Before you “assume” try this crazy method called “asking”
By David Murray, Director
In December 1998 I left Singapore after 4 years as a Contracts Manager with a local Singaporean Infrastructure Contractor to work for a Japanese Infrastructure Contractor in the Philippines, initially in Manila and then predominately in Northern Luzon in Dagupan City.
The project was to deliver flood protection across the region and was a combination of river straightening, erosion protection and civil works including bridges and road elevation. This was a JBIC (Japan Bank for International Cooperation) funded initiative, which provided loans to the National Government for 97.5% of the project subject to the project being Japanese run. A British contracts manager was deemed necessary as the same contractor had suffered a considerable financial loss on a previous JBIC Project because of a failure to comply with the requirements of the contract in relation to provision of notices and demonstration of entitlement.
The project brought significant benefit to the region not only in respect of the infrastructure that would improve people’s lives but also in the number of jobs and local expenditure required to deliver that infrastructure.
The direct Project team comprised Japanese project management and lead engineers, a British contracts manager and Filipino admin staff, project support services, engineers, foremen and supervisors. The Project was popular, the local population and government were immensely supportive and, all things considered the project was going well but it soon became apparent extremely slowly. As the project was spread over 200 km of river it took a while for the Contractor to realise that progress was dragging partially because if there were no Japanese Engineers present at a location there was a lot more card playing than construction work being done, presence on site was ramped up in response. It was also discovered that multiple works packages had been let to three local companies that were actually the same company with three different company names and one set of plant. Multiple work packages that were concurrent were being delivered on arbitrary rotating basis resulting in far less productivity than anticipated.
The initial project set up called for quantum calculations related to Subcontract Payments to be managed by local site engineers with sign off by lead engineers at the head office. It transpired the Subcontractor had been overpaid for works undertaken. The cause is not necessarily pertinent to this narrative, but payment responsibilities were substantially restructured from that point on the Project.
The Contractor wanted the problem solved and the overpayment recovered but did not want to get into a major dispute with a local company as it was not going to be a good look for the Project and the company owner carried some local political weight.
My experience in Singapore and the surrounding countries had taught me that aside from a few cultural differences construction was pretty much the same everywhere. I was wrong.
An attempt at an amicable solution was not successful. The Subcontractor was not willing to procure additional plant unless he was paid more, he did not agree that he had been overpaid to date, didn’t see what the problem was with how he had represented his company at Tender, he was also submitting a claim for prolongation costs as the works were for some reason taking significantly longer than expected. The Contractor decided enough was enough, they wanted the Subcontractor off the Site and to recover the overpayment but still did not want a dispute.
The form of contract was a heavily modified FIDC, the Contractor was relying on bespoke downstream arrangements that sought to pass risk through to the Subcontractors. After a review of the inherited downstream documents I advised the Contractor to terminate for convenience, which entitled the Subcontractor to be paid for works completed up to termination. No additional payment would be due. In accordance with the contract the Subcontractor had provided ‘unconditional on demand’ bank guarantees from a local bank in Dagupan City, the combined value of which was not quite the amount of the overpayment but represented a significant proportion of the monies over paid.
I had plenty of experience with ‘unconditional on demand’ Bank Guarantees during my time in Singapore and the wording provided was a flow down from the FIDIC contract and almost identical to what I had been used to seeing elsewhere.
Parallel with letters of termination being issued to the Subcontractor I attended the head office of the local bank with the Contractor’s Finance Manager. We were ushered into the manager’s office where we explained the reason for our visit and requested that the Guarantees be paid out to the Contractor as beneficiary, as required ‘on demand’.
The manager declined. He respectfully noted that his customer would be most upset if he was to release money to the Contractor. He proposed we call his customer, the Subcontractor to see if he would agree to the bank paying the Contractor. When pressed on the nature of ‘unconditional on demand’ Guarantees he suggested that we had misunderstood the term and that the Guarantees could only be paid on the demand of the customer. Asked to consider the fact that the express wording of the Guarantee was counter to his interpretation he suggested we did not understand how the Philippines worked generally or legally and that there was no legal precedent for ‘unconditional on demand’ bank guarantees. After some explicit threats were made against the Contactor generally and the meeting attendees individually, we decided to leave with uncashed guarantees in hand.
It struck me that my experience was limited to Commonwealth Law jurisdictions and maybe I should seek some advice on the realities of the Philippines Civil Code.
Advice from an international law firm with offices in Manila was that ‘unconditional on demand’ Guarantees are enforceable in the Philippines and that the Contractor was entitled to demand payment under those guarantees. The Contractor could sue the bank and would likely win. That process would be expected to take roughly 12 years. The bank would of course appeal and would not be required to make any payment pending outcome of that appeal in a further 12 years. I was assured though that the Contractor would most likely be successful and receive payment plus interest and costs in roughly 25 years’ time.
Lessons learned included ensuring all security was taken as cash retention or, if the amounts were substantial by Guarantee from a local branch of an international bank backed by a parent company guarantee.
Also never make assumptions and it usually pays to check with an expert.