The Palm Leaf Shopping Mall

Christopher Miers

General Information

The Palm Leaf Shopping Mall (“the Mall”) is under construction in Mondolia. This is a prestige project in the capital and is due to be opened by the President on 1 October next year, a particularly auspicious day in the Mondolian calendar.

The contractor is an international joint venture consortium, Ganamos S.A. (“Ganamos”) and the employer is the Mondolian Government (“the Government”). There is an Engineer appointed by the Government to administer the contract on site and who is deemed to act for the Government.

The contract requires Ganamos to design and construct the Mall (“the Works”) and to complete the Works by 1 May next year. The fitting-out of the stores for tenants by their chosen contractors is to follow on, all of which is to be completed by 16 September next year. There is a final two-week period for contingencies, stocking and staff training.

The Mall comprises 90,000m² of total floor area, of which 65,000m² is commercial lettable space. The Government has already let approximately 50,000m² of the Mall to major retailers including Investex and RetailRus as anchor tenants who are taking 24,000m² and 12,000m² of space respectively.

The Works ran largely to programme. However the Government introduced a change to the fire suppression system requirements within the atrium areas that required additional works and acceleration measures by Ganamos to maintain the programme. The value of this variation to the contract is disputed; the Engineer certified a value of US$1 million for the variation works, which amount has since been paid by the government to Ganamos. Ganamos has claimed a further US$800,000 in addition.

Ganamos is now in the completion stages of the Works and has been commissioning the mechanical and electrical services, while it also completes the internal finishes and the external landscaping. The commissioning includes the testing of the three imported chillers providing the cooling system to the air conditioning.

Under testing two of the chillers failed to meet the contract performance requirements. Ganamos arranged for these two chillers to be partially stripped down and discovered that the refrigerant was contaminated, and that this has caused damage. Replacement specialist parts and refrigerant are necessary which have to be ordered from abroad. The order would normally be expected to take 14 weeks from the date of order to arrive on site, including delivery to Mondolia, clearing customs and transport to the site.

However, during the construction period the President of Mondolia was indicted by the International Criminal Court and this has led to the imposition of international trade sanctions which restrict imports. As a consequence, says Ganamos, they have had to find an alternative means for procuring the replacement parts and refrigerant. The earliest date these will be on site is 1 June next year, following which they require a further four weeks to install them and to complete the commissioning.

The contract provides for liquidated damages to be paid by Ganamos to the Government at the rate of US$18,000 per calendar day for every day that the Works are incomplete after 1 May next year. Ganamos also have site and head office overhead costs of US$16,500 per day. The Engineer has written to Ganamos saying that the failure of the chillers is Ganamos’s responsibility and that the Government will require payment of the liquidated damages due under the terms of the contract if, as expected, Ganamos fails to hand over the project on 1 May next year. Ganamos responded by letter disputing the Engineer’s assessment, asserting that the delay is attributable to the unforeseeable international trade sanctions, for which Ganamos cannot be held responsible, and stating that it will require reimbursement of its additional site and head office overhead costs for all time that it spends on site beyond 1 May next year. The Engineer has rejected these claims.

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The tenants are expecting to have access to commence their shop interior fitting-out (the “fit-out contracts”) from 2 May next year. The Government has informed Ganamos that under its agreements with the tenants, if the Government fails to deliver the stores to the tenants by 1 June next year the tenants will have the right to terminate their tenancy agreements or be paid compensation at the rate of US$1 per m2 of space per calendar day of delay. Any loss of the anchor tenants could prove disastrous for the development and also provide negative publicity for the President and the Government.

The contract provides for “All disputes arising out of, or in connection with, the contract to be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.” However, both parties recognize that arbitration will not address the immediate issue of project completion, and that any financial resolution might take years to achieve. On the recommendation of their legal advisers, Ganamos and the Government have agreed to attempt to resolve the dispute by mediation under the ICC Mediation Rules. The parties have agreed that Ganamos’s Managing Director will meet with the Government’s Deputy Head of Procurement in Paris, with their legal representatives present. Ganamos is the Requesting Party. Both parties have full settlement authority.

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The Palm Leaf Shopping Mall

Christopher Miers

Confidential Information for Ganamos

Requesting Party

The Ganamos joint venture partners consider this to be an important project, giving them a foothold in Mondolia and the region from which they can be considered for tendering on other projects. The region is forecast to achieve high annual growth when compared with the existing market areas in which the Ganamos partners operate where growth is flat and profit margins low.

Due to its own problems during construction, Ganamos is forecasting the project to make only a nominal profit. The variation regarding the fire suppression system to the atrium remains an issue, although internally Ganamos recognizes that the US$800,000 additional claim is inflated; Ganamos would be satisfied with a figure of US$550,000 but was seeking the higher sum to assist in partly restoring the profitability of the project.

Ganamos expects to complete the interior finishes and the external landscaping on time, and considers that the project could be handed over to the Government on 1 May next year without the chillers functioning, to allow the store fitting-out work to be commenced while Ganamos would continue to complete the repairs to the chillers followed by the commissioning. This would allow Ganamos to reduce its site and head-office overheads for the remaining period on site to approximately US$7,000 per day. However in order to create reasonable indoor working conditions for the fit-out contractors, some form of cooling would still have to be provided and the Ganamos mechanical and electrical services partner has proposed an option for Ganamos to install a temporary chiller unit locally procured which could provide a limited supply. It could be operational by around 14 April next year. This will give some cooling, but not sufficient for the operation of the Mall once opened. The temporary chiller and associated works will cost US$350,000. Ganamos considers this work, if carried out, would be a variation to the contract since in Ganamos’s view the principal benefit is to assist in overcoming the delay that Ganamos says is due to the effect of the unforeseeable international trade sanctions. Ganamos therefore considers that the cost should be paid by the Government, although it might concede to share the cost.

Additionally Ganamos would like the Government to agree to pay at least US$550,000 of the disputed additional US$800,000 for the variation regarding the fire suppression system to the atrium, and to pay for the costs of any prolonged period it needs to be on site beyond 1 May next year.

Ganamos would also like to have the opportunity to undertake some of the tenant fit-out contracts. This would take advantage of its workforce on site, and Ganamos thinks it could offer a price advantage over other outside contractors since it has fewer additional costs for bringing in and then repatriating specialist labour. Clearly the selection of contractors for the fit-out contracts is not a matter over which the Government has any control but Ganamos thinks the Government could introduce it to the various tenants and recommend it. While the major fit-out contracts of the two anchor tenants may already be let, there may be many smaller retail outlet fit-out contracts that Ganamos could undertake.

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The Palm Leaf Shopping Mall

Christopher Miers

Confidential Information for Government

Responding Party

There is significant political and personal investment in this project. You are the Government’s Deputy Head of Procurement and you have your personal reputation on the line to meet the date for the President’s opening.

The Mall is an important prestige project and its opening by the President will be given a high profile with media coverage. It is essential that the opening is achieved on time and that the Mall is promoted as a success.

Your Government procurement department has reported suspicions and concerns that some tenants may wish to avoid their tenancy agreements if given an excuse, due to their difficulties arising from the international economic downturn. The recent reductions in forecasts of growth in Mondolia and the publication of reduced high-street spending figures also reinforce this concern. Your team also reported hearing that Investex was in disagreement with its normal fit-out contractor over the price of its fit-out works for the Mall and may need to find another fit-out contractor at short notice.

In your discussions with the anchor tenants for the Mall you have been informed that if the site were handed over to them late, they may nevertheless be able to accelerate their fit-out works to reduce the time required on site and still achieve the planned opening date, but this will add to their fit out costs due to 24-hour working. If they are required to accelerate, the anchor tenants have indicated that they would want to be reimbursed for these additional costs by the Government. You consider that since Ganamos is responsible for the delay, Ganamos will have to pay this additional cost if it arises, which you estimate at US$15,000 per day of delay in total for the two anchor tenants, and a further US$6,000 per day for the other tenants in total.

You do not want to get into discussion about Ganamos’s claim for an additional US$800,000 beyond what has been certified and paid for the change to the fire suppression system. The amount paid was on the basis of the Engineer’s valuation and it is a matter for the Engineer if the figure is to be increased. However if it is critical to reaching agreement on the other matters you will consider a further payment up to an additional US$550,000.

The Government is also considering a new project to expand the airport and Ganamos may have the capability to undertake this and could be added to the Government’s tender list, but before any such discussion with Ganamos you would need to be reassured about their commitment to complete the Mall to allow the opening date to be met. You may also put Ganamos in contact with Investex regarding Investex’s need for a new fit-out contractor.

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The Palm Leaf Shopping Mall

Colin J Wall

Case Analysis

This is a fairly straightforward construction dispute, involving two disputed items, being the true cost of the variation relating to the fire suppression system requirements within the atrium area of the shopping mall and a delay in obtaining spare parts for the defective chillers, given the international trade sanctions imposed by the International Criminal Court on imports into Mondolia. The Engineer has produced a lower valuation on the variation than Ganamos wishes to be paid (although Ganamos has inflated its claim) and has rejected the delay claim in obtaining spare parts for the chillers and the effect of sanctions on the delivery period.

This reflects a common situation in many international construction contracts where the Engineer is perceived not to be fully independent. Ideally, the Engineer as a certifier of time and money issues should have an independent quasi-judicial role between the contracting parties. However, in reality the Engineer is often an agent of the party commissioning the construction, as fees are paid by one party alone. In this specific case, the Engineer has been appointed by the Government to administer the contract and is deemed to act for the Government. The Engineer is therefore not independent and that fact alone causes distrust and confrontational claims. A much better arrangement would have been to employ a properly independent Dispute Review Board under the ICC Dispute Board Rules. Fortunately, the disputes in this mediation are being handled directly by the Government, which is prepared in this case to overrule the Engineer’s valuation of the variation for fire suppression system requirements to the atrium, in the interests of reaching an overall settlement.

Ganamos, realizing the seriousness of the situation, and in order to mitigate losses caused by the delay to obtaining the spare parts for the chiller, has sensibly found a temporary chiller, which will, with the one working chiller, provide sufficient cooling for the fitting-out works to be completed. Ganamos naturally wants to be paid for this mitigation measure, which will cost US$350,000.

The Government’s representative, the Deputy Head of Procurement, is desperate to reach a deal with Ganamos, not only because his/her reputation is on the line but also because any delay to the opening will cause embarrassment and incur substantial compensation costs that the Government must pay to the retail tenants. A quick calculation of the costs associated with a one-month delay from 1 May to 1 June shows that the Government will have to pay the tenants compensation of US$1.5 million (being US$1 per m2 x 50,000m2 x 30 days), whereas, the Government could only collect a total in liquidated damages from Ganamos of US$960,000 (being US$18,000 per day x 30 days). In addition, Ganamos would claim site and head-office overhead costs of US$16,200 per day. It therefore makes economic sense for the Government to make a deal with Ganamos to complete the project on time. If Ganamos makes any settlement conditional on resolving the second claim relating to the fire suppression system, the parties should easily be able settle this dispute as they both have the same settlement sum.

In this particular case it is vitality important for each party to be aware in advance of the financial consequences of taking a particular course of action and, if necessary, to remind the other party of their financial consequences.

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The Palm Leaf Shopping Mall

Greg Bond

Commentary for Training

Looking to the Future

Solutions-focused work looks forward to what can be done, rather than back what has gone wrong so far. The problems to be resolved can be noted and listed, and then the focus can be entirely on how to go about resolving them and what resources are available or would be needed to solve them. This jump to the future might work well in this case.

First, the mediator can ask the parties to list their respective financial claims against each other, and to note what the claims are for. At this point, discussion and argument concerning the merits would not be necessary and the mediator could explain why it should be deferred. Next the parties’ further non-monetary interests can be collected — completion of the mall, retention of the anchor tenants, new fitting-out contracts, etc. Then the parties can look to where the resources might be found for getting these problems solved and the work done. They have a good chance of clearly seeing that they each have the resources themselves that they and the other party need: in terms of expertise and capacity to do work, setting off of money claims against each other’s claims or work to be done, new contracts to offer, or contacts that can be made. Alternatively, the mediator can ask the parties to consider which of these resources can be attained from third parties. The reason why a focus on solutions and resources makes sense here is that there is a deadline to get the Palm Leaf Shopping Mall finished, and both parties have a major interest in getting the job done.

The difficulty may be that the parties are not able or not (yet) willing to work together on the future, and particularly on new contracts and contacts, as long as they fear that current claims will hold them up. It may therefore be easier to discuss the broader solutions in caucus first, as a way of moving beyond the immediate disputed payments and non-payments. One method a trainer might like to try is co-mediation. The mediation could begin in joint session with two mediators, then split into two separate simultaneous caucuses in which the mediators encourage a solutions-focused analysis that the parties can undertake in confidence and with the assistance of a mediator. The mediators can then take a break and exchange notes. If, as is likely, both parties have been able to look forward to solutions that require their mutual resources, then the mediators can ask the parties how much of this they are willing to bring back into joint session. If the parties have identified resources from third parties, then the mediators can work out with the parties what still needs to be discussed and decided in the present mediation. Debriefing after the role-play can look at the benefits and risks of this application of co-mediation, as well as at the usefulness of a purely solutions-focused approach.

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