Challenging Conditions

Megaproject JVs are always intense endeavours that require expert top-down management in order to remain on course and, importantly, profitable. Because profit margins in EPC projects are becoming tighter, an aggressive claims focus has developed in the construction industry as a response to increasingly finely balanced cashflow in the contracting chain.

A particular issue which has driven this since the start of the Covid-19 pandemic is financing. There has been a wave of force majeure claims since early 2020 that is yet to subside, creating extreme pressure on liquidity throughout the industry. The failure of one JV partner to stay out of the red can trigger a flurry of claims in the pursuit of additional cashflow. If the pressure is particularly severe, it is not surprising that JV partners can turn on each other for the same reason.

Therefore, parties intending to enter into a JV must develop a strategy for how to manage disputes before these pressures arise. Dispute avoidance is a common and wise objective but, where disputes persist, there is a need for a quick, cost-efficient and reliable dispute resolution process for internal disputes. Moreover, when a dispute arises it is the contractor, or JV partner, who has invested time and effort in understanding the dispute resolution scheme that has the advantage.

Managing JV relationships

No matter the nature of the dispute resolution procedure, records are king when preparing for claims. Contemporaneous records or data are generally most persuasive evidence for tribunals and courts, yet sharing original data or secondary analysis with a JV partner may bring risks. How then can a party help its JV partners maintain a successful position against the client whilst still keeping an edge, or at least protecting its position, in internal JV disputes?

JVs are built on principles of co-operation, transparency and mutual benefit. Depending on the particular form of any given JV, and the applicable laws, this may not be enough in itself to imply an enforceable duty of disclosure where one partner requires data from another for an external dispute. Despite this, legal tribunals typically take a dim view of parties attempting to withhold relevant information from partners in this context. It is also possible, in certain circumstances, that when a dispute at adjudication or arbitration cannot effectively procced without information belonging to a party outside the contract, i.e. not within the tribunal’s jurisdiction, a court may be persuaded to intervene either to mandate disclosure or hear the case directly. Consequently, the management and exchange of information is key, as disclosures between partners will be a core, and potentially fraught, issue.

In this regard, inter-JV ‘non-prejudice’ or ‘without prejudice’ agreements provide an essential layer of protection for JV partners that must be clarified prior to engaging in claims preparation. A without-prejudice agreement allows the JV partners to agree that the information shared, most typically regarding delays, is shared without prejudice in the instant circumstances, i.e. solely for the purposes of the external claim and either inadmissible as evidence in any claim between the JV partners or, at least, shared without being construed as an admission of any fault or liability.

Such agreements must be carefully considered and, depending on the project, may be complex. Despite this, setting the table this way allows for impactful collaboration during the life of the JV, allowing the respective legal teams to focus on the job at hand without needing to scrutinize every communication or document to consider any potential repercussions for their company or the JV relationship.

Conclusion

Delays and unexpected costs are unpredictable in nature, but when project delays and cost overruns become foreseeable, the JV must look to salvage profitability in view of the project progress and the time remaining until practical completion.

A nuclear solution in the event that one partner is close to insolvency, is to amicably part ways to preserve the remainder of the JV and ensure the smooth continuation of the EPC contract. Alternatively, providing liquidity for an insolvent JV member can immediately resolve any cashflow issues while delaying repayment until a later date, or even to the next project, if the commercial relationship is strong enough.

However, although difficulties may bring claims into focus, it must be remembered that even the most robust claim is never guaranteed to succeed. Furthermore, claims which are rushed or pushed forward due to a financial necessity may undermine the contractor’s position in more credible claims, particularly if a decision creates a harmful precedent that contract administrators or adjudicators feel bound to follow for consistency until it is overturned or distinguished by arbitration.

There are many options for navigating inter-JV issues but, most importantly, indecision will only exacerbate any time or cost impacts. Therefore, it is crucial to have pre-agreed dispute resolution procedures in place from the outset as a project risk mitigation measure.