How to prepare for the inevitability of contractual disputes and project delays

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This is not an unlikely hypothetical. It's a worst-case scenario that plays out too often in large energy infrastructure projects across Africa.

Disputes in these projects are not rare exceptions, they are structural risks. In a sector where timelines are long, stakeholders are many and public interest is high, effective dispute resolution isn't just good legal planning; it's vital to a project's success.

Central to the United Nations’ 2030 Agenda for Sustainable Development are its 17 Sustainable Development Goals, with Goal 7 focused on providing affordable, reliable, sustainable, and modern energy for all.

Effects on long-term bankability and sustainability

From an African perspective, Goal 7’s focus on energy provision is particularly relevant on a continent where around 600 million people lacked access to energy in 2022. Access to energy goes beyond electricity, it is a necessity for societal and economic development.

While the need for energy infrastructure is clear, creating an enabling environment for such projects remains a challenge. Adding to this complexity is the time it takes to complete these projects, often years or even decades.

These conditions embed infrastructure development with inherent risk, making contractual disputes inevitable. Like the structures themselves, large energy projects are intricate and composed of hundreds of moving parts, making them highly sensitive to disruption.

How disputes are resolved has a significant bearing on an energy project’s long-term bankability and sustainability. Work stoppages are the least desirable outcome for all parties.

Causes of disputes in energy infrastructure projects

Large energy infrastructure projects across Africa, like all complex, long-term undertakings, face a range of challenges that routinely give rise to disputes.

These challenges include:

• Regulatory and licensing changes within a jurisdiction
  
• Misalignment between regulatory frameworks and the complexities of operating across borders
  
• Procurement delays, irregularities or fraud
  
• Labour disputes and industrial action
  
• Security risks, including terrorism and local criminal activity
  
• Social unrest and political volatility
  
• Currency fluctuations and shifts in financing conditions
  
• And critically, actual or alleged breaches of contract, often arising relating to scope changes, performance delays, non-compliance or disputes over interpretation

Overlaying all of this is the fact that each jurisdiction has its legal system, rules of contract interpretation, enforcement norms and dispute resolution mechanisms. These localised differences form the legal risk landscape within which energy infrastructure projects must operate.

Just as thinking is evolving around the use of force majeure in climate change-related events, operators in the energy infrastructure space are entering the contracting phase with dispute resolution firmly in mind.

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The challenges of resolving disputes through courts

One key reason why operators in the energy sector focus intently on dispute resolution is the limited effectiveness of court-based processes.

Take this example: A company constructs a wind farm on Mozambique’s coast and requires access to the local electricity grid. The grid owner refuses to provide the facility handover, alleging that the wind farm company has failed to meet contractual obligations.

There is no agreement to arbitrate, so the matter must go through the local courts. However, court systems across the continent face significant challenges. In South Africa, for instance, it can take two to three years to secure a trial date after the matter is ready. Judgment may take several additional months, and appeals can extend the process even further.

As a firm operating across multiple African jurisdictions, we have seen disputes take over a decade to resolve. Fair outcomes are also not guaranteed, with judges often under administrative and political pressure. These disputes in large infrastructure projects are highly technical, and judges may lack subject-matter expertise.

Returning to our example, if the wind farm supplies power to both Mozambique and Zambia, the cross-border nature of the project may force the disputing parties to launch a separate legal process in a different jurisdiction, with findings in one jurisdiction not necessarily enforceable in the other.

For these reasons, depending on the circumstances, we will often advise our clients to stay away from using courts to resolve disputes and rather focus on agreeing to resolve a dispute through arbitration or, more specifically, where there is a cross-border element, international arbitration.

Arbitration allows for nuanced dispute resolution, where attention to detail is crucial

The ideal time to agree to arbitration is during the project’s contracting phase. Arbitration offers several advantages to resolve disputes, including:

• The selection of a neutral ‘home’ for the arbitration, as well as a well-recognised arbitral institute, such as the Arbitration Foundation of Southern Africa, the London Court of International Arbitration or the ICC Court of Arbitration.
  
• Arbitrators can be selected based on expertise, without prejudice.
  
• Cross-border complexity is built into the arbitration process, with superior enforcement mechanisms.
  
• Arbitration is significantly faster and more cost-effective; disputes can be resolved in months, instead of years.

That said, it is crucial that dispute resolution clauses in an energy infrastructure contract or any large project are drafted specifically for the project at hand. Generic or ‘copy-paste’ clauses can cause more problems than they solve.

We have seen projects disrupted by ill-fitting dispute clauses. Clients frequently tell us they wish they had paid more attention upfront. Ultimately, your dispute clause must account for every identifiable risk and create mechanisms to respond to each scenario.

Equally important is ensuring consistency across all project-related contracts. Dispute resolution clauses must be aligned across stakeholders to avoid conflicting processes. This requires oversight and coordination, something specialists and legal advisors are well-positioned to offer.

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Invest in prevention, not repair

Disputes are inevitable, but project failure isn't. The most successful projects are those that invest in risk mitigation early, with arbitration tailored to the project’s specific needs. Disputes lawyers don’t want to be your grudge purchase. If you listen now, you might avoid needing our services later. In the energy and infrastructure sector, this could mean helping to secure a stronger return on your investment.