Jurisdiction clauses on gov projects - Part 2

James Bremen

In the second of a two part series, James Bremen discusses policy over practicality on government projects.

Enforcement outside country of award
With a foreign company or where an international parent company has provided a guarantee, what is relevant for the purposes of the dispute resolution clause is the effectiveness of that clause in providing access to the monetary resources of the counterparty or parent.

Importantly, the creditworthiness of the counterparty ought to be measured by an understanding of the jurisdiction in which its assets are held.

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The relationship between the country where the judgment is obtained, and the country where the judgment is to be enforced, will govern the prospects of enforcing a foreign court judgment.

Even where a treaty between the relevant countries exists, some caution ought to be exercised in relying on foreign courts to enforce judgments.

Some countries require a payment in order to enforce a foreign judgment and others are keen to re-open the proceedings on public policy grounds or otherwise, which may result in an entirely different judgment to that relied upon by the enforcing party.

Certain countries in the Middle East will only enforce a judgment of a foreign country to the extent such judgment is compliant with local law and may not enforce judgments for interest on a debt.

Parent company guarantees
Parent company guarantees are a common form of security and are useful in this context. Contractors on large construction projects are often joint ventures or shell companies with little or no assets.

This structure is also often used because it may be a legal requirement for a locally incorporated company to enter into contracts in certain jurisdictions. This means the parent organisation ultimately benefiting from any project profits, may be based in a different jurisdiction and insulated from liability.

Relying on a parent company guarantee however still requires the judgment to be enforced, albeit in the location the assets are likely to be held. Although the problem may have been reduced in terms of the access to assets it still exists in terms of enforcement.

Therefore whilst parent company guarantees are a useful form of security, they may fall short in terms of protection due to enforcement issues.

Cash retentions
Cash amounts withheld from progress payments to the contractor provide the developer with a very high level of comfort. This money can be withheld should a dispute arise.

The problem with cash retentions is they are resisted by contractors and they accumulate gradually so that the amount of security held varies over the life of the project and relatively small amounts are available in the early phases.

Performance bonds
The provision of a performance bond by a contractor under a construction contract may go some way to addressing the problem of enforcement.

Generally, developers ought to require performance bonds which are “on demand,” which provides the developer with the security of immediate access to guaranteed assets of the contractor through the bond issuing bank or banks in the event the contractor is in default.

While they are expensive and contractors are likely to factor the cost of the provision of the bond into the contract price, the level of security provided by a performance bond is high.

Where the enforceability of a local court judgment may be less than certain in the parents’ home jurisdiction then the amount of bonded security ought to be increased to address this.