What value can be gained from understanding different legal systems approaches to issues arising in construction projects?
Introduction
As globalisation becomes more and more evident the emphasis of transnational trade is increasing. Procurement methods are changing with major infrastructure construction projects being financed in fundamentally different ways from traditional construction projects. The structure of a major infrastructure project will consist of many different contracts between parties of different nationalities, with one of the parties normally a government body. This structure by nature may bring a kaleidoscope of different legal systems into the equation. To manage the legal risks of the project structure it is essential to understand the dynamics of the legal systems that determine or influence the rights and obligations of the parties. If the legal systems or the effects that they may have to the eventual cost of the project are not understood projects could end up costing more and therefore compromising the value or benefit of the project.
It is proposed that even in traditionally structured construction projects with no international element there is value in understanding different legal systems and their approaches to issues that arise, in order to better understand ones own system[1]. In England issues have arisen in construction projects where it seems that the legal system does not have the ability to provide an acceptable solution or answer to the problem. An example is the Pannatown v McAlpine[2] case where the dispute went through the courts all the way to the House of Lords as there was essentially no straight forward answer to the question of who had suffered loss as the employer was not the owner of the building, that was defective. There initially seemed to be a “black hole” of liability due to the rules of privity under English Law.
Due to the nature of construction projects they are prone to certain issues arising from time to time. It is important for these issues to be managed to essentially define the risk exposure of the parties concerned. This is one of the functions that a contract aims to fulfil, however it is necessary for the contract to be assigned to a legal system in order for the parties rights and obligations to be defined under the particular contract and in connection with the contract.
This paper explores what (if any) value and benefit can be gained from understanding different legal systems approaches to issues arising under construction projects from the perspective of both domestic construction projects and major infrastructure projects, which generally are of international nature.
Domestic Construction Projects
For construction projects with no operative international elements, value can be gained in understanding other legal systems approaches to issues that arise, in order to better understand one’s own system. For example France, Italy and Germany all have Civil Codes whose construction law provisions are consistent with the rules of Roman Law governing location and obligations. Much of this derivation has had positive effects, with coherent development of rules comparing favourably with the growth of English Law as a self contained body of law based on obligation. There may be slight differences but essentially the main principles are similar with the way in achieving them being the main differentiating factor. This kind of understanding provides headway for harmonisation of laws.
By understanding other legal systems and the way they deal with issues arising under construction can provide valuable insight into the deficiencies of ones own system[3]. The French Civil Code Art.1972 is the main solution to the tort law problems suffered by all sides of the construction industry in the UK. It is a solution not in the sense that it limits liability. On the contrary, the solution is to provide a regime where almost everyone is liable, but they are aware of their responsibilities, as they are written down in an accessible form. It is a solution in the sense that there are many options for the employer for the same problem. For example when settlement of foundations occurs the engineer cannot say that it was a defect in the workmanship and not the design and that the contractor has ceased to exist which before Murphy in English Law, would have at least caused the employer to look at the local authority with its claim. In French Law in the case of defects caused by several constructors not contractually related to each other but resulting in the same damage the French Courts would hold them jointly and severally liable towards the employer.
Major Infrastructure Construction Projects
For construction projects that involve parties from different legal systems it may be necessary for the contracts to be assigned to one specific legal system in order for the parties’ rights and obligations to be defined, as different legal systems will vary. If it is left to the conflict of law rules to decide on which legal system apples to the contract, the outcome is often inconsistent.
The source of the problem is that there is no world law or court and no universal rules on courts jurisdiction, recognition and enforcement of judgments and arbitral awards. There are approximately three hundred and nine legal systems which vary from civil law systems to common law systems or a mixture to varying degrees of both systems as well as different Middle Eastern law and its many variations. Between these legal systems there are conventions or treaties that are open for signature. In Europe there is European Community Law with legislating body in Brussels as well as the European Court of Justice. However this law is limited and has not fully developed and therefore for this reason and other reasons, to have a reasonable degree of certainty in the way issues are dealt with it is necessary to express the choice of law. In this way parties can assess the choice of law in respect of certain issues that could rise out of the contract or in relation to the contract to obviate or manage their exposure to risk. The Rome Treaty provides for the contracting states to have the choice of law therefore at face value it may seem straight forward for a party to simply choose a particular legal system and only have to be concerned about that particular legal system, however it is not quite the case as there could still be a number of different legal systems to consider.
Ideally the construction project will be implemented under an established legal system that is transparent, certain and enforceable. However the structure of major infrastructure projects is a complicated affair. A typical structure could comprise of a Concession Contract let on behalf of the State (for example, by a particular Ministry or Treasury or by an Implementing Agency set up by the State for this purpose, though invariably backed by the State) with a Project Company. The Project Company will be a Special Purpose Vehicle financed by lenders and private equity investors. Typically an independent engineer arrangement will be required to ensure that such matters as construction completion are properly certified on a fair basis as between the State, the Project Company and the Lenders etc. The Project Company will have a myriad of different contracts for example for the Construction, the Operation and Maintenance, the Off-Take Agreement and Insurances etc. There could also be many sub-contracts linking in to the Main Construction contract etc.
By understanding the applicable legal systems of all the applicable contracts a party will be able to assess their rights and obligations as set out in the contract documents and if necessary, could be enforced ultimately through the local courts or in a jurisdiction where a particular parties assets are.
Although parties may choose the law, inevitably the project will in some way be influenced by the local law. It is often the case that even when the parties make a conscious decision to choose the applicable laws relating to the contract, the law of the location of the project may override what they have agreed. In England and Wales the Housing Grants, Construction and Regeneration Act 1996 (HGCR Act 1996) imposes compulsory rights and obligations to construction operations, as defined under the HGCR Act 1996. For an international construction company operating in England and Wales it would be imperative to understand how the HGCR Act 1996 would affect their operations.
For an international construction company engaged in a construction contract with the Ethiopian government and who has chosen arbitration as the principle dispute resolution mechanism they could be in for a surprise when they find out that the Ethiopian Civil Code although fully recognising arbitration, states that arbitration in an administrative contract is not binding. This could have a devastating effect on a party who could ultimately be left without an acceptable form a dispute resolution.
At the negotiation stage a party will be at an advantage if they understand all the different legal systems that will influence their contract and how they deal with the issues arising in construction projects. For example in civil law jurisdictions as opposed to common law jurisdictions many of the issues that arise in construction projects are dealt with in the code and therefore there would be not much point in expressing them in the contract.
There may be some anomaly in the law which could result in the desired effect not being achieved. For example it is common for manufactures and suppliers in civil law countries to exclude gross negligence from limits on their liability in a contract governed by common law, which may have an uncertain effect or possibly none at all, because at home that limit may be imposed.
When the parties decide on the method of dispute resolution they will ideally want a neutral platform for the dispute to be resolved which is a reason why arbitration is often the preferred mechanism for resolving disputes.
The arbitration framework will consist of various applicable laws which may need to be considered, any relevant rules as well as the international conventions and treaties that are relevant.
A number of systems of law may simultaneously have some application to an international commercial arbitration. They will include amongst others the law applicable to determine the capacity of a party to enter into the arbitration agreement, the arbitration agreement itself, the arbitration proceedings, the dispute itself and the enforcement of the award. In an international construction project it will be of great value to understand the different legal systems that could come into play and negotiate a deal that is most beneficial and identify any risks and make adequate provision for the necessary management.
A party to an international contract should have particular interest in the legal system of the state where the debtors’ assets are located should it become necessary to enforce an arbitration award and whether the state is a contracting party of the New York Convention 1958. That law will determine not only the procedure to be adopted for applications for recognition or enforcement, but also the defences to any such applications. It is important to understand beforehand if the law of the potential place of enforcement could prove to be onerous as an award will be useless if it ultimately cannot be enforced.
Conclusion
Understanding different legal systems approaches to issues arising in construction projects is valuable in the sense that in domestic construction projects there may be areas which are more effectively dealt with in other legal systems and therefore there is scope for lessons to be learnt. In international construction projects it is valuable in the sense that understanding the differences may help towards harmonisation of laws as well as identifying legal risks that could result in major costs being incurred, if not adequately managed or dealt with.
Notwithstanding the above when comparing different legal systems it often becomes evident that the overall principles are similar and essentially the difference lies in the ways of reaching the same conclusion. Be that as it may it seems that there is more to value to gain in understanding different legal systems than to not understand them.
[1] Aspects of comparative law by Christopher Thomas
[2] Alfred McAlpine Construction Ltd v Panatown Ltd [2000] BLR 331, HL
[3] Civil Law Solutions to common law tort problems, Jeremy Winter.
As globalisation becomes more and more evident the emphasis of transnational trade is increasing. Procurement methods are changing with major infrastructure construction projects being financed in fundamentally different ways from traditional construction projects. The structure of a major infrastructure project will consist of many different contracts between parties of different nationalities, with one of the parties normally a government body. This structure by nature may bring a kaleidoscope of different legal systems into the equation. To manage the legal risks of the project structure it is essential to understand the dynamics of the legal systems that determine or influence the rights and obligations of the parties. If the legal systems or the effects that they may have to the eventual cost of the project are not understood projects could end up costing more and therefore compromising the value or benefit of the project.
It is proposed that even in traditionally structured construction projects with no international element there is value in understanding different legal systems and their approaches to issues that arise, in order to better understand ones own system[1]. In England issues have arisen in construction projects where it seems that the legal system does not have the ability to provide an acceptable solution or answer to the problem. An example is the Pannatown v McAlpine[2] case where the dispute went through the courts all the way to the House of Lords as there was essentially no straight forward answer to the question of who had suffered loss as the employer was not the owner of the building, that was defective. There initially seemed to be a “black hole” of liability due to the rules of privity under English Law.
Due to the nature of construction projects they are prone to certain issues arising from time to time. It is important for these issues to be managed to essentially define the risk exposure of the parties concerned. This is one of the functions that a contract aims to fulfil, however it is necessary for the contract to be assigned to a legal system in order for the parties rights and obligations to be defined under the particular contract and in connection with the contract.
This paper explores what (if any) value and benefit can be gained from understanding different legal systems approaches to issues arising under construction projects from the perspective of both domestic construction projects and major infrastructure projects, which generally are of international nature.
Domestic Construction Projects
For construction projects with no operative international elements, value can be gained in understanding other legal systems approaches to issues that arise, in order to better understand one’s own system. For example France, Italy and Germany all have Civil Codes whose construction law provisions are consistent with the rules of Roman Law governing location and obligations. Much of this derivation has had positive effects, with coherent development of rules comparing favourably with the growth of English Law as a self contained body of law based on obligation. There may be slight differences but essentially the main principles are similar with the way in achieving them being the main differentiating factor. This kind of understanding provides headway for harmonisation of laws.
By understanding other legal systems and the way they deal with issues arising under construction can provide valuable insight into the deficiencies of ones own system[3]. The French Civil Code Art.1972 is the main solution to the tort law problems suffered by all sides of the construction industry in the UK. It is a solution not in the sense that it limits liability. On the contrary, the solution is to provide a regime where almost everyone is liable, but they are aware of their responsibilities, as they are written down in an accessible form. It is a solution in the sense that there are many options for the employer for the same problem. For example when settlement of foundations occurs the engineer cannot say that it was a defect in the workmanship and not the design and that the contractor has ceased to exist which before Murphy in English Law, would have at least caused the employer to look at the local authority with its claim. In French Law in the case of defects caused by several constructors not contractually related to each other but resulting in the same damage the French Courts would hold them jointly and severally liable towards the employer.
Major Infrastructure Construction Projects
For construction projects that involve parties from different legal systems it may be necessary for the contracts to be assigned to one specific legal system in order for the parties’ rights and obligations to be defined, as different legal systems will vary. If it is left to the conflict of law rules to decide on which legal system apples to the contract, the outcome is often inconsistent.
The source of the problem is that there is no world law or court and no universal rules on courts jurisdiction, recognition and enforcement of judgments and arbitral awards. There are approximately three hundred and nine legal systems which vary from civil law systems to common law systems or a mixture to varying degrees of both systems as well as different Middle Eastern law and its many variations. Between these legal systems there are conventions or treaties that are open for signature. In Europe there is European Community Law with legislating body in Brussels as well as the European Court of Justice. However this law is limited and has not fully developed and therefore for this reason and other reasons, to have a reasonable degree of certainty in the way issues are dealt with it is necessary to express the choice of law. In this way parties can assess the choice of law in respect of certain issues that could rise out of the contract or in relation to the contract to obviate or manage their exposure to risk. The Rome Treaty provides for the contracting states to have the choice of law therefore at face value it may seem straight forward for a party to simply choose a particular legal system and only have to be concerned about that particular legal system, however it is not quite the case as there could still be a number of different legal systems to consider.
Ideally the construction project will be implemented under an established legal system that is transparent, certain and enforceable. However the structure of major infrastructure projects is a complicated affair. A typical structure could comprise of a Concession Contract let on behalf of the State (for example, by a particular Ministry or Treasury or by an Implementing Agency set up by the State for this purpose, though invariably backed by the State) with a Project Company. The Project Company will be a Special Purpose Vehicle financed by lenders and private equity investors. Typically an independent engineer arrangement will be required to ensure that such matters as construction completion are properly certified on a fair basis as between the State, the Project Company and the Lenders etc. The Project Company will have a myriad of different contracts for example for the Construction, the Operation and Maintenance, the Off-Take Agreement and Insurances etc. There could also be many sub-contracts linking in to the Main Construction contract etc.
By understanding the applicable legal systems of all the applicable contracts a party will be able to assess their rights and obligations as set out in the contract documents and if necessary, could be enforced ultimately through the local courts or in a jurisdiction where a particular parties assets are.
Although parties may choose the law, inevitably the project will in some way be influenced by the local law. It is often the case that even when the parties make a conscious decision to choose the applicable laws relating to the contract, the law of the location of the project may override what they have agreed. In England and Wales the Housing Grants, Construction and Regeneration Act 1996 (HGCR Act 1996) imposes compulsory rights and obligations to construction operations, as defined under the HGCR Act 1996. For an international construction company operating in England and Wales it would be imperative to understand how the HGCR Act 1996 would affect their operations.
For an international construction company engaged in a construction contract with the Ethiopian government and who has chosen arbitration as the principle dispute resolution mechanism they could be in for a surprise when they find out that the Ethiopian Civil Code although fully recognising arbitration, states that arbitration in an administrative contract is not binding. This could have a devastating effect on a party who could ultimately be left without an acceptable form a dispute resolution.
At the negotiation stage a party will be at an advantage if they understand all the different legal systems that will influence their contract and how they deal with the issues arising in construction projects. For example in civil law jurisdictions as opposed to common law jurisdictions many of the issues that arise in construction projects are dealt with in the code and therefore there would be not much point in expressing them in the contract.
There may be some anomaly in the law which could result in the desired effect not being achieved. For example it is common for manufactures and suppliers in civil law countries to exclude gross negligence from limits on their liability in a contract governed by common law, which may have an uncertain effect or possibly none at all, because at home that limit may be imposed.
When the parties decide on the method of dispute resolution they will ideally want a neutral platform for the dispute to be resolved which is a reason why arbitration is often the preferred mechanism for resolving disputes.
The arbitration framework will consist of various applicable laws which may need to be considered, any relevant rules as well as the international conventions and treaties that are relevant.
A number of systems of law may simultaneously have some application to an international commercial arbitration. They will include amongst others the law applicable to determine the capacity of a party to enter into the arbitration agreement, the arbitration agreement itself, the arbitration proceedings, the dispute itself and the enforcement of the award. In an international construction project it will be of great value to understand the different legal systems that could come into play and negotiate a deal that is most beneficial and identify any risks and make adequate provision for the necessary management.
A party to an international contract should have particular interest in the legal system of the state where the debtors’ assets are located should it become necessary to enforce an arbitration award and whether the state is a contracting party of the New York Convention 1958. That law will determine not only the procedure to be adopted for applications for recognition or enforcement, but also the defences to any such applications. It is important to understand beforehand if the law of the potential place of enforcement could prove to be onerous as an award will be useless if it ultimately cannot be enforced.
Conclusion
Understanding different legal systems approaches to issues arising in construction projects is valuable in the sense that in domestic construction projects there may be areas which are more effectively dealt with in other legal systems and therefore there is scope for lessons to be learnt. In international construction projects it is valuable in the sense that understanding the differences may help towards harmonisation of laws as well as identifying legal risks that could result in major costs being incurred, if not adequately managed or dealt with.
Notwithstanding the above when comparing different legal systems it often becomes evident that the overall principles are similar and essentially the difference lies in the ways of reaching the same conclusion. Be that as it may it seems that there is more to value to gain in understanding different legal systems than to not understand them.
[1] Aspects of comparative law by Christopher Thomas
[2] Alfred McAlpine Construction Ltd v Panatown Ltd [2000] BLR 331, HL
[3] Civil Law Solutions to common law tort problems, Jeremy Winter.
posted by Will at 6.4.06
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