As the ninth largest economy in the world – expected to reach fifth place in the next decade – and the largest of Latin America, Brazil is today one of the best markets for foreign investment and an increasingly important operator in the international geopolitical stage. Despite that, three recent reports have described the quality of Brazil’s transport infrastructure – including the airport system – as ranking among some of the worst in the world, despite growing demand from international manufacturers for goods produced in the country.

a) The first report, by the Brazilian economic consultancy LCA Consultores – which analyzed results from a competitiveness poll conducted among attendees at the 2009/2010 World Economic Forum in Geneva – indicates that compared to another 20 countries with which it competes on a global scale, Brazil hangs on to the 17th slot in infrastructure quality in general. On a 1-7 rating scale, Brazil scored 3.4, below the world average of 4.1.

b) The second report, by Brazil’s Applied Economics Research Institute (IPEA), indicates that a number of airports are on the edge of an operational collapse, meaning there is a considerable threat of a logistics blackout in the airport sector unless investment is initiated immediately. The IPEA report said demand for air travel is expected to triple in the next 20 years, especially with the World Cup and 2016 Olympics putting additional pressure on the country’s transport infrastructure, making the situation all the more pressing.

c) The third report, by consultancy company McKinsey, indicates that investment of BRL25-34bn (US$15-20bn) is needed to meet growing demand in the airport sector over the next 20 years. The study found that Brazil’s 20 main airports need massive investments in upgrades to enable them cater for the growing passenger traffic demand up to 2030. The study further concludes that airports such as the Viracopos international airport in Sao Paolo may need up to BRL4-6bn (US$2-3bn) reals to enhance its capacity to handle passenger traffic in its metropolitan area, the most congested in the country. On the other hand, the state’s Congonhas airport was said to be in dire condition, with capacity levels already exceeded, revealed the study. Only tow Brazilian airports were found to be in better condition, the Galeão airport in Rio de Janeiro, and the Curitiba airport in Paraná state.

With these findings in mind, President Dilma Rouseef wants to make a firm position that the country’s airport system will indeed improve in a fast track model. In her 3rd day in Office the new President has decided to privatize the construction and operation of 2 new airport terminals in the State of São Paulo. President Dilma also decided to open up the capital of INFRAERO (the Brazilian Airport Infrastructure Company) and create an special Secretariat – directly attached to the the Presidency’s Office – to oversight civil aviation business in Brazil.

President’s Office has already started meeting with companies interested in the construction and operation of the 2 new terminals in the State of São Paulo. Those companies have been informed that concession agreements for the new terminals will be of at least 20 years and will have BNDES’ (the Brazilian Development Bank) participation in the financing. The BNDES Credit Lines comprise long-term financing, at competitive interest rates, for the development of investment projects, the commercialization of machinery and equipment, and the growth of Brazilian exports. Credit lines and programs provided by the BNDES serve the investment needs of companies of any size and sector set up in Brazil.

Other investments recently announced shall be placed in the airports at Belo Horizonte, Brasília, Cuiabá, Curitiba, Fortaleza, Manaus, Natal, Porto Alegre, Recife, Rio de Janeiro and Salvador, the other 11 host cities of the 2014 World Cup. The Government expectation is that all work shall be completed between June 2013 and April 2014, so that the airports shall be ready to welcome the large number of tourists that should visit the country in this period.

Auction date has been defined

The meeting held between Dilma Roussef, the Brazilian President-elect and members of the State Office and the Government transport sector sealed the date for the auction for the bullet train that will connect Campinas-São Paulo-Rio de Janeiro. According to Dilma’s decision, it will take place on November 29, 2010.

Requests had been made by businessmen to postpone this date, and in view of this, the meeting was held yesterday been the President-elect and the members of the government responsible for the auction.

According to allegations of interested parties, the administration had delayed in disclosing the rules due to the electoral process, which allegedly had impaired companies from taking this decision and from concluding feasibility studies on the project.

Notwithstanding these complaints, the decision was made to maintain the date set on the invitation to bid. Bids will be delivered by the November 29 and the winner will be disclosed 18 days afterwards.

The works, which are now estimated to cost US$ 20 billion awakened the interest of South Korea, China, Japan, Germany, France and Spain.

Funding

The Government published a provisional measure to guarantee funding of up to US$ 12 billion for Banco Nacional de Desenvolvimento Econômico e Social – BNDES financing for the project.

Provisional Measure 511 included a clause that permits the Federal Government cover up to US$ 3 billion should income for the project fall below what has been forecast for the first 10 years of operation.  This measure seeks to guarantee the interests of foreign investors in the project.

BNDES has held discussions with Japanese, Korean, Chinese, Spanish, German and French investors. The cap for the tariff has been set at US$ 115 for the segment between Rio and São Paulo.  The trip will take one hour and thirty minutes (1:30) and the extension of the bullet train is 511 km.

In May 2008, the Swiss Federal Government commenced a consultation process with a view to the full revision of the Federal Law on Public Procurement. During the process, however, it became clear that a full revision was not advisable due to delays of the WTO Government Procurement Agreement of 15 April 1994 to which the Federal Law has to conform. The Federal Government therefore decided to put the full revision on hold and to focus on certain elements of the Law that required urgent attention.

In May 2010, the Government submitted to the Parliament a proposal for an amendment of the Federal Law on Public Procurement (Message to the Parliament of 19 May 2010, 10.051, http://www.admin.ch/ch/d/ff/2010/4051.pdf). The amendment would, in respect of Federal procurement processes for certain types of projects, preclude unsuccessful bidders from seeking a stay of the entire process when challenging a decision of the adjudicatory authority. According to the Government, the current public procurement regulations do not achieve one of their stated main goals, namely the efficient use of public funds.

Pursuant to the legislation in force, challenges of a tender process by unsuccessful bidders, as a rule, do not automatically stay the process. However, courts may grant a stay of the tender process. Bidders bringing a challenge often file a request for such a stay, and these requests are often granted by the courts. This is the opposite of other areas of Swiss public and administrative law, in which challenges, as a rule, automatically have the effect of a stay, and in which the relevant agency or the courts may lift the stay if warranted by the circumstances.

The Government’s experiences in two highly publicized procurement processes in particular are at the origin of its amendment proposal. Both processes came to a grinding halt when certain decisions of the adjudicating authority were challenged:

• The dispute arising out of the procurement for the construction project of the Erstfeld tunnel, which is part of the NEAT project (the world’s longest railway tunnel; see our blog of 6 July 2010), delayed the commencement of the works for 18 months and caused an approximately 50 million Swiss Franc increase of the costs of the project.

• Also in the framework of the NEAT project, the award of the 1.7 billion Swiss Franc contract for the installation of technical railway equipment in the Saint-Gotthard base tunnel was challenged by an unsuccessful bidder. The court in charge of handling the challenge took six months to decide on the request for a stay of the works, which resulted in a de facto stay of the same length. It ultimately rejected the request, but estimates are that every month of stay entailed additional project costs of approximately 10 million francs. Fortunately, the adjudicator and the bidder subsequently reached a settlement.

The Federal Government’s proposed amendment to the Federal Law on Public Procurement would first provide for an automatic stay of a procurement process where a decision of the adjudicatory authority is challenged. Most importantly, however, the amendment provides that if important supra-regional procurement projects are urgent or if their postponement would cause disproportionate delays or damage, a challenge would not prevent the procuring entity from entering into a contract with the successful bidder.

Critics of the proposal consider that it is difficult to reconcile with Switzerland’s treaty obligations and with the fundamental right to court review of adjudicators’ procurement decisions (Peter Galli, Kein Verzicht auf aufschiebende Wirkung, Neue Zürcher Zeitung, 6 August 2010, p. 10; Marc Steiner, Der Rechtsschutz im öffentlichen Beschaffungswesen – ein Baustellenbericht kurz vor dem Durchbruch am falschen Ort, http://www.sgvw.ch/d/fokus/Seiten/100727_lexleuenberger_steiner.aspx).

This judgment from the Inner House of the Scottish Court of Session is therefore very useful as an indication of the UK Courts’ current approach to causation of delay and extensions of time. Of course, this may not be the end of the story as City Inn still has the chance to lodge an appeal to the Supreme Court.

Key Elements

The dispute centred on a late-running project to build a hotel in the city of Bristol. Shepherd was employed by City Inn to carry out this project under an amended version of the 1980 edition JCT contract (a UK standard form of building contract with Quantities). The adjudications which followed the late finish resulted in Shepherd being awarded a 9 week extension of time (“EoT“) made up of 4 weeks awarded by the Architect and a further 5 weeks from the Adjudicator. City Inn was unhappy with this result and took the matter to the Outer House of the Scottish Court of Session. They applied for various orders including
a declaration that Shepherd were not entitled to an EoT; a reduction of the Architect’s award of 4 weeks EoT; and an order for payment of outstanding liquidated damages for delay.

Shepherd counterclaimed for a further 2 weeks EoT and for consequent loss and expense. The matter eventually proceeded to trial and was heard by Lord Drummond Young.

The main elements of the case were a bespoke clause covering entitlement to an EoT (clause 13.8), and the cause of the delay, taking into account the multiple delaying factors which occurred and the extent of their impact.

On the first issue, Lord Drummond Young found that clause 13.8 could not logically apply to instructions which caused delay just because they were in themselves late. Lord Drummond Young also noted that City Inn had not referred to their clause 13.8 rights until this juncture, and that neither of the parties appeared to take the clause into account when acting.

On the second – and more interesting – issue, causation and delay, Lord Drummond referred back to another contract clause (clause 25) to give his judgement. He said that under clause 25 the architect was to exercise his judgment and fix a “fair and reasonable” completion date. He held that an apportionment exercise may be necessary where there is concurrency or no dominant event.

The parties had been unable to locate an electronic, logic linked version of the original programme and so had to use a basic programme showing the activities and durations of the project. Lord Drummond rejected City Inn’s expert evidence which tried to establish, retrospectively, a critical path which led to the conclusion that Shepherd was not entitled to any EoT at all. Instead, he favoured Shepherd’s expert who said that he had attempted to establish a critical path, but that it was impossible to do so accurately. Lord Drummond preferred this common sense approach and found that, using this analysis, Shepherd was entitled to 9 weeks EoT.

City Inn appealed unsuccessfully with most of the judgment concurring with Lord Drummond’s reasoning. The majority opinion was set out by Lord Osborne, and contains five principles relating to the evaluation of a delay and loss plus expense claim. Of course, the Court was examining these issues under clause 25 of the JCT form. However, I think these general principles would have relevance to most construction contracts and illustrate the likely approach that would be adopted by the UK Courts:

1. For an EoT claim to succeed the relevant event must be shown to be likely to cause delay or have caused delay.

2. Whether or not a relevant event causes delay is a matter for common sense.

3. It is for the decision maker to decide what evidence to use in forming his conclusion. This may or may not include a critical path analysis. What matters is that the evidence used is sound, whatever form it takes.

4. If there is one dominant cause, all other causes will be disregarded. The dominant cause must be a relevant event for a claim to succeed.

5. It is for the decision-maker to apportion the delay to completion of works in a “fair and reasonable way” where there are two (or more) causes of delay, but only one of which is a relevant event and neither is dominant.

Although Lord Calloway dissented from the ‘apportionment’ reasoning, all three judges concurred in the result and on the critical path analysis being relevant but not necessary to decide the outcome of an EoT claim.

Implications for future cases

I should have of course stressed that this was a Scottish Judgment. What this means is that the decision is binding on the lower courts of Scotland but not so on the English courts – although given that it is an appeal court decision it will at least be persuasive in England.

What is most striking is that all the judges leaned heavily towards the arguments for being guided by principles of fairness, reasonableness and common sense. Many of the arguments put forward centred on the true meaning and consequences of events being concurrent. However, Lord Osborne stated that the important question was not whether events were truly concurrent, but rather the effects on the completion date of the events. In a similar spirit, Lord Carloway talks about the Architect applying “professional judgment” and “using his and not a lawyer’s common sense“.

In terms of implications for future cases in the UK, the judgment must not be considered an approval of the use only of common sense and fairness at the expense of a critical path analysis. In this case the critical path analysis presented was not considered sound and so was not used to form the judgement. However, that is not to say it may never be used to determine EoT claims, but rather it is up to the decision-maker as to whether he uses the critical path analysis in his “fair and reasonable” decision-making process.

And what of its implications further afield – in the international arena? I think the judgment and the arguments employed would be useful to anyone involved in disputes on causation and EoT’s where there are concurrent events and particularly where there is no critical path analysis or such evidence is flawed.

FIDIC talks about the Engineer making a “fair determination” whenever required to determine any matter under the Contract [Sub-Clause 3.5] and the provision dealing with extensions of time [Sub-Clause 8.4] refers to an extension of time “if and to the extent that completion……..is or will be delayed by any of the [specified] causes“. So the same arguments about causation, apportionment and concurrency could run under a FIDIC based contract.

Similarly, the NEC construction form NEC3, which treats delay events as “Compensation Events”, requires the Project Manager (who has to act “as stated in this contract and in a spirit of mutual trust and co-operation”) to assess “the length of time that, due to the compensation event, planned Completion is later than planned Completion” [Core Clause 63.3]. Interestingly, in NEC, assessment of the impact of the event includes “risk allowances for cost and time for matters which have a significant chance of occurring and are at the Contractor’s risk under this Contract” [Core Clause 63.6].

And, of course, I cannot sign off without mentioning that Pinsent Masons acted for Shepherd Construction on this case!

On July 13th 2010 Brazilian Federal Government launched bidding documents regarding the concession regime and procedures for implementation and operation of the High-Speed Rail (TAV – Trem de Alta Velocidade) that will connect the cities of Rio de Janeiro, São Paulo and Campinas. The project, the most ambitious infrastructure project under the country’s Program to Accelerate Growth (PAC – Programa de Aceleração do Crescimento), specifies that the construction, operation, and maintenance will be granted to the consortium that provides the lowest fare for service.

The concession contract establishes the limit of six years to complete the entire stretch Campinas – São Paulo Rio de Janeiro. The final schedule calls for the railway to be completed by 2017, although the Brazilian Federal Government anticipates the line will be partially open before the 2016 Summer Olympics in Rio de Janeiro.

TAV is worth US 20 billion. The Brazilian Federal Government will invest, through a new state-run entity, US$ 1.5 billion in the project and extend loans worth 60% of the total cost by the Brazilian Development Bank (BNDES – Banco Nacional de Desenvolvimento Econômico e Social).

Potential customers in the parcels market can be classified into two main groups:

- existing logistics companies, interested in moving consolidated loads, using rail as part of the chain – principal players in this field are the Brazilian National Post Office (Correios – Empresa Brasileira de Correios e Telégrafos) and Courier Companies; and

- end users, such as businesses, or individuals.

The construction of TAV will create a very large site, which will directly require numerous professional skills and directly or indirectly generate employment upline and downline The commissioning of the railway and, in particular, the development of land traffic and associated commercial zones served by the railway will create jobs in a progressive manner during the first 10 years’ of operation.

It is estimated that the railway will generate around 30,000 jobs throughout the area affected within about 10 years after commissioning. In addition a further 30,000 jobs could be generated by around 2050 in response to more fundamental shifts in the regional economy.

The choice of consortia contractor by the end of 2010

The Brazilian Federal Government will pick the contractor for the TAV in December 2010. Competitors must submit their proposals before November 29 and the winner will be announced on December 16 at the headquarters of Sao Paulo Stock Exchange (BOVESPA – Bolsa de Valores de São Paulo). Term of the concession is 40 years.

The line will be built and run on a concession basis and the government will rank bids based on the lowest fare, with a maximum permitted price of US$ 0.28 per kilometre. That would translate into economy class ticket fares up to US$ 115.00 for the 430 kilometres (270 miles) stretch between Rio and Sao Paulo.

International interest

The bidding is open to both Brazilian and foreign firms. News report that several countries and international companies have expressed interest in participating of the project:

- Austria;

- China (China Railway Materials);

- France (Alstom);

- Germany (Siemens);

- Italy (Ansaldobreda);

- Japan (Hitachi, Kawasaki, Mitsui & Co, Mitsubishi and Toshiba);

- Spain;

- South Korea (Hyundai and Samsung); and

- United Kingdom.

A new company called ETAV

Federal Government also proposed the creation of the Company of High Speed Rail (ETAV – Empresa de Transporte Ferroviário de Alta Velocidade), With the objective of planning and promoting the development of other high-speed rail lines in the country.

ETAV will be linked to the National Agency of Terrestrial Transports (ANTT – Agência Nacional de Transportes Terrestres) and will be also responsible for managing the technology used by the contractor that wins the High Speed Rail bidding process, in addition to monitoring the project’s deadlines.

Speed, locations and planned route

TAV proposal calls for trains to run at speeds of up to 350 kph (217 mph) and the trip between São Paulo and Rio de Janeiro is expected to last 93 minutes. Seven mandatory stations are be built on the line:

- City of Rio de Janeiro downtown area;

- Rio de Janeiro International Airport;

- City of Aparecida, State of São Paulo;

- São Paulo/Guarulhos International Airport;

- City of São Paulo downtown area;

- Campinas/Viracopos International Airport; and

- City of Campinas downtown area.

The planned route will include 90.9 km tunnels and 103 km bridges and viaducts. An extension to Campinas, 70 kilometres from Sao Paulo was planned with the purpose of reaching the heartland of Brazil’s richest manufacturing and farming state.

The planned route is as follows:

This trend is hopefully coming to an end with the recent enactment of a new law with compulsory requirements on energy saving and efficiency. This marks a clear ambition by Russian policymakers and will probably enhance the nascent interest in green buildings of the main players in the real estate industry, who were severely hit by the current crisis and seek new growth opportunities.

A modest yet growing interest of the Russian real estate industry in green buildings…

Russia has experienced a tremendous construction boom in the last decade, with a clear premium on fast investment returns and the quantity of buildings rather than their quality. Western voluntary green building certification schemes – giving a rating to a specific building on the basis of ecological, social and economic criteria – were then clearly seen as luxury imports and during a long period set aside.

An interesting move towards international standards in general has nevertheless taken place in the last few years, initiated by the growing importance of international financing of Russian real estate projects (this has triggered inter alia the necessity of clean titles for mortgages, offshore contractual schemes, as well as the necessary “bankability” of international models of contracts such as FIDIC for construction, almost nonexistent in Russia ten years ago).

Progressively, this “international” evolution has naturally concerned green building certification, as a clear competitive advantage in a saturated real estate market (decreasing operation costs, insurance rates and legal liabilities, while increasing market differentiation and value). Such international events as the MIPIM have also been instrumental in convincing Russian real estate players of the potential added value of environmental certification.

Part of a global network, the Russian Green building council (RuGBC) http://www.rugbc.org/ created in 2009 is one of the most active advocates of green building certification in Russia, promoting mainly BREEAM schemes (originating from the UK in 1990) and to a lesser extent LEED (US rating scheme introduced in 1998) http://kluwerconstructionblog.com/2010/01/20/going-green-gets-greatly-muddled/. RuGBC is working to adapt these voluntary norms to the Russian context, which is very specific not least climate wise. The creation of a national Russian certification scheme is in this regard envisaged.

Due to the relatively recent Russian interest in green buildings, there are currently less than ten buildings in Russia which have been certified under BREEAM or LEED schemes (one having been developed by a Russian developer, Clearlink). This situation is particularly striking when compared with other emerging markets like China where green building certification schemes are widespread. It appears that this is essentially the result of national priorities, and Russia has recently demonstrated a shift towards such climate-friendly policies.

… Recently stimulated by a bold legislative reform on energy saving and efficiency

Publicly deploring Russia’s inefficient use of energy and its disastrous economic and ecological consequences, President Medvedev has called for an action plan to halve Russia’s energy intensity by 2020. According to the World Bank and IFC, such plan would cost a total of USD 320 billion, but would be paid back in just four years thanks to annual savings of USD 80 billion http://www.ifc.org/ifcext/rsefp.nsf/AttachmentsByTitle/FINAL_EE_report_Engl.pdf/$FILE/Final_EE_report_engl.pdf.

Following these declarations – anticipating somehow the possible alignment of Russian energy prices on the internal market to global market prices and the end of low cost energy – fundamental legislation was passed in 2009. First to implement parts of the Kyoto protocol (ratified by Russia in 2004) and, most importantly here, on energy saving and efficiency with the Federal Law No. 261-FZ dated November 23, 2009 (the “Law”). Certain provisions of the Law directly address energy saving and efficiency measures in the field of construction, these include:

- All new buildings (with few exceptions) will be submitted to Energy efficiency requirements (to be revised every 5 years) and will have to integrate compulsory energy meters to allow energy audits;

- Residential buildings will be rated according to their energy efficiency and such ratings will have to be indicated on the buildings’ facade;

- Public Procurement: energy efficiency of a tender has to be taken into account (considering the lowest lifetime cost of the building, not the lowest cost only);

- Tax incentives and administrative sanctions: while incentives are kept to a minimum, the Law provides for comprehensive administrative sanctions, the most efficient being that a building ignoring the Law requirements cannot be commissioned by the authorities (if the project (design) documentation / construction permit has been submitted to the authorities after November 27, 2009) and as a consequence under Russian law cannot be legally owned by anyone.

It is worth noting that the Law encompasses both construction and operation phases of a building project, and involves most of its actors, from developers and investors to operators and end users, together with designers and contractors. On a practical standpoint, this should permit an efficient implementation of the Law.

In this regard, the Law still lacks certain necessary application decrees and therefore many sensitive issues remain unanswered (e.g. under which SROs http://kluwerconstructionblog.com/2009/11/08/the-end-of-licensing-of-construction-related-activities-in-russia/ should an entity completing energy audits register). Many of these decrees have nevertheless been issued since November 2009 and Russian commentators agree that due to the clear political support of the reform, all of them should be issued within the next two years.

The implementation of this 2009 Law will therefore be an interesting test of Russian policymakers’ new commitment to environmental matters in general and to green buildings in particular.

Xavier Poulet-Mathis
The author thanks Irina Zimina-Lecornu (Attorney at Law, Moscow) for her collaboration.

According to a survey recently disclosed by the Ipea – Institute of Applied Economic Research (www.ipea.gov.br), while private capital injections have grown steadily during this period, State investments have faltered. In 1999, public initiative counted only R$ 20.9 million in railways while private initiative channeled R$ 232.8 million. Public initiative’s peak occurred in 2007 with R$ 352 million when, at the same year, private initiative have soared and exceeded R$ 1 billion in 2004. In 2008 private initiative came to R$ 4.3 billion (led in Brazil by mining company Vale, steel company CSN, and logistics company ALL) and State’s investments downsized to R$ 237 million.

As public investments have not changed significantly during the last decade, railway works and network expansion have primarily counted on the funds raised by private concessionaires. The overwhelming presence of highway transportation has caused the railway system to account for only 30% of total transports in volume terms in 2008, as compared to more than 50% in other countries. This is one of the Brazilian infrastructure bottlenecks that impair long-term investments, since it is difficult to make country’s agricultural output flow smoothly.

The Brazilian railway network comprises 12 railways for cargo transportation stretching along circa 28 thousand km. Between 1999 and 2008, the cargo volume carried soared 79.6%, with emphasis on iron ore, pit coal, soybean, corn, sugar, and others. These products are primarily carried through the Vitória-Minas and Carajás railways, and by MRS Logística (controlled by Vale and CSN). For the sake of comparison, thanks to hefty public investments, China can already count on a railway network that stretches along 86 thousand km, and is planning to expand it to 125 thousand km in the next few years.

Ipea estimates that 141 new infrastructure railroad projects would be required to improve efficiency and competitiveness in this industry. Such priority works comprise, among others, the Transnordestina network linking the Brazilian ports of Pecém (CE) and Suape (PE); the North-South railway extension up to the Brazilian port of Rio Grande (RS); and the additional route along this same network to the interior region of São Paulo. Current Brazilian network could be expanded to at least 40 thousand km by 2020. At least R$ 40 billion (around US$ 22 billion) would have to be invested in these projects in the next 10 years.

Basic notes on some of the major projects to come:

1) North-South Railway (EF 151)

1st Parcel – 50% of the winning Auction bid, at the time of financial settlement, upon the signature of the Sub concession Contract and the delivery of the railroad section defined as: Palmas (TO) – Anápolis (GO), scheduled for December 2010.

2nd Parcel – 25% of the winning Auction bid, upon the delivery of the railroad section defined as: the Ouro Verde de Goias (GO) – Rio Verde (GO), scheduled for July 2011.

3rd installment – 25% of the winning Auction bid, upon the delivery of the railroad section defined as: Rio Verde (GO) – Estrela D’Oeste (SP), scheduled for December 2011.

2) West-East Integration Railway (EF 334)

1st Parcel – 40% of the winning Auction bid of financial settlement, upon the signature of the Sub concession Contract and the delivery of the railroad section defined as: Ilhéus (BA) – Caetité (BA), scheduled for July of 2012.

2nd Parcel – 30% of the winning Auction bid, upon the delivery of the railroad section defined as: Caetité (BA) – Correntina / Barriers (BA), scheduled for December 2012.

3rd Parcel – 30% of the winning Auction bid, upon the delivery of the railroad section defined as: Figueirópolis (TO) – Correntina / Barreiras (BA), scheduled for July 2013

Procurement conditions for participation in the railroad projects:

• Acquisition of the Bidding Documents (www.valec.gov.br)
• The participation of individual Brazilian and Foreign Companies is permitted
• The participation of consortiums between Brazilian and / or Foreign Companies in one Consortium is also permitted
• The presentation of a commitment to form a consortium indicating the participation of each member of the consortium and the leader
• The members of the Consortium will reply jointly and individually for all the actions taken with joint responsibility
• The Consortium can not alter its composition without the prior consent of VALEC (VALEC – Engenharia, Construções e Ferrovias S.A., a public company supervised by the ANTT – National Transport Agency and which has the concession for the North South Railway and the West-East Integration Railway)
• Competence in Public Administration
• Unconditional Acceptance of the Conditions in the Procurement Documents

Neil MacBride, the U.S. Attorney leading the prosecution team, noted, “Bribery isn’t just a cost of doing business overseas. Today’s sentence makes clear that this is a serious crime that the U.S. government is intent on enforcing.” This statement succinctly illustrate the US DOJ’s commitment to prosecute individuals who violate the FCPA.

Assistant Attorney General Lanny Breuer has made no secret that the “prosecution of individuals is a cornerstone of [the DOJ’s FCPA] enforcement strategy.” “Put simply,” Breuer said in a November speech, “the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.” Thus, the FCPA poses a hazard not just for corporate reputations and profits but also for the individual executive. Companies can be fined, but only individuals can be put in prison, and DOJ well knows that the prospect of a stretch in the Federal pen can have considerably greater deterrent effect than the possibility of your employer having to pay a fine. Look for more such announcements in the months and years to come, as FCPA enforcement efforts continue to escalate.

Fiona Philip
Andrew Ness

“Tests on Completion

The first 30 days shall be a monitoring period during which the Contractor sets up the operation of the plant and conducts his own water quality tests to confirm that the final effluent consent has been met. At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.”

We have met the final 30 consecutive days successfully and want taking over. The Employer says we must complete the 90 days which takes us outside of the construction period and hence delay damages are being threatened.

I say we have satisfied the contract at the end of the 30 consecutive days and we should get Take Over even though it is not 90 days.

Have you any idea if we are right in our assessment?

Answer:
Firstly, a couple of brief provisos. I assume that you have made no amendments to the Yellow Book that affect this issue. I’m also assuming that, as you say, otherwise the works have indeed all been completed in accordance with the Contract.

Have the Tests on Completion been passed and are the Works ready for Taking Over?

Obviously your argument is that having satisfied the first 30 day monitoring period and then completed the further 30 consecutive day period and having notified the Engineer that the plant is complete and meeting the Process Guarantee, you have therefore satisfied the requirements for completion and Take Over.

Clause 10 – which deals with Taking Over – says that the Works must have been completed in accordance with the Contract and that a Taking-Over Certificate must have been issued. The Employer must issue such certificate within 28 days of an application if the Works are substantially complete in accordance with the Contract (i.e. apart from minor outstanding work and defects not substantially affecting the Works); otherwise the certificate is deemed to have been issued.

Crucially, “completion” for these purposes includes:

• achieving the passing of the Tests on Completion; and
• “completing all work which is stated in the Contract as being required for the Works to be considered completed for the purposes of taking over”.

So it all comes down to (1) what is required to achieve passing of the Tests on Completion and (2) what the Contract states needs to be completed to achieve take over.

Under the Yellow Book, “Tests on Completion” means “those tests which are specified in the Contract or agreed by both Parties…and which are carried out under Clause 9 [Tests on Completion] before the Works…are taken over by the Employer”.

Clause 9 goes on to spell out the process for carrying out these tests, which falls into 3 stages – pre-commissioning tests, commissioning tests and trail operation – the latter which is intended to show that the plant is operating reliably.

Ambiguous provisions

I think that the Engineer/Employer will forcefully argue that waiting for the 90th day to elapse is part of the “trial operation” and is required for you to pass the Tests on Completion. I agree that there is some ambiguity in the wording in Volume 3 of the Contract as it states: “At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.” However, my own view is that the drafting of the full testing period is clear and explicit – “The test on completion duration shall be 90 days“. Bearing in mind that FIDIC explicitly states “The documents forming the Contract are to be taken as mutually explanatory of one another” I do not think that this wording is actually inconsistent with the words: “which then shall be met by a further 30 consecutive days before Taking Over can take place”. In my view, all the Contract is saying is that the actual commissioning tests period is 30 days but there is then a further 30 day trial operation period to ensure the plant is operating reliably. This is also consistent with the description of Tests on Completion (and the 3 stages) described in Clause 9.1.
Of course, it is open to you to request clarification on this point from the Engineer. Clause 1.5.2 of the General Conditions provides that: “If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any necessary clarification or instruction.”

You do not mention if the Engineer in this case is an independent engineer or is part of the Employer organisation. Whichever is the case, he may well come to the same view as the Employer and, in my opinion, this would be consistent with:

• the express wording (“The test on completion duration shall be 90 days“);
• interpreting the documents as mutually explanatory of each other; and
• the 3 stage process of Tests on Completion which includes a “trial operation”.

Whether or not the Engineer is truly independent, Clause 3.5 applies when a party asks the Engineer for clarification and provides that he must consult with each party in an endeavour to reach agreement. If agreement is not reached, “the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

The Engineer must give notice to both parties of the determination with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 (Claims, Disputes and Arbitration).

What do you do now?

Whilst I think that the correct interpretation is that the testing period is the full 90 days, I am conscious that complying with this period will put you in delay and at risk of liquidated damages for delay. Therefore in practical terms, I think that you should at least make the argument that you have already substantially completed. I think that there is sufficient ambiguity in the Volume 3 wording to argue that the Tests on Completion have been completed and that you are entitled to issue of the Taking-Over Certificate. Therefore you should apply for issue of this certificate if you haven’t already done so (although if you haven’t already done so you will still have to wait at least 28 days before the Engineer is obliged to issue the certificate or you can argue that it is deemed to be issued).

Under Clause 10.1 [Taking Over of the Works and Sections], the Engineer is deemed to have issued a Taking Over Certificate if he fails either to issue a TO Certificate or rejects the Contractor’s application for a TO Certificate within a period of 28 days after receiving the Contractor’s application.

You have not said whether or not the Engineer has rejected the application. If he has not, and more than 28 days has elapsed since you issued it, then the TO Certificate will be deemed to have been issued on the last day of the 28-day period.

Of course, if you applied for the TO Certificate right before the end of the 30+30 days, then the Engineer has up to 28 days to issue or reject, and you are almost in the same position as if your completion test phase was 90 days. If you applied substantially earlier than that then it will make a bigger difference and might be the difference between completing on time or late.

If you are late, then there probably is no harm in making the application for a Taking-Over Certificate. Note that in accordance with Clause 10.1.3(b) of the General Conditions, if the Engineer wishes to reject the application, he has to give reasons and specify the work that is required to be done by the Contractor to enable the TO Certificate to be issued. Even if the Engineer has purported to reject your application, you might be able to argue that he has not done so in accordance with the contract, because he has not specified the work that is required to be done in order to enable the TO Certificate to be issued. Of course in my view, he is likely to simply point to the further 30 day trail operation period under the Contract.

Delay to Testing

Whilst I do not think you have a basis of claim (as my interpretation of the Contract is that you have not yet fully passed the Tests on Completion), if the Employer’s insistence on you waiting until the end of 90 days after the start of the testing period is not permitted under the Contract, there is potentially the right to claim for delay. Clause 7.4.5 provides that “If the Contractor suffers delay and/or incurs Cost … as a result of a delay for which the Employer is responsible, the Contractor shall give notice to the Engineer and shall be entitled to claim both an extension of time and “payment of any such Cost plus reasonable profit, which shall be included in the Contract Price” (Clause 7.4.5(b)). Equally there is the ground in Clause 8.4.1 (e), being “any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site.” The Employer’s Personnel, as defined, includes the Engineer.

Any right to claim will be subject to strict compliance with FIDIC’s notice provisions in Sub-Clause 20.1 (Contractor’s Claims)). I have previously stressed the importance of getting your notice exactly right in the previous Q&A; click here to read more. After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 (Determinations) (see above) to agree or determine these matters.

One final note

Finally, do you have any minutes or notes of any discussions with the Employer about completion testing? If you do, have a look at them to see whether they clarify the position. Obviously it will be helpful if you have evidence that you and the Employer intended the tests to consist of the 30-day monitoring period plus the second consecutive 30-day period only. It is worth noting that FIDIC Yellow Book does not include an “entire agreement” clause precluding extra contractual documents/negotiations in interpreting the Contract. If you have clear evidence that the parties both intended the completion tests to last for 30 days plus 30 days (only) then you may be able to claim successfully that the figure 90 was inserted into the contract by mistake instead of 60, in the event that the dispute goes to arbitration.

]]> http://kluwerconstructionblog.com/2010/04/14/tests-on-completion-under-the-fidic-yellow-book/feed/ 0 http://kluwerconstructionblog.com/2010/03/05/getting-into-the-greenbacks-hurdles-in-competing-for-u-s-government-construction-work/ http://kluwerconstructionblog.com/2010/03/05/getting-into-the-greenbacks-hurdles-in-competing-for-u-s-government-construction-work/#comments Fri, 05 Mar 2010 17:15:43 +0000 Andrew Ness http://kluwerconstructionblog.com/?p=421 Continue reading →]]> Non-U.S. companies frequently ask whether they are eligible to compete for U.S. Government construction and renovation projects, whether within the U.S. or on U.S.-owned facilities abroad. The answer is a simple “yes” in the great majority of cases, unless the project requires access to secure or classified information. Much of the work on U.S. Embassies, for example, requires such access (and some is restricted to only U.S. firms). To work on a secure/classified project, the contractor must possess an Industrial Facility Clearance (FCL), issued in accordance with the National Industrial Security Program Operating Manual (NISPOM). So let’s consider the requirements for that.

To be eligible for an FCL, a company must: (1) need access to the classified information; (2) be organized under the laws of the United States; (3) have a reputation for integrity and lawful conduct; and (4) “not be under foreign ownership, control, or influence (FOCI) to such a degree that the granting of the FCL would be inconsistent with the national interest.” NISPOM ¶ 2-102. Factors considered here include the amount of foreign ownership, the type and sensitivity of information that will be accessed, and the company’s record of compliance with U.S. laws and regulations. NISPOM ¶ 2-301.

Translated, this means that the contractor needs to be a U.S. corporation, but that corporation can be foreign-owned or controlled (that is, a U.S. subsidiary), so long as it complies with the FOCI mitigation rules.

The FOCI mitigation rules are security measures to mitigate the extent of foreign control. One of the most commonly used measures is a Special Security Agreement (SSA). NISPOM ¶ 2-303(c). An SSA allows the foreign owner to maintain inside directors on the Board of the U.S. subsidiary/contractor, while excluding them from all decisions affecting the firm’s classified work. A Government Security Committee of independent, outside directors, approved by the U.S. government, oversees and ensures the proper handling of classified materials. What this means as a practical matter is that the foreign parent can have no influence or control over any decisions relating to the secure/classified project. For example, during the bidding phase the costs of the potential project can be discussed generally with the foreign parent, but the parent cannot be told of the security issues or the potential costs to comply with the security issues. Similarly, during performance, the parent can be told in general terms how the project is going, but cannot be told about a specific issue such as a blast-proof security wall that is causing a project delay.

Another mitigation method sometimes used is the establishment of a Proxy Agreement (PA) or Voting Trust Agreement (VTA). NISPOM ¶ 2-303(b). Under a PA or VTA, the voting rights regarding the foreign-owned stock of the U.S. subsidiary are vested in cleared U.S. citizens approved by the U.S. government. These Proxy Holders or Trustees become the directors of the corporation, to act independently from the foreign parent. Although the Proxy Holders must obtain approval from the foreign parent for major decisions, such as the sale of corporate assets or a corporate merger, the Proxy Holders or Trustees otherwise retain complete control, but the foreign parent still gets the financial benefit of its subsidiary’s operations.

Approval of FOCI mitigation measures is at the discretion of the government agency letting the contract, so there is no sure-fire guarantee of success. But by working with the government and being willing to implement those FOCI mitigation measures the government suggests, it usually is possible to obtain an FCL and compete for secure/classified U.S. Government projects.

Barbara Werther
Andrew Ness

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