1

Engineering, Procurement
and Construction (ECP)
Contracts
1
What is an Engineering, Procurement and
Construction Contract?

▰ Engineering, Procurement and Construction (EPC)

contracts (or turnkey construction contracts) are
commonly used for complex infrastructure projects.
▰ EPC contracts set out the relationship between the
owner and the contractor for the provision of
professional or technical services.
▰ Normally the EPC Contractor has to execute and
deliver the project within an agreed time and
budget, commonly known as a Lump Sum Turn Key (LSTK)
Contract. An EPC LSTK Contract places the risk for
schedule and budget on the EPC Contractor.
2
What is an Engineering, Procurement and
Construction Contract? (cont.)

▰ The Project Owner or client to the EPC

Contractors will normally have a presence in
the EPC Contractors offices during the
execution of the EPC Contract. The Client
places what can be termed a Project Management
Team or PMT to overlook the EPC Contractor.

3
Key Features of an EPC Contract

▰ Sole responsibility
▰ Fixed contract price
▰ Fixed completion date
▰ Contractor claims
▰ Owner remedies
▰ Handover, testing and approval

4
Key Features of an EPC Contract

▰ Full design responsibility

▰ Owner‟s requirements
▰ Completion testing
▰ Performance guarantees
▰ Limits of liability

5
Non-EPC Organizational Structure

TM

PDMG

TSG CMT MSMT

Consultant Contractor Suppliers

Sub-contractor
6
EPC Organizational Structure

TM

PDMG

Contractor

TSG CMT MSMT

Consultant Sub-contractor Suppliers

7
Advantages of an EPC Contract

▰ Single point of responsibility for facility

completion and delivery in accordance with
performance specifications
▰ Greater opportunities for design and
construction innovation
▰ Contract can be awarded on desired factors like
price, qualifications, experience and team
▰ Contractor accepts more risk because it is
responsible for all of the design, construction
and commissioning 8
Disadvantages of an EPC Contract
▰ Loss of control.
▻ Employer/Owner generally less involved in the design and execution.
▻ Contractor incentive to execute for the least cost possible and/or under-design
facility
▰ Cost of Tender.
▻ Difficult to gauge if pricing is appropriate (too high or too low)
▻ World Bank suggest a two-stage bidding process: First, Contractors must submit
unpriced technical proposals. It is only during the second stage that the prices
are considered.
▰ Cost of risks.
▻ Scope changes may be expensive once construction commences
▻ Depending upon market forces, a contractor will attempt to increase the contract
price in accordance with the increase in risk.

9
Legal Considerations of an EPC Contract

▰ Indemnities for overruns and delays

▰ Rights to extensions of time
▰ Insurance
▰ Force majeure provision; defaults and remedies
▰ Intellectual property (e.g. patent, copyright)
▰ Initial phase operation responsibility
▰ Warranties
▰ Dispute resolution
▰ Governing law; interpretation
▰ Attached schedules; especially Definition of Terms 10
2
Corporate Finance and
Project Financing
11
TWO ALTERNATIVES TO FINANCE A NEW PROJECT

1. PROJECT FINANCING
▻ The new project is incorporated into a newly
created economic entity, the SPV, and
financed off balance sheet

2. CORPORATE FINANCING
▻ The new initiative is financed on the
balance sheet

12
Project
Finance
13
About Project Finance

▰ Project finance is the financing of long-term

infrastructure, industrial projects, and public services,
based on a non-recourse or limited recourse financial
structure, in which project debt and equity used to finance
the project are paid back from the cash flow generated by
the project. (International Project Finance Association
(IPFA).

▰ The new project and the existing firm live two separate
lives. If the project is not successful, project creditors
have no (or very limited) claim on the sponsoring firm‟s
assets and cash flows. The existing shareholders then
benefit from the separate incorporation of the new project
into an SPV 14
Features of Project Finance

▰ Non-Recourse Financing
▰ Off-Balance sheet
▰ Capital-Intensive
▰ Numerous Project Participants
▰ Project Finance Documents
▰ Risk Allocation
▰ Special Purpose Entity/Special Purpose Vehicle
▰ Cash Flow Waterfall
▰ Cost of Financing
15
Breaking down Project Financing
1. Project Finance is generally used in oil extraction, power production, and
infrastructure sectors. These are the most appropriate sectors for developing this
structured financing technique, as they have low technological risk, a reasonably
predictable market, and the possibility of selling to a single buyer or a few large
buyers based on multi-year contracts

2. Project Finance is the structured financing of a specific economic entity – a Special

Purpose Vehicle (SPV) – created by the sponsors using equity or debt. The lender
considers the cash flow generated from this entity as the major source of loan
reimbursement. Hence, if the borrower defaults, the issuer can seize the assets of the
said SPV but cannot seek out the borrower for any further compensation, even if the SPV
does not cover the full value of the amount defaulted.

3. Cash flows generated by the SPV must be sufficient to cover payments for operating
costs and to service the debt in terms of capital repayment and interest. Because the
priority use of cash flow is to fund operating costs and to service the debt, only
residual funds after the latter are covered can be used to pay dividends to sponsors
16
undertaking project finance.
Build-Operate-Transfer (BOT)

▰ A form of project financing, wherein a private entity

receives a concession from the private or public
sector to finance, design, construct, own, and operate a
facility stated in the concession contract. This enables
the project proponent to recover its investment,
operating and maintenance expenses in the project.

17
Typical Project Finance Structure

▰ The project finance structure for a build, operate and

transfer (BOT) project includes multiple key elements.

▰ Project finance for BOT projects generally include

a special purpose vehicle (SPV). The company‟s sole
activity is carrying out the project by subcontracting
most aspects through construction and operations
contracts. Because there is no revenue stream during the
construction phase of new-build projects, debt service
only occurs during the operations phase.
18
Typical Project Finance Structure

▰ For this reason, parties take significant risks during

the construction phase. The sole revenue stream during
this phase is generally under an off-take or power
purchase agreement. Because there is limited or no
recourse to the project‟s sponsors, company shareholders
are typically liable up to the extent of their
shareholdings. The project remains off-balance-sheet for
the sponsors and for the government.

19
Off-Balance-Sheet

▰ Project financing may allow the shareholders to keep financing

and project liabilities off-balance-sheet. Generally, project
debt held in a sufficiently minority subsidiary is not
consolidated onto the balance sheet of the respective
shareholders. This reduces the impact of the project on the cost
of the shareholder‟s existing debt and on the shareholder‟s
debt capacity, allowing the shareholders to use their debt
capacity for other investments. Clearly, any project structure
seeking off-balance-sheet treatment needs to be considered
carefully under applicable law and accountancy rules.

20
Off-Balance-Sheet

▰ To a certain extent, the government can also use project finance to keep
project debt and liabilities off-balance-sheet, taking up less fiscal
space. Fiscal space indicates the debt capacity of a sovereign entity and
is a function of requirements placed on the host country by its own laws,
or by the rules applied by supra- or international bodies or market
constraints, such as the International Monetary Fund (IMF) and the rating
agencies. Those requirements will indicate which project lending will be
treated as off-balance-sheet for the government.

▰ Keeping debt off-balance sheet does not reduce actual liabilities for the
government and may merely disguise government liabilities, reducing the
effectiveness of government debt monitoring mechanisms. As a policy issue,
the use of off-balance-sheet debt should be considered carefully and
protective mechanisms should be implemented accordingly. For more on
management of government risks and contingent liabilities
21
Non-Recourse Financing

▰ Recourse financing gives lenders full recourse to the assets or

cash flow of the shareholders for repayment of the loan in the
case of default by the SPV. If the project or SPV fails to
provide the lenders with the repayments required, the lenders
will then have recourse to the assets and revenue of the
shareholders, with no limitation.

▰ Project financing, by contrast is “limited” or “non-recourse”

to the shareholders. In the case of non-recourse financing, the
project company is generally a limited liability special purpose
project vehicle, and so the lenders' recourse will be limited
primarily or entirely to the project assets (including
completion and performance guarantees and bonds) in the case of
default of the project company.
22
Project Finance

Why use Project Finance?

▰ Amount too large for company Balance Sheet
▰ Too much risk for one company to bear
- share different risks with those better able to assess and manage
e.g. Oil exploration, development and production
▰ Some risk that may be encountered:
1. Market Risk
2. Environmental Risk
3. Political Risk
4. Technological Risk
5. Recovery Risk
23
Project Finance

Risk Analysis
▰ Pre construction
▰ Construction
▰ Operation
But many risks may be present at all stages
Resource availability- Geological-Infrastructure-
Technological-Construction-Operating-Labour supply-
Material sourcing-Product market-Management-FX-
Political-Regulatory-Environmental

24
Project Finance

▰ Common causes of failure

Completion delay-Cost overrun-Technical failure-Uninsured
casualty losses-Increase price/shortage of raw
materials-Technical obsolescence-Government
interference-Loss of competitive position-Expropriation-
Poor management

25
Some Methods to Reduce the Risk

▰ Concession agreements
▰ Construction and equipment contracts
▰ Completion guarantees
▰ Supply agreements
▰ Throughput agreements
▰ Cost over run insurance
▰ Cash deficiency agreements
▰ Political risk insurance
▰ Management contracts
26
 Parties of Project Financing

1. Sponsor
▻ The project sponsor is the entity that manages the project. It generally brings management,
operational, and technical experience to the project. The project sponsor may be required to provide
guarantees to cover certain liabilities or risks of the project.
2. Borrower
▻ The borrowing entity might or might not be the SPV. This depends on the structure of the financing and
of the operation of the project (which will themselves be determined by a host of factors such as tax,
exchange controls, the availability of security and the enforceability of claims in the host country).
3. Project Company
▻ The project company is the legal entity that will own, develop, construct, operate and maintain the
project. It is in most cases be the vehicle that is raising the project finance and, therefore, will
be the borrower. It is frequently a special purpose vehicle (SPV) set up solely for the purposes of
participating in a particular project.
4. Operator
▻ Operators are responsible for maintaining the quality of the project‟s assets and operating
the power plant, pipeline, etc. at maximum efficiency
27
Sponsors of Project Finance

1. Industrial sponsors – They see the initiative as upstream and downstream

integrated or in some way as linked to the core business

2. Public sponsors – Central or local government, municipalities and

municipalized companies whose aims center on social welfare

3. Contractor/sponsors – Who develop, build, or run plants and are

interested in participating in the initiative by providing equity and or
subordinated debt

4. Financial sponsors/investors – Plays part of a project finance

initiative with a motive to invest capital in high profit deals. They
have high propensity of risk and seek substantial return on investments
28
Factors to consider in Project Finance

1. Corporate Governance
2. Regulations impost by host Government
3. Industrial Regulation
4. Permitting
5. Taxation
6. Changes in law
7. Custom and Immigration Law

29
Stages of Project Financing

1. Project Origination
2. Financing the Project
3. Constructing the Project (Discussed in the
presentation of EPC)
4. Operating the Project

30
Project Financing

▰ Lending to a single purpose entity for the acquisition and /or

construction of a revenue-generating asset with limited or no recourse
to the sponsor
▰ Repayment of the loan is solely from the revenues generated from
operation of the asset owned by the entity
▰ Security for the loan
▻ the revenue generating asset
▻ all shares and interests in the
entity
▻ real property
▻ all contacts, permits
▻ authorizations, etc.; and,
▻ all other instruments necessary for continuing project
operations
31
Steps

1. Project Identification & Resource Allocation

2. Risk Allocation & Project Structuring
3. Bidding & Mandating Contracts
4. Due Diligence & Documentation
5. Execution & Monitoring
6. Construction Monitoring
7. Term Loan Conversion & Ongoing Monitoring

32
First Stage: Project Origination

1. Host Government 1. Private Sponsors

▻ Roads ▻ Power
▻ Bridges ▻ Leisure Amenities
▻ Rail ▻ Mining
▻ Schools ▻ Oil
▻ Others ▻ Others

33
Second Stage: Project Financing

34
Sample Structure

Sponsors / Arranging Bank

Shareholders

SINGLE PURPOSE
PROJECT COMPANY
Equipment Warranties and Syndicate
Supplier Supply Agents Offtake Banks
agreement (e.g,
Turnkey power purchase)
Contractor Construction Agreement
Other Project Participants:
Feed Stock Long Term Currency and Interest Rate
(e.g., fuel) Agreement Hedge Providers
Supplier Purchaser Multilaterals and EDA’s
Legal Counsel
Operator Operations &
Maintenance Mgmt Technical Consultants
Third Stage: Construction of the Project

▰ i.e. Engineering, Procurement and Construction (EPC)

36
Fourth Stage: Operating the Project

▻ Transferred to alternative
ownership
▻ Operations and Maintenance
▻ Off-takers
▻ Project reincarnation

37
Corporate Finance
38
 PROJECT FINANCING VS CORPORATE FINANCING

FACTOR CORPORATE FINANCING PROJECT FINANCING

Guarantees for financing Assets of the borrower Project assets

Effect on financial elasticity Reduction of financial elasticity None/ Heavily reduced effect
of the borrower for sponsors
Accounting treatment On Balance Sheet Off Balance sheet

Degree of Leverage utilizable Depends on the borrower’s Depends on the cash flows
balance sheet generated by the project
Main variables underlying the Customer relations, Solidity of Future cash flows
granting of financing balance sheet, profitability

39
Corporate Finance

▰ division of a company that deals with

financial and investment decisions
▰ primarily concerned with maximizing
shareholder value through long-term and
short-term financial planning and the
implementation of various strategies

40
Two main sub-disciplines

▰ Capital Budgeting (fixed capital)

a. Capital Investments
b. Capital Financing
▰ Working Capital Management / Short-term
Liquidity (working capital)

41
Capital Budgeting

▰ Capital Investments
- a company identifies capital expenditures, estimates
future cash flows from proposed capital projects, compares
planned investments with potential proceeds, and decides
which projects to include in its capital budget.
Which value-adding projects should receive investment
funding?
▰ Capital Financing
- sourcing capital in the form of debt or equity
Whether to finance that investment with equity
or debt capital?
42
Capital Financing-Debt Capital

▰ A company may borrow from commercial banks

and other financial intermediaries or may
issue debt securities in the capital
markets through investment banks (IB)

43
Capital Financing-Equity Capital

▰ A company may also choose to sell stocks

to equity investors, especially when
raising long-term funds for business
expansions.

44
Importance of Capital Budgeting

▰ Making capital investments is perhaps the most important

corporate finance task and can have serious business
implications. Poor capital budgeting (e.g. excessive
investing or under-funded investments) can compromise a
company's financial position, either because of increased
financing costs or having an inadequate operating capacity.
▰ Capital financing is a balancing act in terms of deciding on
the relative amounts or weights between debt and equity.
Having too much debt may increase default risk, and relying
heavily on equity can dilute earnings and value for early
investors. In the end, capital financing must provide the
capital needed to implement capital investments.
45
Working Capital Management

▰ Management of the company's monetary funds that

deal with the short-term operating balance
of current assets and current liabilities; the
focus here is on managing cash, inventories, and
short-term borrowing and lending (such as the terms
on credit extended to customers).

46
The 3 Important Activities that Govern
Corporate Finance

47
Versus Business Finance

▰ Corporate finance is different from business finance,

while business finance refers to finance to all types of
business such as partnership firms, joint
stock companies, etc.., corporate finance includes,
planning, raising, investing and monitoring of finance
in order to achieve the financial goals of the
organisation.

48
Finance Planning

▰ In the planning phase, corporate finance needs to get a

clear perspective on certain aspects, essentially the
finance of the company has to be decided on questions
like, what are the sources of finance, how much finance
is required by the company and will it be profitable?

49
The Financial Planning Process

1. Gathering 2. Establishing 3. Analyzing

Client Goals and Financial
Information Objectives Structure

4. Developing & 6. Monitoring &

5.Implementing
Presenting Reviewing
Plan
Financial Plan Financial Plan

50
3
Regulatory Compliance
51
“ Regulatory compliance is an
organization's adherence to
laws, regulations, guidelines and
specifications relevant to its
business. Violations of regulatory
compliance regulations often result
in legal punishment, including
federal fines.
52
Regulatory Compliance

▰ It describes the goal that organizations aspire to

achieve in their efforts to ensure that they are
aware of and take steps to comply with
relevant laws, policies, and regulations.

53
Regulations and
Accrediting
Organizations Vary
Among Fields 54
▰ financial industry PCI-DSS and GLBA in the,
▰ U.S. federal agencies, FISMA
▰ food and beverage industry, HACCP ,
▰ in healthcare, Joint Commission and HIPAA . In some
cases other compliance frameworks (such as COBIT) or
even standards (NIST) inform on how to comply with
regulations.

55
Anti-bribery
and Corruption Laws
56
57
58
59
60
61
62
63
64
65
66
Corporate
Governance
67
Corporate Governance

▰ “The system by which companies are

directed and controlled…..”
▰ Set of rules that define the relationship
between stakeholders, management, and
board of directors of a company and
influence how that company is operating.

68
Corporate Governance

▰ Corporate Governance consists of 2

elements:
1. The long term relationship which has to deal with
checks and balances, incentives for manager and
communications between management and investors;
2. The transactional relationship which involves
dealing with disclosure and authority

69
Corporate Governance

▰ Why is Corporate Governance Important?

▻ Ensures that the business environment is fair
and transparent and that companies can be held
accountable for their actions.
▻ Deliver sustainable Good Business Performance.
▻ Emerged as a way to manage modern joint stock
corporations

70
Benefit of Corporate Governance

▰ The Benefits to Companies

▻ Improving access to capital and financial markets
▻ Help to survive in an increasingly competitive
environment through mergers, acquisitions,
partnerships, and risk reduction through asset
diversification
▻ Provide an exit policy and ensure a smooth inter-
generational transfer of wealth and divestment of
family assets, as well as reducing the chance for
conflicts of interest to arise (very important for
the investors).
71
Benefit of Corporate Governance

▰ The Benefits to Companies

▻ leads to a better system of internal control, thus leading
to greater accountability and better profit margins.
▻ pave the way for possible future growth, diversification,
or a sale, including the ability to attract equity
investors – nationally and from abroad – as well as reduce
the cost of loans/credit for corporations.
▻ Many businesses seeking new funds often find themselves
obliged to undertake serious corporate governance reforms
at a high cost and upon the demand of outsiders, often in a
time of crisis. When the foundations are already in place
investors and potential partners will have more confidence
in investing in or expanding the company‟s operations. 72
Benefit of Corporate Governance

▰ The Benefits to Shareholders

▻ Good CG can provide the proper incentives for the
board and management to pursue objectives that are
in the interest of the company and shareholders, as
well as facilitate effective monitoring.
▻ Better CG can also provide Shareholders with
greater security on their investment.
▻ Better CG also ensures that shareholders are
sufficiently informed on decisions concerning
fundamental issues like amendments of statutes or
articles of incorporation, sale of assets, etc.
73
Benefit of Corporate Governance

▰ The Benefits to the National Economy

▻ Empirical evidence and research conducted in recent
years supports the proposition that it pays to have
good CG. It was found out that more than 84% of the
global institutional investors are willing to pay a
premium for the shares of a well-governed company
over one considered poorly governed but with a
comparable financial record.
▻ The adoption of CG principles - as good CG practice
has already shown in other markets - can also play a
role in increasing the corporate value of companies.
74
Corporate Governance

75
Benefit of Corporate Governance

▰ Issues involving corporate governance principles:

▻ internal controls and internal auditors
▻ the independence of the entity's external auditors and the quality
of their audits
▻ oversight and management of risk
▻ oversight of the preparation of the entity's financial statements
▻ review of the compensation arrangements for the chief executive
officer and other senior executives
▻ the resources made available to directors in carrying out their
duties
▻ the way in which individuals are nominated for positions on the
board dividend policy
76
Benefit of Corporate Governance

77
4
Sale of Goods and
Services:
INTERNATIONAL SALES
LAW 78
United Nations Convention
on Contracts for the
International Sale of
Goods (CISG)
79
Introduction: History of the CISG

▰ The CISG is one of the most

successful examples of unification
in the area of international sales
law.
▰ Its legal concepts can be traced to
the historical development of rules
and norms governing international
trade and commerce throughout the
centuries.
80
Introduction: History of the CISG

▰ The latter half of the nineteenth

century witnessed an
internationalist movement Europe,
which sought to create unification
of laws and resolution of conflicts
in domestic commercial law.
▰ The international trade was also
subjected to serious legal
uncertainties.
81
Introduction: History of the CISG

▰ The CISG is a project of the United Nations

Commission on International Trade Law
(UNCITRAL), which in the early 1970s undertook
to create a successor to two substantive
international sales treaties, both of which were
sponsored by the International Institute for the
Unification of Private Law (UNIDROIT):
1. Uniform Law on the International Sale of Goods
(ULIS)
2. Uniform Law on the Formation of Contracts for
the International Sale of Goods (ULF)

82
Introduction: History of the CISG

▰ The Vienna conference of 1980 accepted the draft

prepared by the legal experts by a majority of states
that participated in the conference.

▰ The CISG entered into force in eleven initial

Contracting States on January 1, 1988, and since that
time has steadily and continuously attracted a
diverse group of adherents.

▰ Most Western countries are now signatories to the

CISG.
83
Introduction: History of the CISG

▰ It is the main convention for the International Sale

of Goods.

▰ It is an international set of rules designed to

provide clarity to most international sales
transactions involving the sale of goods.

84
Introduction: History of the CISG

The CISG can be both a discretionary and

mandatory set of rules.
Discretionary Mandatory
Both parties agree to be Parties do not choose to
bound by its rules. use it, but become bound
to it by virtue of its
automatic application.

85
Introduction: History of the CISG

▰ The self-executing treaty aims to reduce obstacles to

international trade, particularly those associated
with choice of law issues, by creating even-handed
and modern substantive rules governing the rights and
obligations of parties to international sales
contracts.

▰ The purpose of the CISG is to make it easier and more

economical to buy and sell raw materials,
commodities, and manufactured goods in international
commerce.
86
Introduction: History of the CISG

▰ Without the Convention, there is greater room for

uncertainty and disputes (the trading law of one
country often differs from that of another).

▰ The CISG does not deprive parties to the contract of

the freedom to form their contracts to their
specifications.

▰ Generally, the parties are free to modify the rules

established by the Convention or to agree that the
Convention is not to apply at all.
87
Salient Features &
General Provisions
88
What are NOT Covered Under the CISG

▰ Sales of consumer goods

▰ Sales of ships, vessels,hovercraft and
aircraft (derived from the prior conventions
(ULIS or the Uniform Law on Intl Sales of Goods
and ULF or the Uniform Law on the Formation of
Contracts
▰ Sales of some intangible rights or claims,
investments securities (stocks, shares),
negotiable instruments, money
▰ Sales of electricity
89
What are NOT Covered Under the CISG

▰ Auction sales
▰ Execution sales
▰ Sales order by government authority
▰ Services contracts
▰ Distribution agreements in their usual form are
not governed by the CISG, although contracts
for the actual order of goods are governed by
CISG. Ex. Agreements like franchising and
marketing contracts
90
Included and Excluded Issues

Included Excluded
▰ Formation of contract 1. Validity of the
(Part II) contract
▰ Rights and Obligations 2. Property or title
of parties to the issues
contract (Part III) 3. Liability for death
or personal injury

91
Minimum Contact
2 Methods Available to Meet the Requirement:
1. Each party has its relevant place of business in a different
contracting state. So it contemplates of sales contracts where the
places of business of the parties are in different states and
either
a. Both states are contracting states; or
b. Only one state is a contracting state and private
international law choice of law rules lead to the
application of the law of a contracting state.
2. The other method of meeting the requirement of sufficient contact
is to have one of the parties have its place of business in a
contracting state, and for that State‟s law to govern the contract
under the normative rules of “private international law” choice of
law doctrines. 92
Party Autonomy
▰ The basic principle of contractual freedom in the international
sale of goods is recognized by the provision that permits the
parties to exclude the application of this Convention or
derogate from or vary the effect of any of its provisions.

▰ The exclusion of the Convention would most often result from the
choice by the parties of the law of a non-contracting State or
of the domestic law of a contracting State to be the law
applicable to the contract.

▰ Derogation from the Convention would occur whenever a provision

in the contract provided a different rule from that found in the
Convention.
93
Interpretation of the Convention

▰ This Convention for the unification of the law governing the

international sale of goods will better fulfill its purpose
if it is interpreted in a consistent manner in all legal
systems. Great care was taken in its preparation to make it
as clear and easy to understand as possible.

▰ Nevertheless, disputes will arise as to its meaning and

application. When this occurs, all parties, including
domestic courts and arbitral tribunals, are admonished to
observe its international character and to promote
uniformity in its application and the observance of good
faith in international trade.

94
Interpretation of the Convention

▰ In particular, when a question concerning a matter

governed by this Convention is not expressly settled
in it, the question is to be settled in conformity
with the general principles on which the Convention is
based. Only in the absence of such principles should
the matter be settled in conformity with the law
applicable by virtue of the rules of private
international law.

95
Interpretation of Contracts: Usages
▰ The Convention contains provisions on the manner in which
statements and conduct of a party are to be interpreted in the
context of the formation of the contract or its implementation.

▰ Usages agreed to by the parties, practices they have established

between themselves, and usages of which the parties knew or ought
to have known and which are widely known to, and regularly
observed by, parties to contracts of the type involved in the
particular trade concerned may all be binding on the parties to
the contract of sale.

▰ The Convention does not subject the contract of sale to any

requirement as to form. In particular, article 11 provides that
no written agreement is necessary for the conclusion of the
contract. 96
Interpretation of Contracts: Usages

▰ However, if the contract is in writing and it contains a

provision requiring any modification or termination by agreement
to be in writing, article 29 provides that the contract may not
be otherwise modified or terminated by agreement.

▰ The only exception is that a party may be precluded by his

conduct from asserting such a provision to the extent that the
other person has relied on that conduct.

▰ In order to accommodate those States whose legislation requires

contracts of sale to be concluded in or evidenced by writing,
article 96 entitles those States to declare that neither article
11 not the exception to article 29 applies where any party to the
contract has his place of business in that State 97
Fundamental
Breach
98
Fundamental Breach
▰ Sometimes known as a “repudiatory breach”

▰ Permits the aggrieved party to terminate performance of the

contract, in addition to entitling that party to sue for
damages.

▰ „Fundamental breach' is defined in article 25 of the

Convention:
“A breach of contract committed by one of the parties is
fundamental if it results in such detriment to the other party
as substantially to deprive him of what he is entitled to
expect under the contract, unless the party in breach did not
foresee and a reasonable person of the same kind in the same
circumstances would not have foreseen such a result” 99
Fundamental Breach

This provision of the convention describes „fundamental

breach' in three ways:
First Second Third
Determined by Definition of Appears to require
looking at the ‘fundamental breach' an ability to
result of the is qualified by the foresee the extent
breach, rather than requirement that the of the detriment
the nature of the detrimental effect flowing from the
term breach. of the breach must breach.
be foreseeable by
the breaching party.
100
Substantial Detriment

▰ There is substantial breach regardless of

whether of it affects the main or ancillary
obligation
▰ detriment does not equal damage, since under
art. 74 CISG the party has a right to claim
damages even if the breach is not fundamental
(or substantial). It appears that the notion of
detriment is much broader than that of damage.

101
Substantial Detriment and Contractual
Expectation
▰ The objective element of substantial
detriment and the subjective element of
contractual expectation are two blended
concepts, since detriment can lead to
fundamental breach if the aggrieved
party has lost interest in receiving
performance.

▰ Case law analysis is important

102
Foreseeability and
Reasonable Standard
103
Foreseeability and Reasonable Standard

▰ Foreseeability element is a filter, which

enables the party in breach to escape from
contract avoidance
▰ Lack of foreseeability of the substantial
detriment is a ground of excuse, and, if
proven, it will prevent the aggrieved party
being entitled to declare the contract avoided.
▰ The burden of proving unforeseeability rests
with the breaching party.

104
Foreseeability and Reasonable Standard

▰ Preferable not only to evaluate whether a

reasonable person of the same kind could
foresee the event, but also to look if business
people of the same trade sector would have
foreseen the event.
▰ The importance of limiting the analysis to a
specific trade sector must be stressed, since
reasonableness standards may considerably
differ from one sector to another.

105
Nachfrist
Notice
106
Nachfrist Notice

▰ A delay in performance does not in itself constitute

a material breach of the contract

▰ Allows a buyer or seller to fix an additional time

for performance beyond that which is specified in the
contract.

▰ The CISG Art. 49(1)(b) allows for avoidance of the contract

even for some non-fundamental breaches. The mechanism in
such cases is of two tiers. First, the aggrieved buyer sets
an additional, curative period of reasonable length for the
seller to perform, a so-called “Nachfrist” period.
107
Nachfrist Notice

▰ Upon the seller's failure to tender curative

performance throughout a Nachfrist period the
aggrieved buyer may avoid the contract.

▰ Thus these non-fundamental breaches are

“upgraded” through the use of the Nachfrist
mechanism to the status of avoidance-justifying
breach.

108
Obligations of
the Seller and
Buyer
109
Obligations of the Seller
1. The general obligations of the seller are to deliver the
goods, hand over any documents relating to them and
transfer the property in the goods, as required by the
contract and this Convention

2. The seller must deliver goods that are of the quantity,

quality and description required by the contract and that
are contained or packaged in the manner required by the
contract.

3. In connection with the seller‟s obligations in regard to

the quality of the goods, the Convention contains
provisions on the buyer‟s obligation to inspect the goods.
110
Obligations of the Buyer

1. They are to pay the price for the goods.

2. Take delivery of them as required by the contract
and the Convention.

▰ The Convention provides supplementary rules for use in

the absence of contractual agreement as to how the
price is to be determined and where and when the buyer
should perform his obligations to pay the price.

111
Rules on Cure and
Risk of Loss
112
Rules on Cure

▰ Early notice by the buyer to the seller of any defects is needed so

the seller can cure the defects. (Quality, quantity of goods or
timeliness of delivery)
▰ Rules depend upon whether the defects were discovered before or
after the contract date for delivery.
▰ If non-conforming tender made before contract date for delivery,
seller has the right to remedy the lack of conformity provided that
the exercise of this right does not cause the buyer unreasonable
inconvenience or unreasonable expense. (art. 37) CURE may be
repair, replacement or making up a shortage in quantity. If seller
cures the non- conformity, seller is still liable to the buyer for any
defects.
113
Rules on Cure

▰ If buyer prohibits the seller from attempting cure, this is a breach of

buyer’s obligations. (Art. 74)
▰ Cure after contract date for delivery (Art. 48) – in addition to not
causing the buyer unreasonable inconvenience or unreasonable
expense, the seller must cure without unreasonable delay.
▰ Can the buyer say no to the cure under CISG? Yes.
▰ If the buyer does so and the seller proceeded to make a
conforming tender, the buyer would not be obligated to accept the
tender. (Art. 48 (2). But if buyer says yes, then it may not seek the
remedy of avoidance.
▰ If buyer says no to the cure he may avoid the contract but must
comply with the requirements under Art. 49.
114
Risk of Loss

▰ Under CISG and domestic law, it is the buyer that bears the risk of
loss to the goods during their transportation by a carrier, unless the
contract says otherwise.
▰ Contract often contains a term which expressly allocates the risk.
▰ If seller uses its own vehicle to transport the goods, seller bears
thee risk of loss until the goods are handed over to an independent
carrier or to the buyer.
▰ Where contract requires seller to deliver the goods to buyer’s
location, or that seller provide part of the transportation and then
“hand over the goods to a carrier or a particular place.

115
Risk of Loss

▰ If goods are not to be transported by a carrier, risk passes

to the buyer when buyer picks them up or if the buyer is late
in doing so, when the goods are “at his disposal”, delay in
picking them up causes the breach.
▰ Title and risk are treated separately, so also breach and risk
are treated separately.
▰ If seller does commit a fundamental breach in a shipment
contract, further damage to the goods during transit will not
deprive buyer of its right to avoid the contract under CISG.
(Art. 49)

116
Contractual
Excuses
117
Contractual Excuses

▰ All legal systems provide relief for someone who despite

good faith intentions is unable to perform.

▰ Doctrine of Impossibility
▻ Requires the contracting party to be objectively
prevented from performing and generally entails the
destruction of the subject matter of the contract.
▰ Doctrine of Frustration.
▻ Performance may still be objectively possible but the
reason for the performance has ceased.

118
Contractual Excuses

▰ Art. 79 of the CISG allows for an excuse if non performance

is due to an impediment that is beyond the control of the
breaching party as was not foreseeable at the time of the
contract formation. The person attempting to exercise such
article must give prompt notice of the impediment to the
other party.

▰ All the excuses doctrines revolve around all or some of the

following parameters:
▻ Unforeseeability
▻ Undue hardship
▻ Beyond the party’s control 119
Force Majeure Clause

▰ Lists the type of events that allow the parties an

excuse out of the contract.

▰ Parties are free to recognize any event as one to be

given force majeure effect.

120
Limitation
Period
121
Limitation Period

▰ Convention on the Limitation Period in the International Sale of

Goods prescribes a four (4) year limitation period for most claims.

▰ Article 22 of the Convention states that the limitation period cannot

be modified through contract; however, it does make an exception
for arbitral proceedings.

▰ Article 9 of the Convention provides that the limitation period

commences on the date that the claim accrues. The date is further
defined in Article 10 as the date when a breach of contract occurs.

122
Limitation Period

▰ The period for a claim of fraud commences on the date which the
fraud was discovered or reasonably could have been discovered.

▰ A limitation period shall in any event expire no later than 10 years

from the date on which it commenced.

▰ The limitation period for warranty claims is 2 years starting from the
date of delivery.

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THANKS!
Any questions?

124