Risk Paths In International Construction Projects – Analysis And Recommendations

Discussion

Global trend of international trade and commerce demands involvement of international laws and conventions laying down the rules to regulate such trade and commerce. For international transactions, there is no ‘international’ law that needs to be applied. The transacting parties needs to decide the particular domestic law that needs to be followed for any future dispute arising out of the contract between them. Prior settlement of terms pertaining to sale, transportation, insurance and mode of payment is required to avoid dispute and damages. Brizplastic Pty Ltd, a small Australian company entered into agreement with Haier, a big Chinese manufacturing company, which needed shipment of three ‘crystal plastic’ extrusion machine made by Brizplastic Pty Ltd. Although the shipment was sent using the Cost, Insurance and Freight (CIF) terms, Haier holds Blizplastic liable for destruction and damage of the machine sent via Aloha Pty Ltd, a shipping company of Panama. (Blonigen & Wilson, 2018)

 A strategic risk management analysis is necessary for analysing the possible liabilities of the contracting parties and the issues they might face due to non-performance of contract. The analysis would strive to find out the probable problems and their causes arising out of the contract. The report would comprise of recommendations that would facilitate the company to handle future overseas agreements efficiently.

Brizplastic Co, an Australian company shipped three of their Crystal Plastic extrusion machine to Haier, a big Chinese manufacturing company. The parties agreed the delivery of the machines on 30 June 2018 or before in three shipments. They chose port of Qingdao to be the delivery port and settled on Cost, Insurance and Freight (CIF) terms for international shipment regulations. Brizplastic approached Aloha Pty Ltd, a shipping company of panama to deliver the machines overseas. The first shipment reached safely to the port of Qingdao on 1 March 2018 and then received by Haier. It worked fine when tested by the buyer company. However, the problem occurred involving the other two shipment.

• As for the second shipment, the ship encountered a typhoon in its voyage and it sank on 5 April 2018.
• The third shipment was flawed as the ship’s chain that was holding the container of the machine snapped while unloading and the machine was severely damaged.
• Haier, the buying company conveyed through their lawyer that it is only liable to pay for one machine which is $300 000 as it did not receive the other two, but it has deducted 10 000 Yuan from the price as the company had to pay import tax.
• It was also mentioned that Haier has refused to receive the damaged machine sent by the third shipment.
• Additionally, the lawyer said that Haier has filed for damages in the Chinese Courts for breach of contract as Brizplastic has failed to deliver the other two machines.
• On the other hand, Qingdao Port Authority intimated Brizplastic to take back the container of the damaged machine by 20 July 2018 otherwise it would be charged for removing and destroying the container.

These are the problems that Stephanie Smart, the CEO of Brizplastic Co is facing, which requires immediate attention of the company. The company needs to negotiation terms with the buyer company as well as the shipment company to settle its losses.

The contract was initiated between Brizplastic co, an Australian plastic manufacturing company and Haier, a major manufacturing company of China. On non-performance of the contract, Haier has the right to sue Brizplastic on certain terms and condition (Berlingher, 2017). Haier, the buyer company can sue Brizplastic for failing to deliver the outstanding machines on time, which affected Haier’s production as it had made necessary changes in its manufacturing unit anticipating the timely deploy of the required machines. However, it is to be taken into consideration that the second shipment was destroyed by typhoon, which is a natural calamity and the shipping company while unloading damaged the third one. Therefore, one of the parties to the situation is the shipping company, which is Aloha Pty Ltd a Panama based shipping company. Aloha Pty Ltd has shown negligence in its part, as it is responsible for the damage of the container of the machine. As Haier refused to accept the damaged machine, it lies in the Qingdao port and the port authority demands immediate action on Brizplastic’s part regarding the machine. Otherwise, they would charge the company for its removal or destruction. Here Qingdao Port Authority is another party to the situation with whom Brizplastic needs to negotiate to ease the matter (Andrews, 2016).

Possible liabilities

Several reasons have led to the adverse situation from which Brizplastic is suffering. The first and the foremost cause has to be the absence of a proper contract between Brizplastic and Haier. It is a mandate to draft a conclusive agreement before executing a work (McKendrick & Liu, 2015). The legal complications of the international law and the cultural differences of a foreign country must have been taken into consideration before entering into the contract as well (“China-Australia Free Trade Agreement (ChAFTA) – Austrade”, 2018). There are certain clauses, which should have been added to avoid the unnecessary legal battle that are companies would be indulging in; one of which is definitely deciding the application of the particular domestic law in case of dispute and the particular court that would hear the case. On the presence of a strong business agreement, companies have no scope to dominate over each in adverse situations. Such agreement must also include the liability of the particular company to pay the necessary taxes, like payment of import or export duties. In absence of such agreement, a company may demand unjustified charges from another (Importing and exporting, 2018). Absence of pacts like CISG (convention on Contract for the international Sale of Goods) leads to various conflicts and disputes between parties pertaining to overseas trade. (“1980 – United Nations Convention on Contracts for the International Sale of Goods (CISG)”, 2018)

The other cause is the negligence shown by the shipping company that led to the damage of the container. Aloha Pty Ltd, the shipping company failed to exercise the due care that it was required to show in its duty. It had a duty to ship the machine safely and it clearly breached such duty (Luntz, 2017). Sound agreements between the seller (Brizplastic) and the carrier (Aloha Pty Ltd) is essential, in absence of which either party can exploit the other on its own whims and fancy. Agreements like sale/purchase contract, contract of carriage, bill of lading, Charterparty, agreements on the terms of Carriage of Goods by Sea Act 1991 are a must to protect businesses from unethical charges of the shipping companies (Bridge, 2017).  Additionally, the shipped goods required an overseas marine insurance to cover the unforeseen situations like the typhoon or the negligence done by Aloha Pty Ltd. Lack of an insurance acts as an added injury to the existing damage. A marine insurance covers cargos from being lost, stolen, damaged or destroyed (Tarr, 2017).

Relevant parties

A future risk management process needs to be adopted by Brizplastic to avoid similar issues in future (Aven, 2016). The company needs to identify, assess and control the risks it would face from a particular contract and then review such control to protect itself from adverse consequences like legal battles and unethical compensations.

Brizplastic must foresee the risks that are involved in an overseas trade. Risks like non-performance of contract due to untimely delivery or damaged goods must be backed by supportive clauses in the contract between the parties. Payment of taxes and import-export duties needs attention of the company prior to entering into a contract. A risk like natural calamity faced by a shipment is another one to be taken into consideration. Issues involving negligence on the part of the shipping company needs to be dealt with. Risk like paying twice for a shipped container damaged by the shipping company itself must be addressed. Risk persists for acting quickly when the port authority calls for immediate action pertaining to removal or destruction of goods. Addressing litigation in a foreign court involves a lot of hassle and expense on the part of the company. Some other risk factors involving international trade are the solvency and reliability of the other party, economic stability in the overseas country, commercial laws in the overseas country, currency exchange rate, interest rate, etcetera (Liu, Zhao & Yan, 2016).

Issues arising out of poorly drafted agreements can lead to atrocious legal battle between companies. According to Trinh (2018), Non-performance of contract leads to partial or fundamental breach of contract, which brings critical consequences for a company such as heavy payment of compensation, free of cost goods or free maintenance of goods for a period. Prior agreement on payment of import-export duties would save the company from paying unnecessary charges in future. Risks involving natural calamity, however, cannot be avoided, yet the consequences can be reduced. Natural calamities bring heavy losses to the company for which it needs to be prepared. Issues pertaining to negligence shown by shipping company can lead to breach of contract with the buyer company, which attracts payment of huge damages. Getting back the damaged container involves double payment to the shipping company as well as extra charges to the exported port authority for storing the container for some duration, which was completely out of schedule. The company is required to act swiftly when the port authority issues notice to clear a stored container immediately, otherwise it would attract penalty. The contracting parties are required to choose their preferred court for litigation in their contract for future disposal of dispute.

Analysis of possible causes

International trades majorly depend on risks and probabilities due to extreme complexities in comparison to domestic trades. Therefore, the only way to reduce such complexities is to form a strong contractual relationship among parties to a contract. In such contracts, the parties must decide the choice of the law that would govern them, whether to apply CISG, delivery terms and conditions and payment procedures. However, in most cases, Convention on Contracts for sale of international goods (CISG) is recommended as it removes the dilemma of choice of law issue between parties. CISG includes rules on which parties to a contract, courts and arbitrators may refer and rely (“1980 – United Nations Convention on Contracts for the International Sale of Goods (CISG)”, 2018). Additionally, Blizplastic must review the risks arising out of faulty contracts and incorporate provisions pertaining to delayed delivery of goods, payment procedure, payment of import duty of the buyer, payment of damages in case of disputes and the court of action for disputes for future transactions. In most international transactions, CIF delivery term is suggested which involve Letter of Credit method of payment where the Bank guarantees the other party in terms of payment on the fulfilment of the agreement (Blonigen & Wilson, 2018).

The parties to the contract are obliged to settle the terms regarding unforeseen and extra costs such as import/export duties, dock fees or stamp duties. The currency pertaining to the payment for the sale should be predetermined and the actual price of the product should be decided too, which should be free from currency fluctuation that often occurs between the date of the contract and the delivery date. Agreements should be drafted keeping all such major and minor details in mind. However, the ability to negotiate incorporation of provisions depends largely upon the leverage and bargaining position of the party.

The risk of overseas transaction cannot be determined wholly, especially in Australia, which is an island and it requires it to send its goods to foreign country either by sea or by air. As air shipment is costlier therefore, businesses choose carriage by sea mostly. Carriage by sea has a lot of risks for it faces issues relating to long distance voyages, marine accidents and calamities and the numerous intricate steps involved in shipment procedure. Brizplastic requires stringent contractual terms with the shipping company which should include provisions relating to the safe carriage procedure starting from the loading of the goods at the port of export till the point the shipment is unloaded at the port of import and handed over to the importing party. Therefore, the company needs to sign a few needful agreements with the shipping companies, like the Charterparty and the Bill of Lading. The parties must agree upon the provisions of the Convention on the Carriage of goods by Sea formulated by UNICITRAL ((“1978 – United Nations Convention on the Carriage of Goods by Sea – the “Hamburg Rules””, 2018). A better transportation situation would result in timely delivery of the goods as well, which means lower risks in terms of untimely delivery of goods to buyer. CIF (cost, insurance and freight) terms could be adopted to shift responsibility of the owner of the goods as soon as it is loaded into the ship (Blonigen & Wilson, 2018).

Future Risk Management process

According to Hill and Kulkarni (2017), Marine insurance is indispensable for carriage by sea shipments as shipping companies tend to lose or damage goods quite frequently. A sound insurance policy would secure the company from any unforeseen losses like natural calamities, overturning of vessels, lost or damage of containers (Renzetti & Dupont, 2018).

The legality of the controls and measures are discussed.

• Contracts based on the terms of CISGwould be risk free and the parties can avoid issues relating to choice of law. CISG is applied to all CISG nation exporter to their export contracts unless otherwise mentioned, which means such export contracts are easily negotiable and the conflicts arising out of such contracts can be easily mitigated. It allows oral and unsigned sales agreement (Lookofsky, 2016). However, CISG has gaps, which are to be fulfilled with the provisions of applicable Contract Laws.
• Australia ratified the convention by enacting the Carriage of Goods by sea Act 1991 (Rogers, Chuah, & Dockray, 2016). It minimises the risks of the seller and the buyer. It makes sure that Charterparties and Bill of Lading meets the standards and guidelines set out in the Act.

Negotiation and bargaining is the major needful at this moment. Due to the absence of strong contractual provisions that clearly speak for payment procedure and payment of additional duties, the CEO needs to negotiate with Haier. The CEO needs to convince Haier for adopting Alternative Dispute Resolution (ADR) instead of Court proceedings to save time and expense.

Brizplastic should pray for Export Market Development Grants (EMDG) from the Government (“China-Australia Free Trade Agreement (ChAFTA) – Austrade”, 2018). The CEO needs to sue Aloha Pty Ltd for damages and either arrange for bringing back the damaged container to Australia or pay for the destruction of it, whichever is more convenient for the company after a thorough inspection.

• Draft a strong agreement with the contracting party that includes provisions for payment, delay, payment of additional costs, consequences as to damaged goods.
• Must follow the terms of CISG.
• Marine insurance is must to secure the future shipments from unforeseen adverse consequences.

References:

1978 – United Nations Convention on the Carriage of Goods by Sea – the “Hamburg Rules”. (2018). Retrieved from https://www.uncitral.org/uncitral/en/uncitral_texts/transport_goods/Hamburg_rules.html

1980 – United Nations Convention on Contracts for the International Sale of Goods (CISG). (2018). Retrieved from https://www.uncitral.org/uncitral/en/uncitral_texts/sale_goods/1980CISG.html

Andrews, N. (2016). Remedies for Breach of Contract. In Arbitration and Contract Law (pp. 279-333). Springer, Cham.

Aven, T. (2016). Risk assessment and risk management: Review of recent advances on their foundation. European Journal of Operational Research, 253(1), 1-13.

Berlingher, D. (2017). The Effects of the International Contract for Sale of Goods. Journal of Legal Studies, 19(33), 96-109.

Blonigen, B. A., & Wilson, W. W. (2018). 16. Trade costs, trade, and port efficiency. Handbook of International Trade and Transportation, 478.

Bridge, M. G. (2017). The international sale of goods. Oxford University Press.

China-Australia Free Trade Agreement (ChAFTA) – Austrade. (2018). Retrieved from https://www.austrade.gov.au/Australian/Export/Free-Trade-Agreements/chafta

Hill, C., & Kulkarni, Y. (2017). Maritime law. Taylor & Francis.

Importing and exporting. (2018). Retrieved from https://www.business.gov.au/products-and-services/importing-and-exporting

Liu, J., Zhao, X., & Yan, P. (2016). Risk paths in international construction projects: Case study from Chinese contractors. Journal of Construction Engineering and Management, 142(6), 05016002.

Lookofsky, J. (2016). The 1980 United Nations Convention on contracts for the International sale of Goods. In International Encyclopaedia of Laws (pp. 1-250). Kluwer Law International.

Luntz, H., Hambly, D., Burns, K., Dietrich, J., Foster, N., Grant, G., & Harder, S. (2017). Torts: cases and commentary. LexisNexis Butterworths.

McKendrick, E., & Liu, Q. (2015). Contract Law: Australian Edition. Macmillan International Higher Education.

Renzetti, S., & Dupont, D. (2018). Ownership and performance of water utilities. In The business of water and sustainable development (pp. 99-110). Routledge.

Rogers, A., Chuah, J., & Dockray, M. (2016). Cases and Materials on the Carriage of Goods by Sea. Routledge.

Tarr, J. A. (2017). Marine insurance law reform in Australia–A following sea. Australian Business Law Review, 45(2 (ABLR 117)), 117-127.

Trinh, T. (2018). An analysis of fundamental breach of contract in the CISG: what could Vietnamese law learn from the GIDG?.

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