ian briggs - downer edi mining - resolving disputes with resources companies – mind games for...

10 November 2015

Resolving disputes with

resources companies – mind

games for contractors

Ian BriggsChief Legal CounselDowner EDI Mining

© Downer EDI Limited All rights reserved

Headlines


• The noughties – crazy times for contractors

• Understanding resources clients and Oil & Gas clients

in particular

• The up front issues

• Particular issues for Aussie contractors

• The effect of falling commodity prices

• Approaches to dispute resolution

• Practical issues for ADR

Agenda


• Infrastructure projects were plentiful

• State governments were spending up

• Alliancing and collaborative contracting became the

norm

• When new water, road and rail projects began to slow,

the resource boom became the main game

• Resources projects, particularly LNG projects, began

swallowing the construction industry

• Coal and iron ore prices were at historical high points

The roaring noughties – 2000 to 2010


• New/expanding coal mine and iron ore projects in WA,

NSW and Queensland –

WA: Hope Downs, Karara, Sino Iron/Cape Preston, Roy Hill

Qld: Broadmeadow, Kestrel, Eagle Downs, Middlemount, Caval

Ridge

NSW: Mt Arthur, Bengalla, Moolarbin, Boggabri

All required supporting rail and port infrastructure

A hot resources market


• Seven LNG projects - $193 billion !

Gorgon

Wheatstone

Prelude/Browse FLNG

Ichthys

QCLNG

APLNG

GLNG

But here was the real action..


LNG is complex technology

Add unproven CSG extraction technology

From wells to ship involves:

Myriad of extraction pipeline networks for gas extraction

Compression stations

Long distance pipelines

Waste water treatment

LNG plant

Port facilities including swing

basin

Substantial geographic spread

Array of different skill sets

Novel environmental and

regulatory issues

Projects were big and complex


The clients were different beasts


• Deal in big projects

• Have little experience or presence in Australia

• Often rely on local project managers

• Used to dealing with the global contractors as EPC/EPCM

contractors

• Very outcome focussed – committed to off-take contracts

• Usually have very tight timeframes

• Don’t mind a scrap with a contractor

• The big decisions are made in other countries – no clear line of sight

with decision-makers

The LNG clients


• Wages and salary pressure and recruitment difficulties

• Mobilisation was difficult and underestimated

• Projects called for fast track design but many were not D&C

• Many contracts were fixed price – on immature design

• Contracts were ill-equipped to deal with magnitude of re-scoping

and re-pricing

• Late environmental approvals meant lengthy schedule delays

• Free issue material was often slow and unpredictable

• Clients had little appetite for collaborative contracts

Particular issues for contractors


Early site access was restricted by approval delays

Mobilisation was disrupted and sluggish

Fast track design meant literally thousands of new drawings

Free issue materials coordination was poor

So

The QS teams were in overdrive with claims

Time bars were missed

Resolution of re-pricing and variations was slow

EOT claims were contested

A common story


• Site teams for both parties struggled with getting on with the job and

resolving claims

• The usual path to negotiation was opaque

• On a few projects, the EPC/EPCM model posed a road block

• Substantial strains on resources and liquidity – contractors felt they

were funding the clients

A very uncomfortable place to be


• Variation and EOT claims kept rolling in

• The outturn cost of the projects was getting bigger and bigger

• The project time lines were slipping

• Relationships were deteriorating

• And then commodity prices started to fall

and fall quickly – iron ore, coal and oil

• The ‘get it done at any cost’ drivers

had disappeared

The perfect storm


Cool heads were needed (and some collaboration)

Where that happened, some good results were achieved

Where it didn’t, the trench warfare became embedded

The response


• Where the parties kept talking, some good results were achieved

• Early discussions led to ‘line in the sand’ deals on time and costs –

but both parties had to concede

• Some contracts were renegotiated and pricing models changed

• Some contracts were converted to collaborative, target price

contracts

Some of the good outcomes


• BCIPA – to pull or not to pull the trigger?

A quick fix, and perhaps some better leverage but...

Tantamount to a declaration of war

Inevitably damaged the relationship, sometimes beyond repair

Dispute resolution


The first step was often a settlement conference, but

a clear line of sight to decision makers was hard to find:

EPCMs and Project managers were not empowered but occupied the

space

Most clients were JVs

The relevant executives were often in other countries

Project financiers were key stakeholders

So where to from there?

Dispute resolution – contract

mechanisms


• Many clients preferred international arbitration

Global parties

Better enforceability

Private

Avoids the hometown decision

• But

Pretty clunky

Not conducive to speedy results

Expensive too

Dispute resolution – contract

mechanisms


• Some contracts had expert determination clauses but

these were rarely used

The disputes were too complex

Final and binding is not always preferred

Good experts were hard to find – most programmers were

conflicted

• Some contracts had mediation clauses but

Getting the decision makers to attend was difficult

Consensual resolution is often hard to sell up the line

Some practical issues with ADR


Ad hoc ADR models were explored

Post-dispute Dispute Resolution Board were set up

The ‘hangman’ expert was used

But both sides have difficulty committing to these as final and binding

on big money disputes

So ... back to the future –

lengthy, expensive arbitration or litigation

ADR options


• Good contracts don’t guarantee success but bad contracts can

create a mess

• Take the time to get to know the other party – no two clients are the

same

• Get to the decision makers early – as soon as the warning signs

appear

• Happy litigators are mythical creatures – persist to find other

solutions

The lessons

ian briggs - downer edi mining - resolving disputes with resources companies – mind games for...

Business