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Proudly presents…

Steering your way through P3


construction projects
Part 1 - Insurance issues,
successes and challenges
Introductions
• Doug Sanders,
– Bordner Ladner Gervais

• Nolan Heuchert
– Wylie-Crump Limited
P3 Construction Projects
• Past 10 years – over $26 billion in
infrastructure under P3 model in Canada
• Current public infrastructure “deficit” (gap
between needs and current funding
commitments) estimated at more than
$200 billion
• Expect to see more P3s, given needs and
available sources of financing
P3 Project Stakeholders
Cost Certainty v. Fair Risk
Allocation

• Cost certainty
• Fair risk
• allocation
Risk Allocation –
Owner Retained Risks
Transfer of Risk/Obligation
• Goal: Optimize levels of risk and
obligation for each party
Managing Risk –
Transfer of Risk / Obligation
Change in Law Supplier default
Cost overruns Input demand
Defects/warranty Offtaker default
Dispute risks Operational
Environmental Permits
EPC contractor default Concessionaire default
Force majeure Liquidated damages
Managing Risk –
Transfer of Risk / Obligation
Project revenue Site - fossils
Public entity default Step-in rights
Schedule Third party default
Set-off Variations
Site acquisition
Site - geotechnical
Site - environmental
Risk Allocation –
Owner Retained Risks
While every project is unique, many Canadian P3 projects have
proceeded with the Public Owner retaining the primary risks
associated with:
• some demand risks (i.e. the future demand for the use of the asset,
although this depends on the type of asset)
• property acquisition
• baseline geotechnical investigation and assessment
• new or undisclosed site contamination
• relationships with First Nations and archaeological issues
• approvals, developing environmental performance criteria, and
auditing compliance with applicable environmental regulations
• procurement risks (such as a lack of bidders or delays in the
procurement process)
• interest rate changes between the time of the selection of the
preferred proponent and financial closing
Risk Allocation – Risks Transferred to
Construction / Services Contractors
Risks typically transferred to the Project Company, and
also on to the Construction and Services Contractors,
include:
• design and construction
• utilities coordination
• permitting
• lifecycle costs
• some demand risks
• industrial relations
• implementation of environmental management systems
• existing or disclosed site contamination
• communications with local stakeholders
Risk Management Insurance Tools
The usual insurance policies come into consideration on
these P3 construction projects:
• Builders Risk
– inclusive of Delay in Start Up (DSU) coverage.
– design exclusion challenged and pushed.

• Wrap Up Liability Insurance


– $100,000,000 limits have become the norm
– Completed operations period pushed as far as possible.
Risk Management Insurance Tools
(cont.)
• Environmental Liability Insurance
– Project specific
– Known contamination challenge

• Professional Liability Insurance


– Project dedicated limits and term.
– Higher limits and breadth continue to be pushed.
• Insured vs. Insured
• Indemnified Parties
– Most challenging insurance coverage line
Risk Management Insurance Tools
(cont.)
Insurance Industry Challenges
• Standard of insurance coverage pushed to the highest
possible level.
– Stakeholders
– Lenders
• The bar is raised on almost every project that then has to
be met again on the next project.
• Public Authorities wanting to use their own insurance
program
– Doesn’t align with the risks / needs of the participants /
stakeholders.
Potential for P3 Litigation
• No significant reported P3 litigation to date
• Potential areas:
– “Gross Negligence”
– Force Majeure and Supervening Events
– Indemnities
Gross Negligence
• Common clause that provides that there is no cause of
action except for loss or damage caused by “wilful
misconduct” (clear in Canada) or “gross negligence”
(murky in Canada)
• UK Privy Council – common law does not distinguish
between simple and gross negligence
• Very marked departure
• May want to define in Contract
Why does it matter?
–Damages
• U.S. – some jurisdictions where gross negligence or
intentional torts can lead to punitive damages
• Canada?
–Contractual interpretation
• E.g. insurance
–Certain statutes
Ordinary vs. Gross
Negligence
–Likely no distinction under English common law
–No generic reason under Canadian law to distinguish
as cannot lead to punitive damages
–Sometimes mix up intentional torts and gross
negligence
Gross Negligence (cont.)
“Gross Negligence” means:
(i) a marked and flagrant departure from the
standard of conduct of a reasonable person acting in the
circumstances at the time of the alleged misconduct, or

(ii) such wanton and reckless conduct or


omissions as constitutes in effect an utter disregard for
harmful, foreseeable and avoidable consequences
Model Agreement for Construction, Ownership and Operation (1999) published by the
Petroleum Joint Venture Association
Gross Negligence in
Contracts
–Don’t worry, its [standard form], [industry standard],
[market]
Gross Negligence in
Contracts
–Exclusions to limitations on liability
• All liability limited to Contract Price excluding Gross
Negligence
–Definition of liability
• Only liable for Gross Negligence
–Indemnities
• Indemnify for Gross Negligence
Gross Negligence in
Contracts
–Certainty of contract demands clear definitions
–If can’t define it, what use is it?
• Adeco v. Hunt (Alta C.A.)
Force Majeure and Supervening
Events
• Force majeure provisions are often used as “basket
clauses” to capture and allocate those risks that are not
otherwise managed
• Relief from responsibility to perform a contract should
unanticipated events render performance of the contract
impracticable or impossible
• May also be used to capture those foreseeable risks that
the parties deem to be inconsistent with the performance
of the contract as contemplated
Force Majeure and Supervening
Events
The four primary components of most force majeure clauses are:
(a) a definition of which events will constitute force majeure events;
(b) a means by which the parties can determine how long a force
majeure event continues once it has occurred;
(c) a description of the procedure by which one party will give notice
to the other party of the occurrence of a force majeure event;
and
(d) a definition of the consequences that a force majeure event will
have (e.g. time and/or money).

• Anticipated Risks may receive unanticipated legal treatment


• “Supervening Events” likely better terminology
Indemnities
• Party transfers to another party its financial loss arising from a
specified event
• Depending on the jurisdiction, there may be special rules at common
law or by statute that impact on the enforceability of the indemnity
• Project Company will often promise to “indemnify and save
harmless” the Public Owner from claims in respect of personal injury
or damage to property, or the wrongful acts, omissions or negligence
of the Project Company or those for whom the Project Company is
responsible
• Project Company will then attempt to require that the Construction
Contractor provide a back-to-back indemnity of the Project
Company’s obligation
• Complications arise
Dispute resolution
Dispute resolution
• Long time horizon for Project Company
• Complex relationships
• Competing interests between JV partners and
different business units within a larger family of
companies
• Notice
• Damages
• Legal privilege issues
Dispute resolution
• Craft and coordinate Dispute Resolution
provisions
• Step Negotiations
• Mediation
• Dispute Review Boards
Enjoy the rest of the 2013
RIMS Canada Conference!