Contractual Disputes With Overseas Investors Cause Tier 1s to Bail Out on Major Projects.

Downer cancels its Tecnicas Reunidas contract - yet another Tier 1 contractor at odds with overseas investors in the mining industry.

Downer has cancelled its Tecnicas Reunidas contract for pre-fabricated module installation for an ammonium nitrate project in the Burrup Peninsula in Western Australia.

Downer is currently pursuing $60 million worth of claims from Tecnicas Reunidas after the Spanish company failed to address a “substantial breach of the contract”. In March last year, Downer was awarded the $72 million electrical, structural and mechanical contract. However, the modules which Tecnicas Reunidas supplied were allegedly poor quality and didn’t fit together properly. This caused substantial issues with delivery of the contract.

Downer had been paid approximately $89 million, but is seeking another $60 million which includes costs for the extensive disruption, delays and the rework required due to the problems with the supplied modules. In Downer's official announcement about the cancellation it said that it didn't take the cancellation lightly, but "...considered it had no alternative given Tecnicas Reunidas's conduct."

Roy Hill Argy Bargy.

There have been a number of disputes at the Roy Hill Mine with Samsung, who hold the overall management contract for the mine.

NRW Holdings has spent the last eight months feuding with Samsung over the $620 million contract for rail formation at the Roy Hill Mine. The companies went to the supreme court last month and are now headed to the Singapore International Arbitration Centre to try and resolve the David-and-Goliath battle.

Laing O’Rourke also wrapped up their involvement with Roy Hill, after a payout of $45 million from Samsung. Last month an adjudicator’s award of another $44 million was thrown out by the court.

Samsung has settled with other contractors having pay issues, including McConnell Dowell, Central Systems and Thiess. While the spokeswoman for Samsung said the company was maintaining open communication and amicable relationships with its subcontractors, many of Tier 1 companies involved would beg to differ.

It is alleged that Samsung has routinely disputed payment claims, exploiting subcontractors who are unfamiliar with overseas adjudication processes. Despite the costs associated with taking it to through the local courts, the uncertainty about both the costs and their chance of success if the case goes to the Singapore International Arbitration Centre has led some of these companies to cut their losses and move on.

Roy Hill Chief Executive Barry Fitzgerald reckons, at a media conference in March, that the number of disputes with Samsung is "quite normal", given the total management contract is worth $5.6 Billion. But these are principal contractors with very large responsibilities within the overall project. Seems like almost no-one has been engaged on contract terms that are clear to both parties.

Changing Market Impacting Amount of Disputes.

Clive Luck is a Clayton Utz partner, and he believes the growth in disputes is largely arising from a market which has fundamentally changed, with weak commodity prices undermining the economics of major projects. In other words - everyone is doing it tough at the moment, contracts have very little wiggle room and almost no-one has the time or money for big errors or variations.

“Owners have little flexibility or desire to accommodate significant delay and variation claims brought by contractors,” he said. “Contractors are also less flexible in their approach to resolving matters commercially.”

Previously, contractors were focused on maintaining relationships so they could win more work but now have switched their focus to maximising returns from their existing projects.

Many of these contractors are using the Construction Contracts Act 2014 to go through an adjudication process.

Mr Luck said we can expect to see more appeals against court judgements, meaning instead of taking two to three years to settle, they’ll probably take four or five.

“You need to be very careful with the contract terms”, he said, “but people also need to pay more attention to both the scope of work and pricing the work.”

Minter Ellison Partner Kevin Stewart weighed in on the issues, saying that it’s essential companies are particularly diligent, especially when it comes to contracts.

He says that an equitable and carefully constructed contract is the best protection against contract disputes, however, it’s not unusual for even experienced contractors to begin work while the contract is still being negotiated.

Mr Stewart also said that some will accept an inequitable or unsuitable contract just for the sake of the relationship or to win the job. “That may be a valid commercial gamble, but it’s hardly best practice,” he said.


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Sources: SMH, Business News, Yahooo 7 News

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