Month: February 2019

February 2019 - Quick Consulting

Construction disput case study Backround of dispute

Construction disput case study start from a identy, a individual person or a company, owns land in Romania. He want to build a shoping mall but he don’t have experience in construction and operation. Don’t know how to do from where to begin and where to finish.
The Mother Company, a big West UE company, old firm with experience, know-how, can provide funds and full services for construction.

The project in a nut-shell

They start negotiations in 2005, for developing the project. The project was implented via a special purpose vehicle company.
Romania Investor and Romania Contractor sign 5 contracts:
-Project Development Contract for preliminary studies and planning: design, budget, rentability -Construction Management Contract and Design
-Rental Services Contract the contractor is mandated to lease the commercial premises
-Financing Brokerage Contract the contractor was to secure the obtainment of a bank loan for the purpose of financing the Project
-Operation Management Contract regulating the maintenance of the commercial center further to the finalizing of the construction works
The sixth legal document: Letter of Guarantee from the Mother Company, which ensures the Investor that the Project will be entirely finalized by the Romanian Contractor. Unilateral document, not in a contractual form Importantly, all negotiations have been conducted with the Mother Company.
The Mother Company negociate with the investor, guarantee the project for the Romanian identy and contract with the Romanian Constructor to make the construction (planning, management, rental services, Prepare technical documentation (final design plans, execution drawings) Apply for permit permits (building etc.) Assist Investor in selecting a constructor Supervise construction of the entire Project Conclude pre-lease agreements).
The investor bring money, so his role it’s decsions and he have to know everything about where his money go. He is informed about construction status, provide information and documents about constructor obligation and he have the final decision regarding the development of the Project.
In 2007, the first year, all conditions was met, despite hiccup-ups, cooperation generally effective Investor approves initial plans and budget, the economic crisis was close.

Construction disput case study The disput

In 2008, parties start a fight, all they said the other break the agreement of contract, the project doesn’t evolve regular.
Investor in march 2008, close unilaterally the mandate for the conclusion of lease contracts, in june 2008. close unilaterally the Construction Management Contract and refuses to pay the services fee. All of this had effect terminates of other contracts. The constructor was rejecting the termination declared by Investor and declares unilateral termination of all contracts in december 2008.

Construction disput case study Arbitral proceedings

From this the arbitration proceedings start by Romania Constructor claiming for: declaration that the Construction Management Contract was abusively terminated by Investor, declaration that its termination of all the contracts as of December 2008 was valid, damages suffered: for actual losses services fees not paid by the Investor The loss of profit, etc. Total value: EUR 13.4 million Interest VAT for services not paid. Claims the Contractor’s failure to complete the Project The budget was amended without the prior approval of the Investor The concept and design of the Project as initially approved by the Investor was amended. The contractual deadlines for the obtaining of the building permit were not observed and therefore the Romanian Contractor is not entitled to the services fees
Damages asked by Investor Actual losses suffered – service fees already paid by the Investor to the Romanian Contractor and the third parties (architects, Project verification) Loss of profits Total value: EUR 13.3 million plus interest
The counterclaim included also the Mother Company The Investor formulated its counter-claim against both the Romanian Contractor and the Mother Company The M.C. had not been named initially as a party to the arbitration

Arbitration

They had same arbitration agreement under all contracts, jurisdiction was on ICA under Chamber of Comerce of Romania, 3 arbitrators, language romanian, in Bucharest and Romanian law was aplicable.
Under the contractual terms any dispute related to the obligation of guarantee of the Mother Company was to be settled exclusively by courts of law located in Hamburg. The Mother Company was not party to the main contracts containing an arbitral agreement in favor of CCIR. The Mother Company is a third party to both the arbitral agreement and the arbitral dispute brought before CCIR Multi-party arbitration. Contractor’s arguments Multi-party arbitration. Decision of the tribunal The Mother Company is not party to the main contracts that are object of the dispute submitted before the arbitral tribunal The connection existing before the Mother Company and the Ro Contractor is not sufficient so as to determine the extension of the arbitral agreement as regards the Mother Company The disputes related to the obligation of guarantee assumed by the Mother Company in the BLG fall under the exclusive competence of the courts of Hamburg The Mother Company has not consented to submitting any dispute before the CCIR court The counter-claim of the Investor may only involve claims related to the ones formulated within the request for arbitration.
Sole legal cause for all contracts, namely the development of the commercial center Instrumentum probationem vs. Negotium juris.
Fees under the Construction Management Contract Conditions for payment: The building permit documentation is prepared by the Contractor on the basis of plans and projects already approved by the Contractor and is compliant with the budget plan. The parties to obtain the building permit. Investor said that the above criteria were not met Romania Contractor’s position was that the building permit was not obtained due to the Investor’s failure to approve the DTAC.
Fees under the Rental Services Contract
Conditions for payment: Contractor to rent in advance 30% of the shopping center leasable area; The parties to obtain the building permit.
Contractor had burden of proof and submitted as evidence:
Contracts concluded with 10 lessees and documents attesting the negotiation of other 27 contracts
Investor argued that such evidence was nor conclusive as:
The rental contracts were concluded after the revocation of the mandate. Lack of certified date (Dată certă) on the rental contracts. The Contract rented less than 1% of the commercial centre until the revocation of the mandate, therefore, the Investor argued that it is not liable to pay the fee services
Loss of profits: the entire revenue owed by the Investor to the Contractor if the Project would have been finalized , the costs not incurred as a result of the Project failing For the Contractor. The entire profit of the Investor if the Project would have been finalized for the Investor.
Evidence used: written documents, contracts and their annexes, written correspondence between the parties, e-mails, technical expert report, financial expert report witnesses.

Award

Termination without fault and survival of entitlement to obtain damages. A party claims that there was a breach of contract. But chooses termination without fault rather than termination for fault.
Past payments reimbursement: Investor made some payments in 2007 under the Construction Management Contract Termination in principle has effects for the future
In conclusion, lack of contractual loyalty and insufficient cooperation between the parties. Both parties are at fault. Both parties wished to terminate the agreements.
The award Acknowledges termination of contracts as of 19 Dec 2012 Romania Investor to pay to Romania Contractor approx.1.8 Milions EUR. Romania Contractor to pay to Romania Investor approx.1.7 Milions EUR. Set-off of arbitration expenses. Rejects claims regarding the loss of profits.8