Safety

Understanding the Risks of International Construction

Contractors operating outside the U.S. face different cultural, compliance and cultural risks, due to differences in contracts, design responsibilities, processes and procedures, and dispute resolution.
By Denis Serkin
March 31, 2021
Topics
Safety

In recent years, international construction projects, especially infrastructure and building projects funded by international development banks, have increased in quantity, size and complexity. The result? More and more contractors are engaging in projects far away from their traditional bases of operation.

In general, a contractor operating abroad needs to understand three categories of risk (the three Cs):

  1. contractual;
  2. compliance; and
  3. cultural.

Contractors must be mindful that crossing borders will often trigger all three of these categories, due to differences in preferred contract type(s), the contractor’s role and design responsibilities, the processes and procedures intended, and the available recourse and ability to recover damages in the event of a dispute.

Contractual

First and foremost, when determining how to properly allocate and negotiate the level of risk, the proper contract form and language must be selected to protect the contractor from unforeseen liability. Typically, international projects funded by development banks, including American development banks, will not utilize traditional “American” forms of contract such as the American Institute of Architects or ConsensusDocs.

The most prevalent form of contract on international projects comes from the Federation Internationale des Ingenieurs-Conseil’s suite of contracts. The FIDIC contract books, typically referred to by their color, were written to address different project types, such as the Red Book, which refers to the traditional design-bid-build model, or the Silver Book for Engineering Procurement Construction/Turnkey Projects. The FIDIC contracts at their very core are different from American contracts and delegate significant power over project decisions to the Engineer.

The application of the FIDIC contract is guided by The FIDIC Golden Principles, which provide a philosophical framework to how the FIDIC contracts should be utilized. For example, Golden Principle # 5 requires that project disputes, unless in conflict with the governing law of the contract, be referred to a Dispute Avoidance/Adjudication Board (DAB) for a provisionally binding decision as a condition precedent to arbitration. In fact, most development banks require that the DAB be in place at the very beginning of a project or they will not fund the work.

Likewise, although FIDIC books contain clauses to address changes in the work, payment terms, claims, force majeure and dispute resolution, some of these clauses may be unenforceable as written under the laws applicable to the project.

Compliance

Second, every international contractor must have a robust corporate compliance and integrity/anti-corruption program. Working far from home in foreign jurisdictions only increases chances that an employee, agent or a joint venturer may act in a manner inconsistent with good corporate citizenship. The World Bank’s debarment list is an encyclopedia of what an international contractor should not do – from falsifying credentials, failing to disclose failed projects, inflating payment applications, to old fashioned bribes to obtain or keep a particular project.

At a minimum, an American-based international contractor must comply with the United States Foreign Corrupt Practices Act (FCPA), the requirements of the project lender, as well as the laws and regulations of the country where the project is located. A true compliance program requires effort, investment, training and genuine support of senior management.

Cultural

Lastly, an international contractor must understand the culture of the country, region, and state where the project will take place. Cultural differences can be less obvious, especially on international projects where participants come from different parts of the world, speak different languages and may have very different ideas of what is acceptable or appropriate in the project jurisdiction.

More obvious or predictable are differences in the definition or process employed by the parties, although these differences are too often overlooked. What constitutes a design phase? What is the expected contractor involvement in the design phase, even if the contractor does not have design responsibility? What is the permitting regime? What are the import/export laws and durations when it comes to procuring materials? What is the local labor market like? Recognizing that things may be different and confirming that assumptions are correct will be critical to successfully completing the project.

Related to culture, there are variations in legal systems. Globally, the Civil Law system is dominant (utilized by Germany, France, Russia, China, Japan and Spain, among others) with only a handful of nations utilizing common law (United States, England, India and Canada).

There are important distinctions between the two; e.g., the use of discovery is significantly limited in civil law jurisdictions. While attorneys in a common law jurisdiction demand discovery from, and question the relevant parties, in a civil law system it is the judge, not the attorneys, who with guidance from the attorneys, will investigate the relevant facts and determine how a case will proceed. Although these differences are not insurmountable, they must be understood and appropriately managed.

It can be challenging to fully understand the various issues that may arise in cross-border construction projects and to be prepared and be ready to respond should disputes arise. Understanding this, Peckar & Abramson, P.C., French law firm Altana, German law firm Breyer Rechtsanwälte, and the consulting and dispute resolution firm PS Consulting recently came together to form the Leading Construction Lawyers International Alliance. Through LCL, a shared understanding of the difficulties faced by international contractors is fostered. A clear focus of LCL is to help navigate the nuances and challenges experienced when working across borders, and to better inform stakeholders throughout Europe, the Americas, Asia, Africa and the Gulf, regarding both the common and complex cross-border issues that arise with international projects. The ultimate goal is to help facilitate successful delivery of projects around the world.

by Denis Serkin
Partner Denis Serkin focuses the majority of his practice on construction law and represents construction managers, general contractors, specialty contractors, owners, developers and subcontractors in the resolution of disputes. 

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