent

Offshore ContractorCompany

registered in SAas an

External Company

OffshoreOnshore

Shareholding

Project Company

Minority shareholder

OffshoreEngineeringand

Procurement contract

Construction contract

21

> Where external company is used, no co-ordination agreement is necessary because it’s the same legal entity

> Because it is the same legal entity, the bank’s risk is reduced

> Don’t have risk of supplier blaming construction company and vice versa because it is the same entity

> Must have separate agreements: one for offshore supply and engineering, one for local construction

> External company structure has been approved by local bank, albeit not in REIPPP context

22

> Currency and Exchanges Act No 9 of 1933

> Exchange Control Regulations 1961

> Treasury delegated authority to SA Reserve Bank

> SA Reserve Bank delegated certain functions to local banks

> Rulings and circulars are issued by SARB to authorised dealers (banks)

> Local resident may not pay an off-shore party without exchange control approval: many standing exceptions/arrangements

EXCHANGE CONTROL

23

> A project company may receive a parent company loan in foreign currency. It may need to pay an off-shore supplier (eg a sister company or third party) abroad in the same foreign currency

> Normally when foreign currency comes into SA, it is converted to ZAR

> Normally a local resident must use his Rands to buy foreign currency in order to pay a non-resident

> To avoid double currency conversion, the SARB allows the project company on application and depending on the merits, to keep the foreign currency in a CFC account and to pay the off-shore supplier from the CFC account in foreign currency

> Without SARB approval this is not allowed

EXCHANGE CONTROL

24

> No currency conversion

> Need SA Reserve Bank approval

CLIENT FOREIGN CURRENCY ACCOUNT

CFC Account

Local (project) company

Receive foreign currency(eg shareholder loan)

Pay in foreign currencyeg pay for engineering done offshore and/or for imported elements of plant

25

> One must be aware of:

> the common law roots of a construction and engineering agreement because this is the backdrop against which our courts interpret these contracts and the common law governs where the agreement is silent

> typical clauses normally encountered in a construction and engineering contract so as to assess what is missing when presented with a draft agreement and what banks will be looking for if the project is funded

> structuring issues when dealing with cross-border transactions

> exchange control rules and opportunities available if the appropriate consents are obtained

CONCLUSION

THANK YOULegal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisors for guidance on legislation which may affect their businesses.

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