Discuss about the Legal Risk Management for Victorian Desalination Plant.
The Victorian Desalination Plant (VDP) project is a government funded project, the contract for which has been offered to Aqua Sure Company in the year 2009 under Public Private Partnership (PPP). The inherent legal risks associated with the pre-construction, construction and operational phase of the project as well as the possible consequences for the contracting party i.e. government and the contractori.e. Aqua Sure Company, will be discussed.
The six risks associated with the project are as follows;
Risks in pre-construction phase
The VDP project is being handled by Aqua Sure Company and the risk of existing underlying environmental conditions might affect the project and create subsequent risk of damage to the environment in terms of flora fauna associated with the region. The Environment Protection and Biodiversity Conservation Act 1999 (EPBC) and Flora and Fauna Guarantee Act 1988 (FFG) protects threatened plants and animal species, ecological of Victoria region from potentially threatening processes (Victorian Government , 2017). During the construction phase in plant site, it was found that there was existence of certain EPBC-listed flora and fauna species as well as their habitat. According to the EPBC Act provide for the issuing of approvals and permits for variety of activities on Commonwealth land as well as land affecting the Commonwealth. The failure to comply with the Act could lead to the penalties which include remediation of the damage, court injunctions, and civil as well as criminal penalties.
The types of risks that might arise with the design are the inadequate designing for the purpose required. It is required to be in compliance with the functional as well as performance specification as provided by the government. In addition, it should follow the construction standards of Australia. After the finalization of the design, it is verified and approved by the contracting authority. In case of errors during the construction phase, the risk of liability arises on both the parties to the contract, equally as both have approved the designed with their mutual consent.
During the construction phase, the completion of project related risks such as delay in completion of construction of plant or cost overrun, which becomes time consuming as well as financial loss due to extra costs incurred in the completion as planned in the budget. Under the contract, the provision of liquidated damages accounts for the damages caused due to inexcusable delays in the project beyond the date of completion of construction process. In this context, inexcusable delays are considered as contractor caused delays or the delays caused due to the risks as accepted by the contractor under the contract (Crepin & Aversa, 2018). The provision of liquidated damages is standard and enforceable by calculating the actual pre-estimate of the related loss. The contractor will be held responsible for delay and cost overrun and they will have to suffer loss of expected revenue, ongoing costs of financing the construction of plant as well as extended costs of site.
Risks in pre-construction phase
During construction phase, the issues of labor disputes usually arise and the conflicts might be general or political in nature. The responsible authority for this risk would be the contractor as the management of labor is considered as the responsibility of the contractor. The allocation of work to the labors should be the responsibility and every possible effort to resolve the dispute and prevent them from arising is also the responsibility of contracting authority.
The operation phase include a number of risks such as regulatory risks, political risks, demand risks, maintenance risks, inflation risks, strategic risks, insurance risks and such others. However, in case of VDP project, major risks that might exist are regulatory risks and maintenance risks. The project might face the issue of changes in law from time to time that might affect the ability of the project to perform as well as the price at which, the compliance with the law could be maintained. The unanticipated laws and regulations of future might increase operating costs for desalination plant. As the project is being undertaken with an expectation of over 95 years, the changes in the laws such as taxation laws and increase in the interest rates create influence upon the project. The risk sharing responsibility will be of both the contracting party as well as the contractor.
As Aqua Sure is dealing with the desalination of water to make it available to the people for drinking purposes, the utilization of chemical substances is essential. The hazardous qualities of the material create risk to environment as well as human health working in the plant. The infringement of legislation and standards established in Australia under Health and Safety Act, 2004 and Occupational health and safety legislation, is considered as an offence and the corporation is held responsible for penalty in accordance with the offence, which might be $100 to $1000 depending upon the severity of the injury or harm caused to the individual (Australian Capital Territory, 2004).
In order to complete the project on time, it is essential to mitigate the risks associated with the pre-construction, construction, and operation phase, for which, the contracting party as well as the contractor must have to take certain initiatives and measures.
During pre-construction phase, in order to mitigate or minimize the risks associated with the environment, the contracting party should conduct required initial due attentiveness so as to determine the fitness of the site for establishing plant from the perspective of the environment. During site survey, the rules and regulations should be taken into consideration. The surveyors must be aware about the EPBC Act and the consequences of its infringement as the law of Australia is strict for the protection of environment and biodiversity (The State of Victoria, 2017). In addition, all the environment issues should be disclosed by the contracting authority well in advance to the contractor. It is also the responsibility of the contractor to carry out complete investigation of the site as well as the contracting party should review all the environment plans prepared by the contractor in order to ensure effective management of the risks.
Risks related to non-compliance of EPBC Act
After the approval of design by the contracting authority, the occurrence of conflict regarding the error or correction will be the responsibility of the contracting authority. However, it is also the responsibility of the contractor to follow the standards and procedures, but they are not liable to pay compensation for the designing errors that might be exhibited in the construction phase.
In the risks associated with project completion, the risks could be mitigated by implementing the contracting party to implement a sectional completion process, which would enable the contractor to start receiving payment for the purpose of design and construction with the substantial completion of the sections of the project (Gregory, 2014). In order to mitigate the risk of inexcusable exposure to delays, the contractor should initially supervise the project completion time and extension approval should be received through the contracting party. However, the contractor will be held responsible for delays and will have to bear financial penalties and liquidated damages for exceeding the construction deadlines under contract.
The risks related to labor disputes could be minimized by proper allocation of work to them and a supervising authority should be employed by the contractor in order to supervise the progress of work as well as the proper management of labor (Crepin & Aversa, 2018). The manager or supervisor should prevent all such circumstances from occurrence that could result into conflicts.
In the operation phase, the risks related to changes in laws are required to be shared by both the parties to the contract and entitlement of contractor to relief might be the subject to minimum thresholds. The contractor would not be compensated for the general changes in law that only affect operational expenditure or taxation as it affects the market equally. The changes in the interest rates or taxes should equally be shared by both the parties to the contract to minimize the impact on anyone.
The desalination plant is being established in Australia and is under the jurisdiction of Australian government as well as the state authorities. It is the legal responsibility of the company to follow all the health and safety rules and regulations as established by the Australian government such as the Health and Safety Act, (2004), Occupational Health and Safety Regulations, (2007), and Occupational Health and Safety (Hazardous Substances) Regulations (1999).
During the progression of project, the management of the project is required to be such that the project gets completed without occurrence of any disputes. However, it might not be possible as clashes in opinions create one or the other kind of conflicts which might result in dispute among the workforce employed in the project. In general, dispute boards are utilized by majority of corporations to resolve the disputes occurring in workplace and it includes a panel of at least three people having technical instead of legal knowledge, are convened either at the occurrence of project, or on ad hoc basis on the occurrence of dispute. These members conduct first instance review of the matter and on the basis of mandate, provide non-binding or binding recommendations.
Risks related to designing Errors
In order to resolve the dispute in a formal manner, there are three main forms of dispute boardswhich are;
- Dispute Adjudication Board (DAB) -It comprises of 3 members, one selected by each party and third selected by the two nominees. The formal notice is provided to one of the party to the dispute for the avoidance of dispute purpose. The procedures adopted by DAB are formal and structured and contain provisions of time conditions for the notices. The decisions of DAB are immediately binding unless there is a matter of satisfaction occurs between parties to the dispute (Australian Disputes Centre , 2015).
- Dispute Review Board (DRB) -It comprises of three members and deal with the issues as they occur. They act impartially as well as independent and take preventive measures to minimize the complexity of the issue. The recommendations provided by the DRB are non-binding.
- Combined Dispute Board (CDB) – The CDB also reviews the matter of dispute and provides non-binding recommendations to the parties, however, if any one of the party requests which is not objected by the other party, the CDB obtains the authority to provide binding interim determination. That is why, it is considered as a hybrid option available under the International Chamber of Commerce (ICC) DR rules.
It is evident from the distinguishing characteristics of the three boards that DAB possess the mandate to provide binding decisions while DRB do not possess the power to provide binding decisions but it can only make recommendations that are non-binding. In addition, the dispute board could not be considered as an arbitral tribunal. In case of DRB, the dispute board is a body with a mandate and function similar to either that of a conciliator while in case of DAB, it is considered as a statutory adjudicator in the legal systems of Australia.
Key features in both these boards;
- The number of members in these boards are three but in large disputes, the number of member may increase to five, however, it occurs rarely.
- All the members of dispute boards are required to be impartial and independent.
- The proceedings and outcomes of dispute boards are usually confidential and are never disclosed to third party.
- The members of dispute boards keep themselves updated with the progress of the project.
- They possess technical knowledge required to review or decidethe matter in dispute.
- The members follow inquisitorial procedures and are not bound by the rules of evidence in order to evaluate the matter in dispute.
- The duration of hearing the dispute and providing written recommendations is generally short, usually three months from the date of referral of matter to the board.
- The parties to the dispute are obliged to keep their performance continue while the dispute is before the board.
These characteristics of dispute board make it an appropriate approach for the resolution of disputes in majority of corporations.
For VDP Project, the most suitable approach for the purpose of dispute resolution would be DAB as the decisions provided by them are binding on both the parties. In addition, there are various advantages of including DAB in the process of dispute resolution such as;
- The members of DAB are familiar with the ongoing activities of the contract so they can provide every possible advice to resolve the dispute.
- They are considered to be as the subject expert and can address the dispute effectively.
- It is an effective mechanism to resolve the dispute as the parties could maintain confidentiality up to the level they prefer.
- The time and money could be saved.
On the other hand, the only disadvantage is the selection of the members actually having knowledge and skills to resolve the dispute.
Thus, for VDP Project, the best suitable option would be DAB for the resolution of the dispute.
In order to reduce the occurrence and impact of disputes on the project, the project should be managed in an effective manner. The main causes of inter-organizational conflicts are task interdependency, differentiation, opposing values, interests and objectives, communication obstacle, tensions as well as personality traits. The occurrence of disputes might hamper the performance of the employees so it requires being resolved as early as possible. In order to reduce the occurrence and impact of disputes on the project, the management should include;
- Well-planned and documented negotiations along with best practices in negotiations.
- Clear and precise written contract.
- Commitment to act in good faith, reasonably, honestly, as well as fairly.
- Clear and effective communication between all and emphasis on maintaining relationships
- Dispute resolution clauses in written contracts.
In this manner, the occurrence of disputes could be prevented and the project could be managed effectively.
References
Australian Capital Territory, 2004. Magistrates Court (Occupational Health and Safety Infringement Notices) Regulations 2004. [Online] Available at: https://www.legislation.act.gov.au/sl/2004-32/20040805-15690/pdf/2004-32.pdf [Accessed 7 May 2018].
Australian Disputes Centre , 2015. Overview. [Online] Available at: https://www.disputescentre.com.au/dispute-board/ [Accessed 7 May 2018].
Crepin, A. & Aversa, F., 2018. Construction and projects in Australia: overview. [Online] Available at: https://uk.practicallaw.thomsonreuters.com/7-519-4527?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 [Accessed 7 May 2018].
Gregory, M., 2014. Three Approaches to Dispute Resolution. [Online] Available at: https://gregorymediations.com/three-approaches-dispute-resolution/ [Accessed May 2018].
The State of Victoria, 2017. Biodiversity management. [Online] Available at: https://agriculture.vic.gov.au/agriculture/farm-management/business-management/legal-information-for-victorian-landholders/biodiversity-management [Accessed 7 May 2018].
Victorian Government , 2017. Environmental effects of desalination plant.
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