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Transformation in the construction industry: Keeping pace with change

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Three pillars are at the heart of global efforts to boost sustainability and make our built environment cleaner, greener and more socially responsible: construction, energy and technology. These three industries have come to be intricately connected in an era of transformation on a scale never seen before.


Across the world, leading construction industry players are developing innovative projects and deploying new technology to transform the way we live and work. 

Meanwhile, energy and mining  & metals companies in rural Africa are increasingly installing generating assets and distribution facilities to ensure continuity of energy supply for their operations. 

The predicted increase in flexible working may well result in a more widespread move to the development of "smart cities," with technology built into the heart of daily life. 

All this is happening amid the fallout from the COVID-19 pandemic, which has shifted perceptions of how the world may look in the future. 

But the pandemic has also forced project owners, developers and contractors to look at their contractual terms more closely, as budgets are cut and works are interrupted due to government restrictions. 

This compendium of articles, written by colleagues from offices across the world covers a wide range of issues, examines some of the key topics relating to the shifting relationship between the construction, energy and technology sectors in our rapidly changing world. 

It looks at the role the construction industry is playing in the development of distributed energy projects in the US and battery storage in the UK. 

In the Middle East, the boom in the construction of smart cities has led to the use of new project structures to embed energy -saving measures within the developments. In Africa, renewable energy projects driven by public procurement programs have attracted investors and developers from around the world, drawn by the vast opportunities on the continent. 

Increasing work in a volatile environment, however, means that risk allocation and mitigation are more important than ever. Courts in regions as diverse as Russia, India, Latin America, the Middle East and the UK have all been examining force majeure and risk clauses within contracts. Industry players would be wise to take note of these decisions and trends as markets are beginning to return to post-coronavirus normality.

Insolvency can also be another resultant risk, with recent reforms in the UK, Australia and Singapore affecting the construction sector if contracts are not carefully reviewed and, potentially, redrafted to reflect the new rules. 

Although the current environment may have raised awareness of risk in construction projects, there is no doubt that the recent disruption and focus on innovation, new technology and sustainability is bringing immense opportunity to the industry around the world with a real chance of lasting impact.

“Focus on innovation, new technology and sustainability is bringing immense opportunity to the construction industry around the world” 

Construction considerations in the US distributed energy market

Microgrids are an increasingly attractive means to provide reliable electricity, generated on-site, customized for the needs of the individual location and sensitive to the environment.

construction arbitration square US Distributed energy

Untangling a failed energy startup

The commissioning and startup phase of any energy project—liquefied natural gas, power, renewables, petrochemical—represents an important, and potentially perilous, transitional period during the construction process.

construction arbitration square US Untangling

Impact of COVID-19 restrictions on Mexico’s construction industry

The coronavirus pandemic has had, and will continue to have, profound effects on the global construction industry. There have been and will continue to be substantial delays and cost impacts as a result of labor shortages, disruption to supply chains and financial pressure.

construction arbitration square Mexico- Case study

Bankability of contractor performance security in Latin American construction projects

Delays in construction projects are common and even more so at the moment, and so the question of ensuring that there is a mechanism for the prompt payment of damages in the event of a contractual breach is arguably now more important than ever.

construction- arbitration square atAm Bankability

Impact of insolvency reform on the construction industry

With the threat of increased insolvencies as an effect of the COVID-19 pandemic remaining very real, the construction sector needs to be aware of the impact of changes to insolvency laws.

construction arbitration square UK Insolvency

UK case law emphasises need for clear drafting in descoping and vesting of goods

In 2020, the UK courts heard two significant cases with an impact on the way construction contracts and subcontracts are drawn up and carried out, affecting employers, contractors and subcontractors to major projects.

construction arbitration square UK descoping

Opportunities and challenges in battery storage

By Richard Hill, Sofia Lambert and Kit Goodfellow

Increased battery storage capacity can and is being encouraged in order to facilitate the move towards the decarbonisation of electricity generation and can contribute to greater resilience and efficiency of integrated grids. 

construction arbitration square uk-battery storage

Opportunity and risk in African construction contracting

By Matthew Richards and Rhulani Matsimbi

Investment in infrastructure in Africa has soared in recent years, and construction activity has risen with it.

construction arbitration square africa contracting

Finding an appropriate contractual bedrock for procurement of mining & metals projects in Africa

With its huge mineral potential, Africa is likely to see a number of mining projects move from exploration and feasibility to construction. 

construction arbitration square africa mining and metals

Risk allocation in recent construction projects in Russia

By Chris Duncan and Daria Plotnikova

The past few years have seen a shift in the way contracts for construction projects in Russia have been drawn up and scrutinized in response to growing awareness of risk.

construction arbitration square russia risk allocation

A sustainable future: Smart cities in the Middle East

Urban environments are in the middle of a revolution. The powers of technology and data are being harnessed to make cities safer, more efficient and more sustainable.

construction arbitration square middleeast smartcities

Saudi Supreme Court clarifies COVID-19 effects on contractual arrangements

COVID-19 has had a significant effect on construction projects around the world, delaying work and forcing many parties to go back to their contracts and examine whether there is scope for a claim, and Saudi Arabia was no exception.

construction arbitration square ksa supremecourt

Navigating through construction disputes in India

Where large projects exist, disputes will often arise. The Indian construction sector is no exception, but the lack of a standard form contract and the option of several forms of dispute resolution means that resolving disputes can be complex.

construction arbitration square india construction disputes

Bankability of contractor performance security in Latin American construction projects

Delays in construction projects are common and even more so at the moment, and so the question of ensuring that there is a mechanism for the prompt payment of damages in the event of a contractual breach is arguably now more important than ever.

5 min read

Although the advantages for project owners to require liquid forms of security may be obvious, these instruments typically come with additional costs for project owners and risks for contractors

When embarking on the construction of energy and infrastructure projects in Latin America, contractors are typically required to provide security to back their payment and performance obligations in the underlying construction or supply agreements.

The focus has traditionally been and remains on the liquidity of the instrument, but project owners and lenders are taking different approaches with respect to contractor performance security, as it is not always easy for a project owner to receive payment for damages or remedial work in the event of a contractor breach.

Irrevocable standby letters of credit tend to be the more liquid forms of performance security that contractors commonly provide to backstop their obligations. Depending on its conditions, a project owner as beneficiary under a letter of credit may simply need to deliver a formal notice to the issuing bank in order to receive payment.

As an alternative, contractors can provide parent guarantees or surety bonds, but these instruments typically require a more cumbersome process for project owners to receive payment or performance of the underlying contractual obligation.

Liquid forms of security

This is particularly important in Latin America, where security issued under local law, such as "fianzas" in Mexico or "seguros de caución" in Argentina, may not provide for payment on demand to the project owner as beneficiary. They may instead require legal action such as a final and binding judgment confirming the contractor's breach, or include conditions such as termination of the underlying agreement.

Although the advantages for project owners to require liquid forms of security such as letters of credit may be obvious, these instruments typically come with additional costs for project owners and risks for contractors. Contractors will include any costs of taking out performance security in the underlying contract price. These may be significant depending on the amount and term of the letter of credit.

Contractors may also not have sufficient lines of credit with their issuing banks to support substantial letter-of-credit capacity, in particular given the impact of COVID-19 on the balance sheets of many international contractors.

Contractor internal risk policies may also impose limitations on the amount and volume of letters of credit issued on a contractor's behalf. These cost and risk factors should all play into a project owner's decisions regarding adequate contractor performance security in a construction contract.

In addition, lenders may not have the same perspective as project owners in this respect, given the primary focus of a lender on price and time certainty during execution of the construction phase.

A liquid form of security, such as a letter of credit, provides leverage to ensure that contractors perform their obligations laid out in the underlying construction contract. Project owners and lenders may not necessarily agree that the additional cost of liquid security provides added or sufficient value to the project.

This has created a tension between project owners and international lenders in Latin American construction projects, particularly in projects that are more complex, in jurisdictions with greater political and legal instability, or where contractors have less experience with the applicable technology or doubts over credit standing.

The financial and practical implications of adequately structuring contractor security packages can impact successful and timely completion of construction in the region

International lender scrutiny

The importance of liquid security was recently highlighted in a particular case in Argentina after the country reopened to international project financing and the first wind projects were being rolled out. Although the chosen contractor had extensive experience building wind farms, international project lenders heavily scrutinized its security package.

This raises the question of whether project owners should incur additional cost for an instrument they may never use, particularly if they are working with leading international contractors or have previously successfully executed a project in Latin America.

The answer depends on many of the factors mentioned above. In any event, a liquid form of performance security tends to change the dynamic of the contractual relationship between the project owner and the contractors. This is particularly true for projects that experience delays, and which are disputed between the parties.

Contractors tend to feel more pressure to perform when a liquid form of security is on the line, as opposed to a parent guarantee or surety bond. International lenders will likely continue to analyze contractor security packages in Latin American construction projects in view of the added complexities that energy and infrastructure projects are currently facing for timely completion due to the COVID-19-related impact.

However, letters of credit do not represent the panacea for liquid performance security. In recent Mexican and other Latin American energy projects, contractors have successfully prevented or impeded draws on letters of credit by presenting requests for injunctions in the jurisdiction where the letter of credit was issued.

Letters of credit can often require a breach by a contractor under the construction contract as a condition to draw, for example citing delays "attributable to the contractor". In certain jurisdictions, courts or arbitral tribunals may look into the merits of the underlying breach that triggers the right to draw under the letter of credit.

If they find that the contractor did not breach the construction contract, they may issue an injunction to freeze the draw from the issuing bank's account located in its jurisdiction by determining that the project owner is not entitled to such draw on the letter of credit.

The financial and practical implications of adequately structuring contractor security packages can can have significant influence over the successful and timely completion of construction in the region, and the complexities behind building energy and infrastructure projects in Latin America will likely increase in years to come. This means the debate between project owners and lenders regarding contractor performance security will endure, and the question of "what is bankable?" in an international financing in Latin America will likely remain open.

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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

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