At an estimated cost of S$1.33 billion, the new Sports Hub will boast a 55,000-seater retractable roof stadium, a 6,000-capacity Indoor Aquatic Centre, a 3,000-capacity Multi-Purpose Arena and a Water Sports Centre.

Despite the tender being awarded by the Singapore government in 2008, the PPP project commenced construction only in September 2010 – the result of delays from the 2008-2009 global financial crisis and high construction costs. It is now expected to complete in 2014.

Other major infrastructure projects soon to get underway include the Tuas desalination plant, Singapore’s second and largest such plant. Local water authority PUB closed its open tender late last year and the outcome of the tender is expected in first quarter 2011. The Tuas desalinated water plant is expected to complete by 2013.

This is already PUB’s fourth Design, Build, Own and Operate (DBOO) project. The first three were desalination and recycled water projects. The purpose of such arrangements include helping local water companies build their track records towards eventually exporting such expertise overseas.

Another notable launch is Tuas Power’s Tembusu Complex comprising a waste re-utilisation facility, a biomass-clean coal co-generation plant and a desalination plant, costing an estimated US$1.5 billion.

The project has already garnered several local awards for innovation and research with part of the biomass-clean coal cogeneration plant’s processes converting ash into synthetic aggregates for use in the construction industry.

FIDIC Red Book – A hiccup?

In a rare decision, the Singapore High Court in PT Perusahaan Gas Negara (“PGN”) v CRW Joint Operation (“CRW”) [2010] 4 SLR 672 refused to uphold an ICC arbitration award arising from a contract using the FIDIC Red Book 1999 Edition.

Disputes between the parties over variation orders and payment requests were referred to a Dispute Adjudication Board (DAB) by the contract. The parties accepted several of the DAB’s decisions, save one involving a disputed sum of over US$17 million.

The DAB decision was referred to arbitration and the Tribunal upheld it in its award. When CRW applied to register the arbitration award in a Singapore court, PGN sought to set it aside.

The Singapore High Court set aside the award on the basis that the arbitration tribunal exceeded its powers in rendering a final award in contravention of the parties’ agreement. The High Court interpreted the dispute resolution provisions in the FIDIC Red Book to mean that CRW was first required to refer the disputed DAB decision back to the DAB for review and confirmation, before involving arbitration.

Notably, the Court observed a possible gap in the 1999 FIDIC Red Book as it did not expressly allow a counter party’s failure to comply with a DAB decision to be referred directly to arbitration.

This is a rare instance of the Singapore High Court setting aside an arbitral award. It highlights the importance of parties understanding the clauses in their contract, especially how the reference to arbitration is to be properly invoked.

Mohan R Pillay
Partner & Joint Head of Office
Pinsent Masons MPillay LLP
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@pinsentmasons.com

The 2010 survey sees a much broadened territorial scope to include emerging venues such as Singapore together with the established venues of London, Paris, Switzerland and New York.

The key factors influencing international arbitration identified by the survey are not surprising – governing law, seat of arbitration, choice of arbitral institution, and appointment of an arbitrator.

A. Governing Law

The survey revealed a preference for a company’s home jurisdiction as the governing law.

When this was not possible, the next choice was for the widely accepted laws of England, New York, or Switzerland.

B. Seat of Arbitration

The survey identified a clear emphasis by corporates for arbitration seats to have “formal legal infrastructure”. This included the national arbitration law and a track record in enforcing arbitration agreements and arbitral awards.

Survey results on the preferred seat of arbitration reveal Singapore’s emergence as a regional leader in Asia. Singapore garnered 7% of votes in line with Paris (7%), Tokyo (7%) and New York (6%) but behind the historically well established centres of London (30%) and Geneva (9%).

The survey respondents were also asked to rate the arbitration seats which they had used before. Of these, London, Paris, New York were well regarded while Singapore was the next most commonly referred to seat.

47% of survey respondents rated Singapore as very good or excellent. This certainly reflects well on Singapore’s push in recent years to be a regional hub for arbitration. As the 2010 survey recognised, Singapore is a new entry from the 2006 survey as the most popular Asian seat.

C. Choice of Arbitral Institution

When choosing an arbitral institution, the survey showed that corporations look for neutrality, “internationalism” and a strong reputation. This was important as an institution with broad acceptance increased the likelihood that the counterparty would accept the institution.

This has important practical repercussions – as one survey respondent noted, such institutions would be readily accepted without having to trade-off some other element of the contract negotiation.

The emergence of Singapore as the choice of seat in Asia is also reflected in corporate perceptions of arbitral institutions. In the 2010 survey, the majority of votes for preferred arbitral institutions went to ICC (50%), LCIA (14%) and AAA/ICDR (8%) and SIAC (5%).

D. Singapore Efforts

The survey results are evidence of Singapore’s successful and well documented efforts at positioning itself as an international arbitration centre:

• Singapore offers an attractive “neutral” seat in Asia for impartial resolution of disputes

• As a signatory to the New York Convention, Singapore arbitration awards are enforceable in over 140 countries

• Singapore’s International Arbitration Act (which adopts the UNCITRAL Model Law regime,) was revised as recently as 1 January 2010 to remain current with developments in international arbitration;

• Singapore’s Courts have designated arbitration judges and are supportive of arbitration;

• Singapore’s laws allow foreign lawyers to conduct arbitration in Singapore (including those governed by Singapore Law)

• As reflected in the 2010 International Arbitration Survey, the SIAC is a leading regional arbitral institution. In 2009, the SIAC saw the highest increase in arbitration case-load (60%) among the major arbitral institutions in the world;

• Maxwell Chambers (launched in January 2010) offers parties state-of-the-art dispute resolution complex, with dedicated arbitration hearing rooms and related support facilities. It currently houses the SIAC and leading institutions such as the American Arbitration Association, the Permanent Court of Arbitration, the ICC, the Arbitration and Mediation Centre of the World Intellectual Property Organization and the International Centre for the Settlement of Investment Disputes

Mohan R Pillay
Partner & Joint Head of Office
Pinsent Masons MPillay LLP
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@pinsentmasons.com

The construction industry, like the food and beverage business, shows considerable partiality to foreign workers. The most common reason – lower labour costs. Thus, the construction industry is filled with foreign workers running the gamut from India, Sri Lanka, China, Thailand, Indonesia, Philippines and even Myanmar.

Things however look set to change with the 2010 budget announcement including a call to increase local productivity as foreign workers now comprise almost a third of the total workforce. This has led to government moves to reduce dependence on foreign workers by hikes in the foreign worker levy and reducing the “man-year” entitlement which directly restricts the number of foreign workers on a site.

This is clearly designed to encourage businesses to restructure and upgrade their operations through innovation and training of their local workers.

Productivity is expected to rise, but so are construction costs, possibly by as much as 6 per cent when these restrictions to foreign labour kick in next year.

Comparing the Singapore increase with construction costs in key Asian cities, prices are generally expected to rise with economic recovery and the increase in building needs. The Singapore Building and Construction Authority statistics for 2nd quarter 2010 showed standard high rise office building costs of US$1,910/m2 in Hong Kong, US$760/m2 in Beijing, US$832/m2 in Shanghai, US$1,835/m2 in Singapore.

In perspective, Beijing and Shanghai are some of the cheapest cities to build but prices for these cities could rise 3 per cent this year and Hong Kong could register the biggest percentage increase in costs.

Rising levels of construction (and construction costs) are likely to herald more rather than less disputes.

A recent conference organised by the Singapore International Arbitration Centre discussed the development of business in India and the availability of arbitration. The booming Indian economy, set to hit 8 per cent growth this year, has created tremendous business opportunities for investors. As Singapore’s law minister Mr K. Shanmugam who spoke at the conference noted, the best-laid investment plans can turn awry and more are increasingly looking at arbitration in lieu of court proceedings to settle disputes.

Singapore is already the top Indian destination for investments abroad by Indian companies between 2008 and 2009 and more than 4,000 Indian firms operate here today. Singapore’s attractiveness as an arbitration hub for Indian companies is also reflected in SIAC’s announcement that it handled arbitration cases from India involving $173 million for 2010 to date, up from disputes involving $156 million for the whole of 2009.

Investors in the major countries in the region seek a neutral venue for arbitration and Singapore presents a easily accessible, neutral and effective arbitration venue.

Having world class facilities helps as well as Singapore then becomes the ideal venue for firms that might need help if their investments hit trouble. As Sir Vivian Ramsey QC observed on Friday last week at the SIAC-SCL Conference on “Construction Disputes Asia” in Singapore, arbitration in Singapore has the support of the government as seen with the building of a “state-of-the-art” arbitration centre at Maxwell Chambers.

At the same time, India has recognised the need to institutionalise its arbitral process and is now seeking to revamp the Indian Arbitration and Conciliation Act. Generally, the proposed changes reflect a shift towards institutional arbitration in lieu of the prevalent practice of ad hoc arbitration in India.

These amendments also underline a determined effort to reduce the role of Courts by severely limiting the scope of the public policy exception.

One unusual and interesting proposal is the introduction of a deemed arbitration clause for commercial contracts worth 50 million rupees (about £7 million at today’s rates) or more unless the parties agree otherwise. In such cases where parties fail to refer the dispute to an approved arbitral institution, the Indian High Court is then empowered to authorize the appointment of an approved arbitral tribunal within 30 days of a reference made by a party.

The proposals are very much at an early stage in the form of a Consultation Paper. It will be interesting to see what progress it makes in the coming months.

Mohan R Pillay
Partner & Joint Head of Office
Pinsent Masons MPillay LLP
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@pinsentmasons.com

IT supplier EDS is to pay a total of GB£318 million to settle a dispute over a contract which it entered into 10 years ago with the broadcaster BSkyB . This payment marks the end of one of the IT industry’s longest-running and most expensive court cases. The original contract was worth £48 million and contained a limitation of liability cap set at £30 million. As some Governments wield the axe on public-spending budgets, creating even greater pressures on the Construction sector to win mandates to build a reducing number of projects, the case serves as a very painful reminder that the law of misrepresentation is alive and that senior management need to have processes in place in order that they can take immediate action if there is any suggestion of fraudulent practices during the sales process.

The case is reported as BSkyB Limited (“BSkyB”) (and others) v HP Enterprise Services UK Limited (formerly Electronic Data Systems Limited) (“EDS”) and others [2010] EWHC 86 (TCC).

BSkyB hired EDS to build it a £48 million customer relationship management (CRM) system in 2000. The project ran into difficulties at an early stage and re-planning amendments were made to the Prime Contract in July 2001. The first major stage of the project was completed late and further serious performance issues led to relations between the parties breaking down. Relations between the companies broke down in 2002 and BSkyB assumed responsibility for implementing the CRM system itself, and ultimately completed delivery in March 2006 at a cost of £265 million. BSkyB and Sky sued EDS, claiming that the company had lied about the development and timescale of the project during the sales process. BSkyB alleged that EDS had made fraudulent misrepresentations in relation to the availability of resources, time, cost, ‘proven technology’ and methodologies. It also sought damages for negligent misrepresentation and for breach of contract. In total, it originally sought more than £700 million from EDS. The contract signed by the two companies contained a £30m limitation of liability which would apply if the project faced difficulties. That cap would not apply, though, in the event that fraud was established.

In January, the High Court upheld one of BSkyB’s five fraud claims. EDS’s claim that the project would deliver “on time and budget” was fraudulent, ruled Sir Vivian Ramsey in a judgment which ran to almost 500 pages. A key witness for EDS was the Managing Director of its CRM business at the time of the contract. Sir Vivian found that he had masterminded the bid for the contract and said he displayed an “astonishing ability to lie.” One month after issuing its judgment on the facts, the High Court ordered that EDS should make an interim payment of £270m to BSkyB pending a final ruling on damages.

The judge found that only one of BSkyB’s five claims of fraudulent misrepresentation, relating to the anticipated timescale of the project, was established. Ramsay J. also found that EDS was liable for negligent misrepresentations in respect of statements made during the 2001 re-planning negotiations and that EDS was liable for certain breaches of contract for failure to exercise reasonable skill and care or conform to good industry practice by:

failing to properly resource the project;
being seriously in delay in performing the works; and
carrying out little work due to either failing to properly capture requirements, manage that process or through general lack of progress.

During the bid phase, the MD had told BSkyB that the system could go live within nine months and be completed within 18 months (in accordance with the timescale set out in the Prime Contract). Ramsay J. decided the statement was made without any basis or assessment of the actual time it would take and was made purely to ensure that EDS won the contract. As such, the MD was reckless as to the truth of the representation and, as BSkyB had relied on it in selecting EDS above its competitors, the cause of action for fraudulent misrepresentation was established:

“In my judgment his conduct went beyond carelessness or gross carelessness and was dishonest. I consider that he acted deliberately in putting forward the timescales knowing that he had no proper basis for those timescales. At the very least he was reckless, not caring whether what he said was right or wrong.”

The emphasis in the judgment is on the dishonesty of one man, since dismissed from EDS, and there were no findings of systemic or widespread internal failures or recklessness in relation to EDS’s wider sales processes. The extreme nature of the individual’s deception tainted the balance of his evidence, including evidence about the relevant representations. The judge’s approach may have differed if EDS’s employee had purely been reckless in putting forward the timescale, and had otherwise proven credible in the witness box. As it was, a key point in discrediting the EDS employee arose when BSkyB’s lead Counsel exposed the witness’ perjury in claiming that he had completed an MBA at Concordia College, St. John, when he had actually bought the qualification ‘online’ – much apparently as Counsel’s dog ‘Lulu’ was able to do… though apparently with slightly better grades!

Assurances as to the achievability of challenging technical solutions, demanding programmes and of course lump sum prices for significant work packages, are not uncommon in the Construction sector. This case serves as a timely caution to construction companies and consultants of the very serious consequences of a rogue employee securing a bid through dishonest means, and reflects an earlier finding of the Court as to the circumstances in which fraudulent misrepresentation may be established, where an architectural practice was found to have failed to inform a client of the resignation of a key individual prior to entering into written professional appointments, in Fitzroy Robinson Ltd v Mentmore Towers Ltd [2009] EWHC 1552 (TCC).

Clearly, sound corporate governance requires that companies plan and estimate their work in the bid and sales process and reduce any tolerance they may have for “cowboy” sales practices. Bid and pitch documentation should be robust and verified – and verifiable. Estimates and statements as to capabilities should be closely scrutinised. Any such statements should accord with the provisions of the contract when it comes to be signed. It is also imperative that companies preserve records of their bid calculation e.g. resource needed and timescales for delivery. EDS fell foul of the fact that much of its calculation was said to have taken place on ‘whiteboards’ – the actual working product not having been recorded in any meaningful way.

Construction contracts often encounter difficulties and of course there are risks attached to any project of scale. Robust change management procedures and certainty around timetables can help to contain such problems for both contractors/consultants and employers alike. Ultimately, companies looking to avoid being caught in the same position as EDS should also ensure that they have confidence in their procurement procedures and, of course the honesty of their employees – great care must be taken when recruiting sales staff and of course, while tightening recruitment processes to protect against rogue employees is of course important, so too is ongoing training to ensure that the BSkyB case lessons are known to sales teams – so that, unlike EDS following Lulu’s surprising contribution to their case, Construction sector players can avoid any future cases of – ahem – ‘ruff’ justice!

Vincent Connor
Pinsent Masons

This third edition replaces the SIAC Rules 2007 and is part of SIAC’s efforts to stay lean and effective as it keeps apace with the rapid growth of international arbitration.

Key updates include an expedited arbitration procedure for claim amounts less than S$5 m or in cases of exceptional urgency. The expedited process requires an award to be issued within six months from the tribunal being constituted and the reasons for the award may be in “summary form” under the expedited procedure.

Also new to the Rules are the inclusion of a new rule on interim and emergency relief through an Emergency Arbitrator prior to the constitution of tribunal.

The Rules also establish an SIAC committee to decide on jurisdictional challenges to the arbitrator when the other party does not agree to a challenge to the arbitrator and the arbitrator being challenged does not withdraw voluntarily within 7 days of notice of challenge.

Added teeth have been added to provide additional protection of confidentiality as the tribunal may impose sanctions for breach of confidentiality obligations.

A key change to the 2007 Rules was the introduction of a Memorandum of Issues to be drawn up between the parties. This has now been removed in the new 2010 Rules.

With the growing popularity of international arbitration as a dispute resolution option, the robustness and flexibility of the amended SIAC Rules have offered a timely change when choosing SIAC as the administrating body for arbitration in Singapore.

The “greening” of equatorial Singapore sounds a bit odd until you realise that it refers to the Garden City’s buildings. Singapore has emerged as one of the more aggressive governments within the Asia-Pacific region in its pursuit of a green building program.

The Building Construction Authority (BCA) Green Mark certification scheme introduced in 2005 allowed developers till 2008 for the mandatory Green Mark scoring as part of Building Plan submissions and applications for Temporary Occupation Permits.

The certification comes with financial incentives as the BCA awards higher Gross Floor Area values for higher-tier Green Mark ratings.

Amongst the checklist items are efficient design for natural ventilation and lighting. Interestingly, points are also given for adjusting mechanical ventilation requirements in car-parks vis a vis CO sensors.

Heat transmitted from the roof is taken into account. Aesthetically, this has not been a bad thing with the creative use of roof gardens by developers. Even water efficiency toes the “green” line with rainwater diverted to landscape irrigation and bonus points given for using renewable energy from solar power or wind.

It’s been a testament to the BCA’s efforts that by May 2010, there are now 450 green buildings in Singapore with a total floor area of 16 million square meters or 8 percent of Singapore’s Gross Floor Area.

Other initiatives include a CleanTech Park (CTP) to be developed from July this year. The “green” themed business Park is expected to complete in 2030 with 20,000 people in 30 “living laboratory” buildings. These include “clean-tech” companies to commercialise green urban solutions for Singapore and the Asia-Pacific, along the same lines as Masdar City in the UAE.

The legal services landscape in Singapore is changing as well with the introduction of a new Joint Law Venture on the scene in the form of Pinsent Masons MPillay LLP, granted a JLV license in July this year by the Attorney-General’s Chambers.

Thomas Edison once said “Everything comes to him who hustles while he waits” – It’s an apt description of the association between Pinsent Masons and MPillay as the two entities patiently operated closely with each other for three years, by way of a formal association, from 2007 before obtaining their JLV license.

The pairing of the two entities through the JLV will allow a full range of service offerings as a “one-stop shop” option for clients, combining Pinsent Masons’ widely acknowledged international expertise with MPillay’s award winning in-depth local knowledge and experience.

As the sixth JLV in Singapore, it won’t be the first JLV but it will certainly be unique in its dedicated focus on the construction, engineering and energy sectors.

So some interesting and I believe positive developments for the Singapore legal environment in signing off this “Lean Green Venture” story.

Mohan R Pillay
Managing Partner, MPillay
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@mpillay.com

The worth of “sands” in Singapore has taken on added dimensions in recent years given the republic’s dependence on imported sand from its neighbours for its thriving construction needs. Much hullabaloo has similarly been generated on the newsfront with the phased opening of two casinos, one of which happens to share the namesake of Marina Bay Sands.

Singapore’s construction demand in 2010 is projected to reach between S$21 billion and $27 billion this year (£10.5 to £13.5 billion at today’s rates) led by strong public sector construction demand at an estimated 65% of Singapore’s total construction bill. The city state embarked on more reclamation works and various road projects plus expansion of its network of stations and tunnels with a new Circle Line for its Mass Rapid Transit (MRT) System.

Private sector growth has been fuelled by the development of a new financial downtown area. Gamblers and thrill seekers meanwhile rejoiced at the government’s award in 2006 of two Integrated Resorts helmed by casinos and the much anticipated Universal Studios.

This growth brought with it increased demand for sand – land sand for concrete and sea sand for reclamation works. Malaysia banned the export of both sand types in 1997 and Indonesia followed suit in 2003 (sea sand) and 2007 (land sand). Highly disruptive to the MRT lines and the new financial downtown (i.e. including the casino complexes), the supply disruption sparked construction delays and lawsuits between contractors and employers as the price of sand tripled. The government stepped in to release stockpiled sand and a legislative fix saw licensing regulations in 2009 requiring importers to have procurement plans to handle any sudden supply disruptions and ensure the reliable growth of the construction industry.

From our new office on the 22nd floor overlooking the waters of Marina Bay to Marina Bay Sands Integrated Resort, the skyline has never been more dynamic and ever changing as Marina Bay Sands slowly emerges from delays to its original opening date of end 2009. Touted as the world’s second most expensive casino after MGM Mirage Las Vegas, Sands remained under construction as its rival, Sentosa Resorts World commenced phased opening of themed hotels such as its Hard Rock Hotel in January and casino in February. To the delight of thrill seekers, March witnessed the opening of Universal Studios on Resorts World (though not without hiccups as its Battlestar Gallactica duelling roller coaster ride remains suspended due to technical glitches).

With much relief, Sands got its casino license 1 day before its opening just last month on 27 April. However, Sands’ strength in MICE (meeting, incentive, convention and exhibition) suffered a slight blip recently after complaints during the 2010 Inter-Pacific Bar Association (IPBA) Conference plagued Sands, the first convention hosted by Sands. In the broad scheme of things though, we wait patiently for Sands to throw open its SkyPark sitting above its three hotel towers and for the world’s largest oceanarium to open at Resorts World.

Visitors to Singapore in a more professional capacity are also set to take advantage of recent updated arbitration legislation. The International Arbitration (Amendment) Act 2009 came into force on 1st January to reflect the 2006 changes to the UNICITRAL Model Law, from which Singapore’s International Arbitration Act (IAA) is based on.

Key changes to the IAA include support from the courts in granting orders in aid of foreign arbitrations (e.g. taking of evidence) and interim relief (freezing of assets, amongst others).

These changes stand Singapore arbitration in good stead along with the January 2010 official opening of Maxwell Chambers, a custom designed international dispute resolution centre with 12 preparation rooms and 14 medium and large hearing rooms, the largest being able to accommodate 80 people for a hearing. A full suite of available support services is available, from wireless internet, video conferencing and state of the art digital recording to transcription services, translation services and catered meals. In the 6 months from its soft opening in July 2009 to its official opening, 60 cases have been heard, the majority of them being international arbitration.

There are probably worse places to be in now than in Singapore, a city where the worth of sands may, to some at least, be worth more than diamonds…

Mohan R Pillay
Managing Partner, MPillay (in association with Pinsent Masons)
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@mpillay.com

Last year, my observation on investment in the wind power industry was that the timing might be right, but investors should be patient and be prepared for challenges.

In fact, some international wind farm developers have pulled out under the pressure of continuing low returns on investment.

Some of the major causes of low returns are as follows:

(a) difficult grid connection – the grid enterprises managing the state monopoly business have no financial incentives to provide timely grid connection to renewable energy power plants, and there is no effective mechanism to compel them to connect new producers, nor any unified technical standards for connection.

(b) unfavorable pricing – the local stated-owned power plants have no pressure to make profits, and they won many wind projects by tendering below-cost output prices; also the formulas and processes for tariff setting are still being worked out, and remain unpredictable (especially for independent producers).

(c) inexperience – foreign investors may lack the local connections and know how of both incumbent power companies and new independent local competitors, and as a result face higher costs and more obstacles across the board.

The central government has been aware of these problems and in response recently promulgated amendments to the 2006 Renewable Energy Law taking effect on April 1, 2010 (the “2010 Amendments”). The 2010 Amendments aim to clarify some statutory ambiguities and solve some policy problems, but still provide only fairly general guidance. More detailed implementing regulations are expected to be issued in the coming months.

Perhaps the single most important innovation in the 2010 Amendments is a new focus on renewables outtake. In particular, there is now a further requirement that the state energy authority and power administration take responsibility to supervise the implementation of the requirement, provided for in the 2006 Renewable Energy Law, that all power generated by renewable energy shall be purchased by the grid operators so long as the renewable power generation facilities and connection to the grid satisfy relevant technical criteria. To help ensure this outcome, the state energy authority and power administration, together with the state financial department, are mandated to jointly determine a minimum ratio of renewable energy to total power to be purchased by grid enterprises, based on the total generated power volume.

Although technical criteria for network connection have not yet been published, drafting and internal discussions are underway at the power administrations. Balance will be important, since there will be serious downsides to technical requirements that are either too low (hazardous for the network as a whole) or too high (unnecessarily raising costs for renewable power producers).

It is also worth mentioning the 2010 Amendments’ mandate for the state treasury to establish a renewable energy development fund. This fund will be sourced from ad hoc funds in the annual budget and from renewable energy surcharges, and might be used to compensate grid enterprises for their increased costs of purchasing renewable power.

Certainly, the 2010 Amendments reiterate the central government’s commitment to facilitating investments in wind and other renewable power projects. However, in the absence of rational and transparent sales, tariff and technical interconnect regimes, the investment environment will continue to be challenging and risky, and the current distortions in the market will persist.

Volcanoes – we have rather a lot of them in Asia, but even we’ve been obsessing about the infamous Icelandic one, this week. Though 6000 or more miles away from the action, Japanese car manufacturers relying on components from Ireland and Korean mobile phone suppliers ready to send their wireless wares to a waiting world, have been among those frustrated as the volcanic ash cloud has choked airfreight routes. Which got me thinking…not so much about force majeure (I’ll leave that to my holidaying partners examining their insurance documents to seek support for their compensation claims!) but about the options a contracting party faces when the party with whom he’s entered into an agreement has breached a material provision (say, a delivery date): should he accept that party’s repudiation and sue for damages or simply terminate it in accordance with the procedure provided for in the agreement?

The recent English Court of Appeal case of Shell Egypt West Manzala GmbH v. Dana Gas Egypt [2010] EWHC 465 (Comm.), albeit not exactly a construction case, dealt with this particular dilemma which is of considerable significance for construction contracts. In this case, Dana Gas acquired drilling rights in the Nile Delta from the Egyptian Government and brought in Shell as a partner in the petroleum exploration project. Under the contract, Shell agreed to make an initial investment of US$15m and also to make further substantial contributions. However, 8 months later, disputes arose between the parties and Shell alleged that Dana Gas had failed to notify a change of control in the company; and that their failure constituted a repudiatory breach of the contract.

As we all know, if a party commits a serious breach which goes to the root of the contract – that is, a repudiatory breach – the innocent party is confronted with two options. It may decide to assert that the contract has been ‘repudiated’. This will provide the innocent party with a right to treat the contract, and its obligations under it, as terminated with immediate effect and sue for damages for the breach of the contract. Alternatively, it may decide to act in a way as if the contract is still in effect, or in another words, to ‘affirm’ the contract’s continuing existence. If the innocent party decides to take the latter option, its right to terminate (in respect of that particular repudiatory breach) will be lost.
In the Shell Egypt West case, instead of informing Dana Gas that it was terminating the contract for repudiatory breach and in doing so, exercising a contractual right of rescission, Shell issued a termination letter to Dana Gas which invoked a clause under the contract allowing it to terminate the contract on giving 30 days’ notice (based on, sadly, a mistaken view on the situation on the assignment of concession rights). As we shall see, that decision was to have a significant consequence…

On appeal to the High Court, Shell argued that it had made a mistake in its termination letter (as it mistakenly believed that Dana Gas had failed to obtain an assignment of the concession interests granted by the Egyptian Government to another party) and it should not be deprived of its rights to recoup their investment. Essentially, a termination letter may be issued pursuant to the contract under two separate provisions – Clauses 3.1.8 and 3.1.9. Clause 3.1.8 provides that if the agreed closing date of the project was not achieved, Shell may terminate the contract but Dana Gas would not be obliged to repay Shell’s initial investment; whilst Clause 3.1.9 provides that if the agreed closing date of the project was not achieved because of Dana Gas’s failure to obtain an assignment of the concession interests granted by the Egyptian Government – Dana would need to repay Shell’s initial investment. Here, on the mistaken belief that the assignment was not effected, Shell issued the termination letter pursuant to Clause 3.1.9 even though it was also aware of Dana Gas’s repudiatory breach based on the change of ownership.

Despite Shell’s arguments based on their mistake, that is – Dana Gas should have realized that Shell had misinterpreted the events and that Dana Gas was in repudiatory breach of the contract, the court held that, even if Dana Gas had realized Shell’s mistake, such knowledge would not have “remove(d) the essential thrust of the letter”, namely – Shell wished to terminate the contract under the termination clause and not in respect of the repudiatory breach. In doing so, Shell had acted in a way which ‘affirmed’ the existence of the contract. This in turn deprived Shell both of a right to damages and a right to recover the US$15million investment which it had contributed under the contract. Clearly, what Shell should have done was to accept Dana Gas’s failure to notify the change of control as a repudiatory breach of contract. Had this occurred, Shell could have reclaimed its investment based on its contractual right of rescission. And even if Shell doubted this route, it could have stated in its termination letter that, in the alternative, it was exercising the 30-day termination right.

This case suggests that if an agreement and the general law provide a party with alternative rights, not only will the innocent party be required to carefully consider the options available to them (as they may lead to very different consequences) by observing proper contract management, but that it should also communicate their election in appropriate terms. Parties should not be too quick to decide to turn to their termination rights under the contract but should instead, thoroughly investigate all of their options based on the correct interpretation of factual circumstances and frame the ‘termination letter’ tactfully to broaden the remedies available to them. Now, turning back to those frustrated mobile phone suppliers desperately waiting for the ash clouds to clear, one would imagine they should probably be a little less worried now (assuming they’ve taken good legal advice), when they next find a ‘termination letter’ in their letter box, yet…they will be asking themselves: “Hmm…I wonder if there’s anything wrong with this termination notice?”.

China has been busy hatching some of its own contractual eggs by taking FIDIC standard forms traditionally used by International Contractors in their overseas projects, and adapted to reflect local conditions and times.

The FIDIC Silver Book has been considered by the the Ministry of Housing and Urban-Rural Development (“MOHURD”) to promote the EPC contracting model in China. A draft MOHURD standard form was prepared with reference to FIDIC Silver Book and international engineering contracting practices, and released for public comments at the end of 2009. This adaptation by MOHURD appears to have been partly influenced by the GF-1999-0201, a standard form widely used in China, mostly for government financed projects using procurement methods such as competitive bidding.

The resulting risk allocations have turned out quite different from the original “turnkey” nature of the FIDIC Silver Book that may come as a bit of a surprise to those used to EPC contracts. Owners and developers may not get quite the turnkey solution they were expecting in relation to matters such as responsibility for information as to underground conditions and site obstructions, the obligation to obtain approvals, permits and licenses and especially in relation to site safety. It will be of great interest for the construction sector to see how the Chinese EPC form of contract, when finally issued, in fact addresses these matters.

Similarly the Regulation on Construction Market Administration which is likely to be promulgated by the State Council later this year appears influenced by the FIDIC Yellow Book and is likely to provide a clearer legal basis for adopting some of the forms of contracting widely used in the international market, especially in respect of Design and Build contracts.

This Easter also coincides with the anniversary of the Independent Mediation Rules 2008 introduced by the Beijing Arbitration Commission (BAC) on 1 April 2008. These rules were implemented after the participation of over 120 arbitrators and construction engineering experts, including very well known experts. I know this, because my collegue Hew Kian Heong and I were also asked for my own humble contributions to this effort. I therefore know that these Mediation Rules were also drafted so that they could be used to support a multi-tiered dispute resolution process as envisaged by standard form contracts such as ICE and FIDIC.

One of the key attractions of the FIDIC suite of contracts is flexibility, which allow their renewed use in many new markets by taking into account local laws and regulation, and I have no doubt my Chinese friends will capitalize on this advantage its fullest.

The Tort Law marks a milestone in PRC legislative history, and will have myriad implications for diverse areas of private and commercial activity.

As a construction lawyer, I am particularly interested in Article 86 of the Tort Law concerning liability for loss and damage caused by collapse of construction works.

Although the Tort Law has been in planning for some time, it seems to have been influenced by some very recent events. Much attention has been focused on the recent milk scandals as a catalyst for the product liability aspects of the legislation. But it is also widely speculated that Article 86 was driven by the recent case of a building collapse in Shanghai in June 2009. The collapse of a 13-floor building at Shanghai’s “Lotus Riverside” apartment complex was perhaps one of the top 10 local news events of 2009 in Shanghai. The accident killed one worker on site and left 489 home buyers without their expected homes (in many cases, costing all of their life savings). The collapse has been blamed on improper construction methods.

Quality problems have long plagued the construction industry in China. “Tofu Building” is the cheeky term used by the local press to describe such shoddy construction projects. Clearly, to some extent, this situation reflects a failure of the current legal and regulatory regime. Hence, there is little humor in this situation for Chinese policymakers.

Although there are administrative sanctions and contractual remedies for poor construction quality, tort legislation has been less than robust. Tort protections are especially important in addressing harm to innocent third parties who would not be entitled to compensation as a matter of contract.

No doubt in recognition of this, the Tort Law has clearly placed liability for collapse of construction works on the contractors and developers who are best able to avoid them in the first place.

Since 1987, Article 126 of General Principles of Civil Law (“GPCL”) has provided that:

“If a building or any other installation or an object placed or hung on a structure collapses, detaches or drops down and causes damages to others, its owner or manager shall bear civil liability, unless he can prove himself not a fault.”

GPCL Article 126 creates a rebuttable presumption that the current property owner or manager is liable in these cases. But these are quite disparate cases – there is a potentially immense difference between the types of causation involved in items falling from a building and in a building itself collapsing. In cases where the building itself collapses, the current owners or managers would have very little opportunity to prevent the harm. Hence, there seems to be little reason to hold them primarily liable. On the other hand, the original contractor and developer, the parties best situated to prevent catastrophic building collapse, are not included (even secondarily) as potentially liable persons here.

To remedy this and other issues in relation to personal injury liability under the GPCL, in 2003 the Supreme People’s Court issued an interpretation (“Interpretation”) that, among other things, clarified the application of GPCL Article 126. Specifically, Article 16 of the Interpretation clarified that, if the collapse is caused by design or construction defects, the responsible designer and contractor can also be held directly liable to injured parties.

Article 86 of the Tort Law deals only with collapse, providing:

”Where any building, structure or facility collapses, causing any harm to another person, the construction employer and contractor shall be liable jointly and severally. After making compensation, the construction employer or contractor shall be entitled to be reimbursed by other liable persons if any.

Where the collapse of any building, structure or facility, which causes any harm to another person, is attributed to any other liable person, the other liable person shall assume the tort liability.”

With this new Article 86, we have a new bright-line rule for primary liability in the case of construction collapse. Article 86 rests primary liability for building collapse squarely with the employer and contractor. In place of the previous rebuttable presumption of fault for current owners / managers, there is now strict liability for employers and contractors. We also have a broader and more objective rule of reason in relation to secondary or contributory liability, insofar as any other person contributing to the collapse, whether contemporaneous, upstream or downstream to the original employer/contractor, can also be held liable.

Although the Tort Law has changed the formal statutory liability rules in relation to collapse of construction works in China, in the final analysis, the formal and practical significance of this change may not be very great.

Formally, the Supreme People’s Court has long since clarified that the original employers and contractors could be liable in building collapse. Practically, those parties are the most obvious targets for liability in the event of building collapse, and under current practice the employer and contractor are already joined whenever possible, even without the new rule. But, since most developers in practice usually use special purpose vehicles (SPVs) to carry out their projects, dissolving the SPVs on completion, recourse to the original developing parties may be less available than the Tort Law seems to assume. It therefore appears that the contractors may well end up being the easiest targets at the end of the day.

Hence, while Article 86 represents a rationalization and refinement of the liability rules in this area, it will no doubt take much more than this marginal formal change to begin to reverse the deeply entrenched incentives causing the proliferation of Tofu Buildings in China.