Bot model and legal risks to industrial project constructors

By Chen Zhuo and Wang Hao, Tian Yuan Law Firm
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In industrial infrastructure projects using the bot model, disputes can be lengthy, expensive and complex. It is therefore imperative for constructors to manage their legal risks with extra prudence

The BOT (build, operate, transfer) model has thrived in the construction of industrial infrastructure owing to the large investments, lengthy construction and operational cycles, and high technical thresholds involved. But, for those same reasons, BOT is a hotbed for legal disputes, especially ones associated with massive disputed amounts and complex factual and legal scenarios. The authors, based on practice experience, summarise advice for industrial project constructors under the BOT model to ward off legal hazards.

Company law amendments provide improved protection, Chen Zhuo
Chen Zhuo
Partner
Tian Yuan Law Firm

Specify the division of labour, scope of guarantees and boundaries of responsibility with the owner, while properly preserving evidence. Most BOT industrial infrastructure projects are within, or near, an owner’s factory area, designed to provide basic raw materials and energy to an owner’s main facilities, or conduct recycling, purification or other forms of environmental treatment to industrial output. Many owners are responsible for partially supplying raw materials and utilities such as water, electricity and gas, while also purchasing and repurposing the derived outputs.

Therefore, project constructors are advised to clarify with owners the division of labour, scope of guarantees, and boundaries of responsibility during the BOT process. That includes but is not limited to: which party should be responsible for obtaining administrative approvals for project creation, environmental impact and land use; who facilitates access, accommodation, storage and transport of personnel, materials and equipment; the quantity, quality and pricing standards for the owner’s provision of production raw materials and utilities, and for purchasing derivative outputs, and rules of compensation if standards are not met; the boundaries of owners’ and constructors’ management and maintenance responsibilities; and the required status of facilities on delivery or standard of use.

During contract performance, the project constructor should properly preserve evidence of its own fulfillment of duties, and any of the owner’s unmet commitments. For example, project constructors are advised to: sign certificates at critical junctures such as project delivery and performance assessment; send business liaison letters to the owner for important matters during construction and operation; and log the quantity and quality of raw materials and utilities provided by the owner, with whom such information should be confirmed.

Wang Hao, Tian Yuan Law Firm
Wang Hao
Associate
Tian Yuan Law Firm

For designers, specific constructors and suppliers of equipment and technology, set time limits and performance parameters at standards not lower than those committed to by the owner. BOT project constructors may need to engage professional designers, or specific constructors, or purchase required equipment or technology from suppliers.

Project constructors should ensure time limits and performance parameter requirements they set for designers, specific constructors or suppliers are not less than those committed to by the owner. That is to prevent default to the owner through engaging third parties. In particular, project constructors should, for any upcoming delivery, assess if the owner’s standard of use can be met by third parties alone.

Project constructors have the option to fully disclose their potential default liabilities and legal consequences to third parties. Thus, if a constructor ends up bearing more default liabilities towards the owner than anticipated, it could claim full recourse from third parties for any liabilities incurred.

Clarify with the owner the manner of disposal, and method and basis of calculating compensation in case of early termination. A significant portion of BOT-related disputes involve a project constructor claiming compensation for losses from an owner after a project is prematurely terminated.

Project constructors should specify with the owners the exact manner of disposal in case of early termination, and the method and basis of calculating compensation, providing the termination is not attributed to the constructor’s default. That includes but is not limited to: clarifying whether the owner is obliged to purchase the facilities and, if so, how consideration is calculated; if the project constructor plans to partially finance it through finance lease or loans, the financing costs should be disclosed to the owner and explicitly listed as part of the constructor’s project costs; the components and calculation basis for day-to-day operating earnings and costs should be properly ascertained and logged; and if some of the derived outputs are sold to external parties by the project constructor, earnings should be disclosed to the owner and listed as the constructor’s project earnings.

With policies leaning heavily towards energy preservation and emissions reduction, there is a chance a project may be prematurely terminated due to reduced production capacity accorded by the government, or elevated environmental standards. Project constructors should confer with owners on whether such scenarios trigger a “change of situation” or force majeure, and the manner of the owner’s compensation to the project constructor, or sharing of losses.

When disputes arise in industrial infrastructure projects under the BOT model, often project constructors have invested a significant amount of capital but have yet to recover costs. With projects unable to independently operate or generate profits without the owners’ co-operation, constructors often find themselves at a distinct disadvantage. Project constructors therefore need to closely monitor legal risks when signing and performing project contracts, prepare for all eventualities, preserve evidence of duty fulfillment and, if necessary, take timely steps to cut losses and uphold their rights to prevent any unwanted legal or economic aftermath.

Chen Zhuo is a partner at Tian Yuan Law Firm. He can be contacted at +86 138 1041 7260 or by e-mail at chenzhuo@tylaw.com.cn

Wang Hao is an associate at Tian Yuan Law Firm. He can be contacted at +86 136 5118 1449 or by e-mail at wanghao@tylaw.com.cn