Estimating Construction Delay Damages in International Arbitration

The Situation

In 2015, an international construction company (“Claimant”) initiated an arbitration against an energy and infrastructure conglomerate (“Respondent”) that had executed an engineering, procurement, and construction (EPC) contract to build a hydroelectric power plant on a turnkey and fixed-price basis. The Claimant fell behind schedule in the construction of the hydroelectric plant, and ultimately delivered it after the contractually guaranteed delivery date. The Claimant alleged that delays were due to misinformation from the Respondent and to events beyond its control. Accordingly, the Claimant asked the tribunal to approve change orders that would grant a time extension and provide compensation. The Respondent asked the tribunal to reject the Claimant’s requests and order the Claimant to pay the liquidated damages (LDs) specified in the EPC contract. The Claimant asked the tribunal to relieve it of its LDs payment obligations either by a) granting the Claimant a time extension or b) ruling that the LDs in the contract were an unenforceable penalty under New York law (i.e., alleging they were disproportionately higher than expected losses from a delay).

NERA's Role

The Respondent retained Director Kurt G. Strunk and Senior Consultant Willis Geffert as its economic experts to rebut the Claimant’s argument that the LDs defined in the contract were an unenforceable penalty. NERA’s report provided an economic analysis of LD provisions in the EPC contract and placed the contractual negotiations, including the bid process, in the context of standard commercial practices in the power sector for new generation facilities. NERA’s report also provided a quantitative assessment of delay damages based on a custom financial model built by NERA. NERA structured its quantitative analysis to assist the tribunal in its assessment of the proportionality of the stipulated LDs to the likely losses from delay. 

Mr. Strunk provided oral testimony to the tribunal at the hearing addressing all economic aspects of the case. Mr. Strunk presented a comparison of the likely range of possible losses from delay to the LD amounts stipulated by the parties. He described the EPC contract negotiations that followed the Respondent’s competitive bid process and established that the EPC terms were consistent with prevailing commercial practices in the power sector.

The Result

Consistent with NERA’s evidence, the tribunal found in favor of our client, the Respondent, who was awarded LDs in accordance with the terms of the EPC contract. The tribunal thereby upheld the terms of a carefully crafted agreement entered into by sophisticated parties.