How do international construction contracts handle the special challenges of building projects overseas?

Introduction

For many, globalizing the construction industry has meant an unprecedented increase in activity in different jurisdictions. In such global construction opportunities, there is significant overriding market interest, and potential to fund infrastructure. However, engaging in construction internationally incurs various and unique challenges not usually present in engaging in a local venture. Internationally, this change may require, foreign legal systems to consider, the culture and language differences, changing regulatory contexts and different levels of expertise to consider, and logistical challenges.

However, these complexities are managed and reduced by entering into, and executing, international construction contracts. International construction contracts are much more than transactional documents, they are useful and potentially sophisticated instruments to manage risk, allocate responsibility and provide mechanisms for dispute resolution recognizing that international construction can be difficult to resolve. The following paper will assess how International construction contracts are structured and performed to consider the unique complexities and challenges of construction, engaging in a critical review and providing best practice learning through both legal and industry best practice.

I. Governing Law and Standardized Contractual Frameworks

An essential feature of international construction contracts is the choice of the governing law. The selection of an appropriate legal system is important because it will dictate how the contractual obligations will be construed, and how disputes will be resolved. Projects that span multiple jurisdictions will typically contain an applicable law clause, which will help contain uncertainty about law applicable to the contract and avoid unnecessarily expensive litigation. It should be noted, however, that some local laws, such as those governing health and safety, labor, and environmental laws, are mandatory terms under the applicable jurisdiction and contrary terms (notwithstanding the operative law clause) could not have an effect.

To facilitate a level of international consistency and predictability, many construction contracts adopt a standard form developed by the FIDIC, ICC, or UNCITRAL. Among them, the forms and provisions of FIDIC’s family of contracts are considered the industry benchmark for international construction projects because they establish clear roles and provide comprehensive procedures for variations or claims and have balanced forums that properly assign risks and risks sharing between contractors and employers.

The institutional acceptance of the standard forms of contracts allows the parties to gain more certainty in their commitments and reduce the need for additional, continuous negotiation, facilitating the initiation of the project and its delivery. The prescriptive nature of the format of the contracts, including specific timelines for notices and responses, enforces disciplined management of the contract; this is relevant for the parties engaged in a construction project considering the complexity and size of an international construction project.

II. Strategic Risk Allocation

At the heart of international construction contract management lies rigorous risk allocation. Overseas projects contend with diverse risks that stem from regulatory changes, political destabilization, currency fluctuation, and site conditions that cannot be anticipated. While local projects are confronted with varied risks, the addition of international components increases the uncertainty potentially faced.

Contracts routinely allocate risk to the party best able to address or mitigate that risk, increasing operational efficiencies by cutting discouraged claims and disputes. For example, contractors generally assume risks associated with construction, including delays, defective workmanship, or procurement issues. Meanwhile, employers broadly assume risks that are outside the control of the contractor - such as a change in legislation, force majeure events (for example, war, or natural disaster), or unexpected feature of the site.

Costs of risk placed on contractors can be supported through contract features that respond to affordability dynamics, like price adjustment clauses for inflation and other material changes, and similar considerations to provide an insurer or bonds for the contractor's performance obligations, or to clarify the respective responsibilities due to force majeure events lengthening compliance with the contract or ceasing performance altogether (contemplating the bizarre nature of some of the potential worldwide contracts- with lots of opportunities for scenarios!), wherein appropriate re-assimilation into pricing and obligations has to negotiate parties to secure outcomes they can achieve. They provide a cushion financially and contractually where they are needed when dealing in dynamics that are uncertain at the outset and ongoing, whilst also providing assurance to stakeholders that the project is at least somewhat viable.

Yet complications arise around the equitable risk exposure - where one party carries all the weight of excessive obligations, it may breed opposing and troublesome relationship dynamics, or abandonment of the project altogether at some point. The best practice would always ensure that contracts are established with for propriety risk exposure and not seek to unduly place burdensome obligations onto inappropriate contracting parties (we cannot stress enough to seek proper balance).

III. Dispute Resolution: Nuances of Transnational Conflict Management

It is almost certain that disputes arise in construction matters that involve big projects - particularly international disputes. International contracts are suited to the inherent uncertainties of such situations by generally ensuring the dispute process includes multi-tiered mechanisms which aim to resolve disputes quickly and which are intended to preserve commercial relationships.

In general, disputes move from attempts to resolve the dispute in negotiations through to mediation and Dispute Adjudication Boards (DABs), before finally proceeding to arbitration. There is a general acceptance of the appropriateness of arbitration as a predictable means of resolving a dispute both nationally and internationally. The popularity of arbitration in international settings, has been attributed to the neutral nature of arbitrators, the enforceability of arbitral awards in lands governed by the New York Convention, and the speed at which arbitration can proceed when compared to litigation. Arbitration is commonly a menu-driven process, with contracts setting out the arbitration rules clearly, naming an institution (such as ICC or SIAC), naming where in the world the seat of arbitration will be, providing governing procedural laws and documentation language. Contracts attempt to diminish jurisdictional uncertainty and disputes about how proceedings will be run, and provide a route for the tribunal to focus on the substantive issues in dispute.

Some projects will allow the use of DABs to determine disputes quickly and continue with the construction project. These newish mechanisms acknowledge an alternate method for dispute resolution within the commercial construction context (as opposed to depend on the normative method of litigating through the court system).

IV. Managing Cultural and Operational Complexity

Although legal and procedural aspects are essential, international construction contracts will not work as they should without consideration of the significant cultural and operational challenges that come with an overseas project.

Cultural differences can influence negotiation strategies, views on contractual obligations, methods for managing risk, and approach to dispute resolution. For example, some cultural views prefer a collaborative style to solving problems, while others will prefer a more adversarial approach. Even language differences can cause the party to misunderstand each other in verbal and written forms of communication or other interpretations of a contract which can complicate the administration of the project.

Arranging a contract to account for cultural values will often suggest a requirement in the contract for open and transparent communication systems to processes, define a standard for the language of documents and communication, and specify the roles and responsibilities of the employer, contractor, subcontractor, and contract administrator or engineer. In addition to contractor arrangements to account for cultural values, the contract can also include methods that involve provisions for local labor laws, issues with diversity in the workforce, or logistics, therefore allowing room for operation based on local protocols while maintaining standardized expectations into the project.

This emphasis on the cultural sensitivity of a contract leveraging the project management system and modern technology (e.g., digital documents and multilingual deployed systems) will go a long way to close some gaps in friction and build trust among the parties.

V. Contemporary and Emerging Considerations

In recent years, we have seen the growth of emerging risks, including global pandemics, geopolitical strife, disruption across supply chains and urgent climate imperatives. International construction contracts are adapting in response to these developments.

Mere issues of force majeure and hardship are now addressed as a wider range of issues with more specific notice obligations and provisions for equitable risk allocation or renegotiation of the contract. Digital transformation of contract management has supported real time tracking of compliance, control of documentation and automated risk analysis.

Sustainable development and environmental, social and governance (ESG) obligations are becoming more integrated into contracts in response to regulatory requirements and stakeholder expectations. These modifications acknowledge the capability of international agreements to be dynamic instruments that evolve with challenges throughout the world.

Conclusion

International construction contracts are complex constructs that are designed to deal with the extraordinary complexities of a building project overseas. Their ability to be effective lies in articulating rights and obligations amongst multiple legal jurisdictions; but also fair balance of risk; provision of accessible dispute resolution; and respect for operational cultural practices.

Using standardized forms of contract, such as FIDIC, judicious consideration of risk sharing, and considering innovation, stakeholders can take uncertainty and manage it as risk. As such, these contracts can be instrumental to support sustainable infrastructure growth and international collaborative development.

It will be necessary to continue to develop and apply international construction contracts to ensure that ambitious overseas projects are able to move purposefully from idea to delivery, despite the ongoing geopolitical, economic, and environmental pressures that arise.