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Print articleDeveloping a Better Working Environment in which to Implement Infrastructure Contracts
January, 2007 - Ms. Margaret Huang
Foreign companies have always complained about the requirements and criteria associated with tendering for domestic infrastructure projects. The conservative attitude and lack of commercial awareness of bureaucrats and discriminatory qualification requirements have all contributed to warding off reputable international companies. Comments made by both the American and the European Chambers of Commerce in recent years have by and large recommended that international tendering be encouraged. In order as to improve the quality of Taiwan¡¦s basic infrastructure and to attract participation in domestic infrastructure projects by reputable foreign companies, the government ought to respond and improve at least the following aspects¡G
I. Qualification requirements should avoid discriminating against the participation of foreign companies
While Taiwan has not yet joined the Agreement on Government Procurement of WTO (GPA) and is therefore not bound by its regulations, legislators have included key GPA principles in the Taiwanese Governmental Procurement Act. However, if we examine the qualification requirements and evaluation items, which were recently used, we find that some requirements contradict the rule that ¡§an entity shall only prescribe the qualifications related to contract performance in prescribing the qualifications¡¨. This rule is laid out in the GPA and has an equivalent provision in the Taiwanese Procurement Act. For example, requirements may include having previously engaged in domestic infrastructure projects, possessing specific professional abilities or holding domestic qualifications and/ or licenses (while foreign equivalent certification is not recognized). Since they conflict with the GPA, such restrictive measures should be avoided. Secondly, in practice, restrictions preventing foreign companies being either the sole participator or the leading company in projects carried out under Private Participation Law also exist. In our view, in the absence of mutual reciprocity issues, there is no reason to indirectly limit the business opportunities of a foreign company which has been recognized and is authorized to operate in Taiwan subject to domestic law.
II. Model contracts for government procurement should be clear and tailored to the type of project involved.
In traditional infrastructure projects under the Taiwanese Procurement Act, other than in rare ¡§limited tendering procedures¡¨ cases, vendors have no negotiating power over the contract. Moreover, in the current version of the model contract for government procurement, little consideration is given to the type of infrastructure project and its scale. Reputable foreign contractors, based on their extensive practical experience, may find it unreasonable that the domestic model contract applies to all types of project. On the other hand, if we compare the model contracts for Engineering, Procurement & Construction (EPC) and Mechanical Electronics Equipment, both which were drafted by the International Federation of Consulting Engineers (FIDIC)- their provisions relating to risk allocation for project delays, the risks shouldered by the government, who bears the responsibility for construction design, how and under what circumstances the contract price might be adjusted and the conditions for payment all differ enormously. This reflects the differences between the various types of projects. Similarly, the Taiwanese government should introduce model contracts tailored to the type of project involved. In this way contracts might be executed more smoothly and potential disputes could be avoided.
III Appropriate risk and liability provisions as well as liquidated damages clauses should be included in project-specific contracts.
The government should not avoid facing commercial realities. Misallocation of risk often leads to unnecessary cost and inefficient use of resources. Based on domestic legislation and international practice, the principle of risk allocation that we believe ought to be used is ¡§the allocation of risk to the party best able to manage it at the lowest cost.¡¨ As regards to how contract breaches are treated in practice, the government generally asks for compensation for both the damages caused and the profits lost. In addition, it has requested contractual punitive damages in the past. Consequently, foreign companies are often interested in finding out whether, like abroad, it is possible to contractually fix a cap on compensation and consequential damages. Lacking clear official guidelines relating to Taiwan¡¦s government procurement contract, government bureaucrats seldom concede terms or conditions of the contract. As a matter of fact, due to business needs, limitations of liability and liquidated damages clauses are acceptable in the model contracts of some stated-owned enterprises (CPC and Taiwan Power) and are included in a draft amendment to official guidelines relating to the government procurement contract. However, such caps on liability must further the interests of the government and are decided on a case by case basis. Therefore, this will not lead to the creation of new standard contracts.
IV Effective and efficient dispute settlement mechanisms should be introduced.
When government agencies are faced with construction disputes, they tend to opt for litigation rather than for arbitration. For the government, an acceptable arbitration clause in a procurement contract is very vague. It allows, at most, wordings such as: ¡§the dispute may be referred to arbitration, mediation, court proceeding,¡¨ or that ¡§arbitration is subject to the consent of the other party¡¨. This lacks any practical meaning. It usually takes several years to obtain a final court judgment and high costs are incurred during litigation. Therefore companies would like to be able to use arbitration clauses that set out the governing law, the arbitration rules and the place arbitration should take place. Moreover, if international construction contracts drafted by the FIDIC can be used as a template, companies might include provisions allowing a Dispute Review Board (DRB) composed of experts jointly appointed by the parties to be set up. The DRB might allow for a settlement to be reached without having to proceed to arbitration. This is an effective method of dispute resolution.
The overly conservative and impractical attitude of domestic construction bureaucrats has been clearly highlighted in comments made by both the American and the European Chambers of Commerce. On the other hand, most reputable companies run sustainable operations. Therefore, they are reluctant to accept involvement in an unviable project. Thus proper and fair contract provisions as well as a reasonable environment for implementation must be provided if the government expects high quality public infrastructure. Then, not only will top foreign companies be attracted, but the performance of domestic companies will also be improved.
I. Qualification requirements should avoid discriminating against the participation of foreign companies
While Taiwan has not yet joined the Agreement on Government Procurement of WTO (GPA) and is therefore not bound by its regulations, legislators have included key GPA principles in the Taiwanese Governmental Procurement Act. However, if we examine the qualification requirements and evaluation items, which were recently used, we find that some requirements contradict the rule that ¡§an entity shall only prescribe the qualifications related to contract performance in prescribing the qualifications¡¨. This rule is laid out in the GPA and has an equivalent provision in the Taiwanese Procurement Act. For example, requirements may include having previously engaged in domestic infrastructure projects, possessing specific professional abilities or holding domestic qualifications and/ or licenses (while foreign equivalent certification is not recognized). Since they conflict with the GPA, such restrictive measures should be avoided. Secondly, in practice, restrictions preventing foreign companies being either the sole participator or the leading company in projects carried out under Private Participation Law also exist. In our view, in the absence of mutual reciprocity issues, there is no reason to indirectly limit the business opportunities of a foreign company which has been recognized and is authorized to operate in Taiwan subject to domestic law.
II. Model contracts for government procurement should be clear and tailored to the type of project involved.
In traditional infrastructure projects under the Taiwanese Procurement Act, other than in rare ¡§limited tendering procedures¡¨ cases, vendors have no negotiating power over the contract. Moreover, in the current version of the model contract for government procurement, little consideration is given to the type of infrastructure project and its scale. Reputable foreign contractors, based on their extensive practical experience, may find it unreasonable that the domestic model contract applies to all types of project. On the other hand, if we compare the model contracts for Engineering, Procurement & Construction (EPC) and Mechanical Electronics Equipment, both which were drafted by the International Federation of Consulting Engineers (FIDIC)- their provisions relating to risk allocation for project delays, the risks shouldered by the government, who bears the responsibility for construction design, how and under what circumstances the contract price might be adjusted and the conditions for payment all differ enormously. This reflects the differences between the various types of projects. Similarly, the Taiwanese government should introduce model contracts tailored to the type of project involved. In this way contracts might be executed more smoothly and potential disputes could be avoided.
III Appropriate risk and liability provisions as well as liquidated damages clauses should be included in project-specific contracts.
The government should not avoid facing commercial realities. Misallocation of risk often leads to unnecessary cost and inefficient use of resources. Based on domestic legislation and international practice, the principle of risk allocation that we believe ought to be used is ¡§the allocation of risk to the party best able to manage it at the lowest cost.¡¨ As regards to how contract breaches are treated in practice, the government generally asks for compensation for both the damages caused and the profits lost. In addition, it has requested contractual punitive damages in the past. Consequently, foreign companies are often interested in finding out whether, like abroad, it is possible to contractually fix a cap on compensation and consequential damages. Lacking clear official guidelines relating to Taiwan¡¦s government procurement contract, government bureaucrats seldom concede terms or conditions of the contract. As a matter of fact, due to business needs, limitations of liability and liquidated damages clauses are acceptable in the model contracts of some stated-owned enterprises (CPC and Taiwan Power) and are included in a draft amendment to official guidelines relating to the government procurement contract. However, such caps on liability must further the interests of the government and are decided on a case by case basis. Therefore, this will not lead to the creation of new standard contracts.
IV Effective and efficient dispute settlement mechanisms should be introduced.
When government agencies are faced with construction disputes, they tend to opt for litigation rather than for arbitration. For the government, an acceptable arbitration clause in a procurement contract is very vague. It allows, at most, wordings such as: ¡§the dispute may be referred to arbitration, mediation, court proceeding,¡¨ or that ¡§arbitration is subject to the consent of the other party¡¨. This lacks any practical meaning. It usually takes several years to obtain a final court judgment and high costs are incurred during litigation. Therefore companies would like to be able to use arbitration clauses that set out the governing law, the arbitration rules and the place arbitration should take place. Moreover, if international construction contracts drafted by the FIDIC can be used as a template, companies might include provisions allowing a Dispute Review Board (DRB) composed of experts jointly appointed by the parties to be set up. The DRB might allow for a settlement to be reached without having to proceed to arbitration. This is an effective method of dispute resolution.
The overly conservative and impractical attitude of domestic construction bureaucrats has been clearly highlighted in comments made by both the American and the European Chambers of Commerce. On the other hand, most reputable companies run sustainable operations. Therefore, they are reluctant to accept involvement in an unviable project. Thus proper and fair contract provisions as well as a reasonable environment for implementation must be provided if the government expects high quality public infrastructure. Then, not only will top foreign companies be attracted, but the performance of domestic companies will also be improved.
