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Drafting and negotiating third party agreements for major infrastructure projects

A number of project risks, if realised, can cause delays to the delivery and completion of major infrastructure projects. One project risk is the management of interfaces with key third parties, such as the need to carry out project works on land owned by a third party. In our previous article we considered a number of practical strategies that principals can apply to the identification and management of these interfaces.

One powerful tool available to principals is to enter into an interface agreement with the third party. The aim of entering into an interface agreement is to remove risks to delivery of the project that arise from the rights and powers of that third party.

In this article we will consider what a principal delivering a major infrastructure project needs to consider when analysing an interface to determine if an interface agreement is needed and the key issues relevant to drafting and negotiating interface agreements with third parties.

Is an interface agreement necessary?

Before entering into negotiations with a third party it is important for a principal to understand the technical and commercial significance of the interface. It is only with this understanding that a principal can decide whether an interface agreement is needed for project delivery and whether the terms and conditions demanded by the third party are proportional to the benefits provided by the agreement.

The importance of an interface to project delivery can vary widely. At one end of the spectrum are situations where the principal has all the legal rights and powers it needs to deliver a project, but would like to establish and maintain a good relationship with a third party. At the other end are situations where the third party controls a key element of the project, such that the project cannot be delivered without their co-operation. In the former case, an interface agreement is a ‘nice to have’ but not essential to delivery of the project. In the latter, an agreement is essential to delivering the project as planned.

We will outline below the key issues that determine the importance of an interface to project delivery. While each project and each interface are different, the two key technical issues to consider are:

  • the works that will be the subject of the interface agreement and how a delay to delivery of the works would impact the construction program
  • the legal rights held by the third party.

Understanding these issues is necessary to assess the commercial importance of the interface and identify the key issues for negotiation.

Analysing the interface in relation to the construction program

As noted above, the primary reason for entering into an interface agreement is to remove risks to project delivery. Therefore, principals should consider how the interface works fit in to the construction program and whether a delay to carrying out those works will cause a delay to completion of the project overall.

Consider the following questions when analysing the nature of the works that will be subject to the interface agreement.

  • Are the works on the critical path (such that a delay to the interface works will delay completion of the whole project) or can they be completed separately without jeopardising the completion date for the project? For example, construction of a pedestrian bridge over a road adjacent to a new railway station, constructed as part of the project, may not be necessary to commence operations but will improve the customer experience and public safety outcomes for the project.
  • Will the principal be constructing permanent works or will the works only be in place during the construction phase? This influences both the level of impact on the third party and the importance of the works to the operation phase (and therefore completion) of the project.
  • Are the works going to be used for the project or handed over to the third party? If the works will be handed over to a third party, the project may be able to move into the operations phase without the works being completed. In other cases, such as utility relocations, handing over completed works to the third party is a pre-requisite for carrying out the main project works.

The importance of the rights of the third party

The second key consideration is the nature of the legal right of the third party as this will form the landscape for the negotiation. To illustrate how this is relevant, consider the contrast between the situation where the principal needs to access land owned by a third party against the situation where the principal needs to obtain a statutory consent in order to carry out the project.

If the third party is the owner of land that the principal needs to access, build on or alter for the purposes of the project, the third party is generally entitled to consider their own commercial interests when negotiating an interface agreement. If the principal has compulsory acquisition powers, exercise of these powers can be a viable alternative approach if negotiations fail.

By contrast, if the third party has a statutory consent or approval role (as is the case with roads authorities for alterations to roads or local councils for the erection of hoardings), the third party must act in the public interest and otherwise comply with the principles of administrative law (such as the requirement to act reasonably) when granting that consent. It is unlikely the principal will have a viable alternative to obtaining that statutory consent or approval.

Commercial importance of the interface

The commercial importance of an interface flows from consideration of the nature of the works and the rights of the third party described above. Some of the commercial considerations that commonly apply to interfaces are set out below.

Consider the costs to the project likely to result from delay to completion of the interface works.

  • If the works the subject of the interface are on the critical path so they delay the whole project, the commercial consequence of a delay to those works can vary based on the project delivery model being used. In a Public Private Partnership, which involves by definition the provision of finance at commercial rates, a delay to completion can result in a proponent incurring significant costs that are not present for a contractor under a standard design and construct contract.
  • If the remainder of the project can proceed without the interface works being completed on time, this may still result in additional costs to adapt the construction program.

Consider whether the principal will ask the contractor or proponent to bear the risk of delays arising from third party interfaces. The general rule is this risk is assumed by the contractor or proponent as the party in the best position to control the risk. However, principals should consider if for any reason the principal is in a better position to manage the risk, whether the risk is one the contractor or proponent is likely to accept, and at what cost. Consider whether risk sharing arrangements in the contract would result in cost savings or help to reach agreement with the proponent or contractor.

Key issues for negotiation

Once a principal understands all of the elements of an interface, the potential impact in terms of cost and delay to the project are known and this forms the background for the drafting and negotiation of the agreement. The drafting needs to focus on what the principal needs from the third party in order to deliver the project (such as access to land or a statutory consent). In order to successfully negotiate the agreement, it is important to know what rights the principal can do without in the agreement and, crucially, what rights are essential for delivery and how much the principal is prepared to offer the third party to secure those rights.

The aim of an interface agreement is to remove risks to delivery of the project posed by the rights and powers of third parties. The most effective way to do this is to maximise the alignment of an interface agreement with project objectives and other project documents. While each interface is different, the following alignment issues are common to many interface agreements.

  • Design review procedure: the procedure for the third party to review designs should align as far as possible with the design review procedure for the design of the remainder of the project works in the main contract. In order to eliminate risks to delays in review and approval of designs, consider imposing time frames for response, specifying the basis for objections by the third party and, where appropriate, provide for the participation of an independent certifier.
  • Completion procedure: if the third party will have a role in completion of the works, the procedures in the third party agreement should align as far as possible with the completion procedures in the main contract. The objective is for the interface works to proceed to completion on the same timetable as the remaining project works. The third party’s conditions for reaching completion should be clearly stated and be based on objective criteria. Avoid any requirements that works should be completed to the third party’s ‘reasonable satisfaction’ which can allow a third party to introduce new requirements after an agreement is signed.
  • Provision of services by the third party: if the Principal needs any services provided by the third party to facilitate design or construction (e.g. design review, presence of inspectors at crucial stages of construction), these should be identified in the agreement with arrangements for provision of those services (including timing and payment).
  • Statutory approvals and other processes: wherever possible, the processes and procedures in the interface agreement should satisfy any relevant statutory requirements (e.g. satisfaction of specified planning approval conditions, approval to commence construction under the agreement is deemed approval under an Act). This should be clearly acknowledged in the agreement.

Please get in touch with one of our Construction & Projects team members if you would like to discuss interfaces with third parties or interface agreements in further detail.

AUTHOR 
Catherine Baxter | Special Counsel
T +61 2 9291 6234
E catherine.baxter@maddocks.com.au

A number of project risks, if realised, can cause delays to the delivery and completion of major infrastructure projects. One project risk is the management of interfaces with key third parties, such as the need to carry out project works on land owned by a third party. In our previous article we considered a number of practical strategies that principals can apply to the identification and management of these interfaces.

One powerful tool available to principals is to enter into an interface agreement with the third party. The aim of entering into an interface agreement is to remove risks to delivery of the project that arise from the rights and powers of that third party.

In this article we will consider what a principal delivering a major infrastructure project needs to consider when analysing an interface to determine if an interface agreement is needed and the key issues relevant to drafting and negotiating interface agreements with third parties.

Is an interface agreement necessary?

Before entering into negotiations with a third party it is important for a principal to understand the technical and commercial significance of the interface. It is only with this understanding that a principal can decide whether an interface agreement is needed for project delivery and whether the terms and conditions demanded by the third party are proportional to the benefits provided by the agreement.

The importance of an interface to project delivery can vary widely. At one end of the spectrum are situations where the principal has all the legal rights and powers it needs to deliver a project, but would like to establish and maintain a good relationship with a third party. At the other end are situations where the third party controls a key element of the project, such that the project cannot be delivered without their co-operation. In the former case, an interface agreement is a ‘nice to have’ but not essential to delivery of the project. In the latter, an agreement is essential to delivering the project as planned.

We will outline below the key issues that determine the importance of an interface to project delivery. While each project and each interface are different, the two key technical issues to consider are:

  • the works that will be the subject of the interface agreement and how a delay to delivery of the works would impact the construction program
  • the legal rights held by the third party.

Understanding these issues is necessary to assess the commercial importance of the interface and identify the key issues for negotiation.

Analysing the interface in relation to the construction program

As noted above, the primary reason for entering into an interface agreement is to remove risks to project delivery. Therefore, principals should consider how the interface works fit in to the construction program and whether a delay to carrying out those works will cause a delay to completion of the project overall.

Consider the following questions when analysing the nature of the works that will be subject to the interface agreement.

  • Are the works on the critical path (such that a delay to the interface works will delay completion of the whole project) or can they be completed separately without jeopardising the completion date for the project? For example, construction of a pedestrian bridge over a road adjacent to a new railway station, constructed as part of the project, may not be necessary to commence operations but will improve the customer experience and public safety outcomes for the project.
  • Will the principal be constructing permanent works or will the works only be in place during the construction phase? This influences both the level of impact on the third party and the importance of the works to the operation phase (and therefore completion) of the project.
  • Are the works going to be used for the project or handed over to the third party? If the works will be handed over to a third party, the project may be able to move into the operations phase without the works being completed. In other cases, such as utility relocations, handing over completed works to the third party is a pre-requisite for carrying out the main project works.

The importance of the rights of the third party

The second key consideration is the nature of the legal right of the third party as this will form the landscape for the negotiation. To illustrate how this is relevant, consider the contrast between the situation where the principal needs to access land owned by a third party against the situation where the principal needs to obtain a statutory consent in order to carry out the project.

If the third party is the owner of land that the principal needs to access, build on or alter for the purposes of the project, the third party is generally entitled to consider their own commercial interests when negotiating an interface agreement. If the principal has compulsory acquisition powers, exercise of these powers can be a viable alternative approach if negotiations fail.

By contrast, if the third party has a statutory consent or approval role (as is the case with roads authorities for alterations to roads or local councils for the erection of hoardings), the third party must act in the public interest and otherwise comply with the principles of administrative law (such as the requirement to act reasonably) when granting that consent. It is unlikely the principal will have a viable alternative to obtaining that statutory consent or approval.

Commercial importance of the interface

The commercial importance of an interface flows from consideration of the nature of the works and the rights of the third party described above. Some of the commercial considerations that commonly apply to interfaces are set out below.

Consider the costs to the project likely to result from delay to completion of the interface works.

  • If the works the subject of the interface are on the critical path so they delay the whole project, the commercial consequence of a delay to those works can vary based on the project delivery model being used. In a Public Private Partnership, which involves by definition the provision of finance at commercial rates, a delay to completion can result in a proponent incurring significant costs that are not present for a contractor under a standard design and construct contract.
  • If the remainder of the project can proceed without the interface works being completed on time, this may still result in additional costs to adapt the construction program.

Consider whether the principal will ask the contractor or proponent to bear the risk of delays arising from third party interfaces. The general rule is this risk is assumed by the contractor or proponent as the party in the best position to control the risk. However, principals should consider if for any reason the principal is in a better position to manage the risk, whether the risk is one the contractor or proponent is likely to accept, and at what cost. Consider whether risk sharing arrangements in the contract would result in cost savings or help to reach agreement with the proponent or contractor.

Key issues for negotiation

Once a principal understands all of the elements of an interface, the potential impact in terms of cost and delay to the project are known and this forms the background for the drafting and negotiation of the agreement. The drafting needs to focus on what the principal needs from the third party in order to deliver the project (such as access to land or a statutory consent). In order to successfully negotiate the agreement, it is important to know what rights the principal can do without in the agreement and, crucially, what rights are essential for delivery and how much the principal is prepared to offer the third party to secure those rights.

The aim of an interface agreement is to remove risks to delivery of the project posed by the rights and powers of third parties. The most effective way to do this is to maximise the alignment of an interface agreement with project objectives and other project documents. While each interface is different, the following alignment issues are common to many interface agreements.

  • Design review procedure: the procedure for the third party to review designs should align as far as possible with the design review procedure for the design of the remainder of the project works in the main contract. In order to eliminate risks to delays in review and approval of designs, consider imposing time frames for response, specifying the basis for objections by the third party and, where appropriate, provide for the participation of an independent certifier.
  • Completion procedure: if the third party will have a role in completion of the works, the procedures in the third party agreement should align as far as possible with the completion procedures in the main contract. The objective is for the interface works to proceed to completion on the same timetable as the remaining project works. The third party’s conditions for reaching completion should be clearly stated and be based on objective criteria. Avoid any requirements that works should be completed to the third party’s ‘reasonable satisfaction’ which can allow a third party to introduce new requirements after an agreement is signed.
  • Provision of services by the third party: if the Principal needs any services provided by the third party to facilitate design or construction (e.g. design review, presence of inspectors at crucial stages of construction), these should be identified in the agreement with arrangements for provision of those services (including timing and payment).
  • Statutory approvals and other processes: wherever possible, the processes and procedures in the interface agreement should satisfy any relevant statutory requirements (e.g. satisfaction of specified planning approval conditions, approval to commence construction under the agreement is deemed approval under an Act). This should be clearly acknowledged in the agreement.

Please get in touch with one of our Construction & Projects team members if you would like to discuss interfaces with third parties or interface agreements in further detail.

AUTHOR 
Catherine Baxter | Special Counsel
T +61 2 9291 6234
E catherine.baxter@maddocks.com.au