By Chris Wilcock
Managing complex disputes can be difficult. The recently-reported Australian case of Alstom v Yokogawa1 highlights how it can go horribly wrong. In March 2002, Alstom entered into a ‘turnkey’ contract with FPP as the owner. Alstom agreed to refurbish an ageing power station to meet a performance specification. The contract sum was AU$148m. There were staged completion requirements and significant delay damages.

In September 2002, Alstom entered into a subcontract with Yokogawa. Alstom tried to pass down its turnkey obligations to Yokogawa. The project ran into difficulties. FPP and Alstom blamed each other for delays; Alstom blamed defective coal mills for the problems.

However, in 2005 Alstom agreed to pay FPP AU$20m in damages, including AU$13m or so in respect of delay damages. In 2007, Alstom then commenced proceedings against Yokogawa. It blamed Yokogawa for delays. After years of time-consuming claims and litigation, Alstom’s claims were rejected. What went wrong?

The judge examined the nature of a ‘turnkey’ contract. He concluded that the head contract between FPP and Alstom was such a contract, but the subcontract was not. This was not for the lack of trying, but the subcontract was a “drafting disaster”.

Special conditions had been drafted in an attempt to pass down to Yokogawa obligations that Alstom had assumed under the head contract. The subcontract contained “… numerous ambiguities, inconsistencies, lacunae and, in some cases, grammatical nonsense…”. This was largely responsible for the litigation that ensued.

Having made the settlement with FPP, Alstom had turned its attention to Yokogawa. It assembled its team. That caused problems. Its ‘expert’ was a former employee who had researched the claims against FPP, but who was now instructed as its ‘independent expert’. The judge said he lacked the necessary objectivity.

The judge also said Alstom had failed, during the job, to cooperate with Yokogawa in the planning of the subcontract works. In the litigation, the judge rejected Alstom’s argument that it had no obligation to provide programming information to Yokogawa in respect of the main works.

One of the most interesting aspects of the judgment was a passage on good faith. The subcontract contained no express term obliging the parties to act in good faith.
However, the judge said that the subcontract “… was a contract in which there arose an implied obligation on parties to act in good faith…” because the parties’ “… respective contractual and operational requirements demanded a high degree of co-operation and reliance upon the good faith of each other.…”

What can we learn from the case? The importance of drafting contracts properly, with competent advice. The manner in which main contract obligations are passed down to subcontractors needs to be thought through very carefully.

That it is a dangerous strategy for a main contractor to settle with an owner and then ‘blame’ a subcontractor, without a detailed analysis of liabilities. While experts can be ‘in-house’, they must be able to show that they are indeed independent and not advocates of the claim.

Claims and litigation are complex, there are no short cuts and the entire process needs a strategy that works. That courts are prepared to recognise a wide obligation of good faith in complex construction contracts.

This case stresses the importance of getting it right throughout the construction process, from “cradle to grave”, i.e. procurement, project /commercial management, claims, experts. In fact, all the things Hill does extremely well.

Construction Week

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