一、Legal Risk Case
1. Case Introduction
On February 10, 2009, a listed companies (A company) signed the "Rail transit Contract" with a country government in Middle East (owner), as agreed by EPC + O/M general contracting mode (i.e., design, procurement, construction,operation and maintenance). According to the contract, A company completed the construction in November of 2010, and began to oeprate and maintain the project for three years and meanwhile achieve the capacity of up to 35%. In May, 2011, A company should complete all debugging, and the project achieve 100% of capacity.
Only concept design being available when signing contract, as a result, A company could not identify accurate quantities. Besides, the owner designated the design to a foreign design company, as also the project technical standard and facility orders, so the foreign control system utilized is very expensive. Therefore, A company could not accurately control the project cost and schedule; after a large scale of construction, owner continuously put forward new functional requirements, leading to a big increase in quantity, which make it difficult to effectively adjust the total project value and construction period, so as to produce a large number of additional cost, causing a huge losses and the actual net loss of this project is more than 4billion yuan in RMB.
This case reveals some serious problems in risk management and control process of central state owned company’s overseas investment:
1）Lacking risk prevention awareness in overseas investment of central state owned company.
When state owned companys going into overseas markets, without familarity with the market, careful market analysis and enough data, the estimated cost is too low in bidding.
When signing the contract with the owner, there is neither comprehensive survey, nor detailed discusssion about the contract details and requirements, and in the contract, both sides of the project did not list detailed quantities, leading to a great quantity increase after construction and losses.
2）Expansion of foreign investment is too fast, without decent management and technical level.
Though A company is general contractor of the rail transit project, the owner subcontracted design and equipment procurement to foreign design company, resulting in the equipment, materials and design, such these key links controled by foreign company in project implementation. Due to the prediction error of human cost, material cost, time schedule and quantities, and a great difficulty in coordinating the complex association team, causing the chaos of entire project management, cost surge and out of control.
3）Insufficient risk assessment for overseas investment and large defects in contract
As a listed company, the investment should be very careful. A company committed dereliction of duty in this project survey and lack sufficient risk assessment.It is also not caution enough when signing contract, so the terms of the contract are flawed.
4）Pay attention to face activities, and ignore business rules.
In its 2009 annual report, A company announced this project as a symbol of cooperation between the two countries, however, they ignored detailed survey procedure of investment, and lacked of due diligence report, the investment argument report, legal risk assessment, etc. After the problems happen, A company did not launch stop measures, but assemble a large number of personnel from the whole system of 15 units, and ultimately suffered a heavy loss.
二、Suggestions for risk prevention
To prevent the relevant risks in overseas investment, after the discussion of Security and Legal Deaprtment, Operation and Planning Department, Mingcheng Law Firm, and Shanggong Law Firm, the suggestions are as following:
1. Duediligence Report
1）Project outlines: Include engineering descriptions, geological surveys, planning requirements, municipal materials, government approval documents, technical standards, and contract mode, etc.
2）Management outlines: investment management regulations of project location, labor regulation, financial regulation and environment protection regulation, etc.
2. Compose project investment argument report
Include: investment scale, fund resource, credit support, tax regulation, foreign currency management, investment feasibility study, cash flow, investment return period, etc.
3. Compose risk assessment report
Include: potical risk, legal risk, technical standard risk, labor risk, safety risk, currency rate risk, religion and folk risk, exis mechanism risk, etc.
4. Stength overseas project contract management
1）Contract signing phase: analyze the potential problem in project management throughly and relocate the risks between each side of contract feasibily; regulate the provisions, the clauses should be in detail, and avoid inconsistence.
2）Contract fulfillment phase: strength the site management; be strict with the engineering quality, safety,schedule and avoid default; emphasize the engineering certificate, to make sure the compliance of the certificate process; keeping the project archives well, to preserve the original evidence for any possible disputes.
3）Contract relief phase: strength the risk prevention, construct the exit mechanism. To make sure the claims on time and conforming to procedures,to prevent owner from suffering loss; pay attention to the claims analysis and material collection.