International Construction: Navigating the Risk of Payment Disputes Abroad in the Era of COVID-19

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Global Opportunities in Construction Grow

Even in today’s uncertain times, lucrative opportunities exist outside national borders in the architectural, engineering and construction (AEC) fields. Several factors help facilitate these opportunities:

  1. Expanding technological advancements permit rapid communication and transmission of large volumes of information.
  2. Global financial and economic markets are increasingly interdependent.
  3. Global design and engineering trend in interconnected ways.
  4. Capital development investment grows rapidly in emerging markets. (5) International developers face increasing pressure to control project costs and quality.

As a result, competition to engage the most competent AEC sources is increasingly fierce in the global construction economy. Illustrating this point, for example, international architecture and engineering firms helped design and build many of the iconic venues for the 2008 Beijing Olympic Games.

With Greater Opportunity Comes Greater Risk

An AEC entity wishing to expand into global markets needs to recognize the additional risks involved in international projects. For instance, Bruner and O’Connor on Construction Law highlights 20 specific risks inherent to international construction, including the variation in the availability, productivity and skill of labor; unfamiliar local geologic conditions; potential economic and political instability; and possible arbitrary local government regulations.1

One particular risk that many AEC companies operating abroad confront is the increased and unfamiliar prospect of non-payment. In the United States, mechanic’s liens provide some protection for unpaid AEC services. Depending on the jurisdiction and type of project, a contractor, engineer or designer will often hold a security interest in the property in which it has performed work. The AEC provider thus has leverage in most domestic jurisdictions to be paid for AEC work if the owner or developer refuses to pay under the terms of the contract. No equivalent to a mechanic’s lien exists in many international jurisdictions. As such, AEC companies involved in a payment dispute abroad are often forced to negotiate payment without holding security in the property itself or initiate a contract enforcement action in a foreign forum under unfamiliar laws.

Basic Steps to Assess Risks

Before undertaking a construction project in a foreign jurisdiction, therefore, AEC entities should consider the following three steps in weighing the anticipated benefits with the potential risks of a prospective project.

First, closely examine the project delivery method. In the United States, most public and private projects are awarded under the design-bid-build method or the design-build method. Larger international construction projects, in contrast, employ many additional methods of delivery, such as Engineer-Procure-Construct, Turnkey, Design-Build-Operate, Design-Build-Maintain, Build-Operate-Transfer and Build-Own-Operate-Transfer. Many of these methods enhance risks of non-payment by providing project owners with more control over performance metrics. Therefore, AEC entities should pay close attention to the allocation of risks in these project delivery contracts to assess what potential pitfalls may lie ahead.

Second, when possible, consult other AEC professionals who have operated in the nation in question. Payment processes in many countries, and in emerging markets in particular, are often more flexible in practice than in the United States or United Kingdom. Having an awareness of these practices may help an AEC professional avoid future surprises and better assess the degree of risk of a payment dispute. More generally, consulting with individuals and organizations with prior experience in an unfamiliar culture or jurisdiction can uncover otherwise unanticipated considerations necessary for project success.

And third, consult an attorney experienced in construction law in the local jurisdiction. Legal rights and remedies are often the least familiar customs and practices in unfamiliar international construction markets. Therefore, an AEC entity should consult with an informed legal expert regarding potential legal rights and remedies before leaping into a project. For example, AEC entities should understand how to enforce any judgment or settlement relating to a project. In some circumstances, project partners may feel empowered to ignore court orders or to fail to abide by the terms of settlement; therefore, the AEC entity may be forced to engage in further legal action following resolution of a payment dispute. If enforcing legal rulings or determinations is challenging or constrained, there is added risk to working in that foreign jurisdiction.

Conclusion

International construction projects offer meaningful financial and creative opportunities. To ensure that the benefits of these opportunities outweigh the risks, AEC professionals should take certain steps to better assess the project in advance of performing work there. As discussed above, assessing risk proactively is particularly important in the uncertainty of 2020’s COVID-19 pandemic.

This article summarizes content from Bruner & O'Connor on Construction Law. For more information on this topic, or for additional citations, see § 20:1 & 20:2

FOOTNOTES

  1. Risks in international construction, 1 Bruner & O'Connor Construction Law § 20:2

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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