International Construction Law Review
LONG-TERM EQUIPMENT AND MATERIAL PROCUREMENT AND SUPPLY CONTRACTS FOR MINING AND INFRASTRUCTURE PROJECTS IN AUSTRALIA—AN OVERVIEW OF COMMERCIAL AND LEGAL ISSUES1
ANDREW CHEW
Special Counsel, Mallesons Stephen Jaques, Sydney, Australia.
State of the market
Over the last decade, Australia has enjoyed a boom in the mining industry as a result of the thirst for resources around the world and, in particular, from China. This has resulted in significant increases in capital expenditure in major mining investment, and fast tracking of infrastructure and mining projects. Examples include BHP Billiton’s Olympic Dam and Worsley Alumina expansions, Fortescue Mining’s Pilbara Iron Ore project, and various coal expansion projects in New South Wales and Queensland.
The current global credit crisis has slowed global growth with many infrastructure investments either being delayed or cancelled. Whilst China is slowing, it has put in place a large stimulus package and its banks have ramped up their lending allowing the economy to pick up. This has set China apart from the other struggling economies and there is consensus by economic commentators that China’s growth will begin to lift from mid-2009 or soon thereafter.2 China will remain a main stalwart export market for Australian resources, as it is still predicted that it will grow at 5–8% per annum based on its continually urbanising domestic economy. In addition, the Australian Government is accelerating its Building Australia spending and has provided guarantees in respect of Australian banks.
Supply constraints
Major mining companies such as BHP Billiton, Rio Tinto, Xstrata, Anglo and Vale have been competing for limited pools of skilled labour resources and specialist equipment and materials. This has created market demand across all sectors and regions. Until recently, factories and production facilities at major equipment and material suppliers have generally been running at or near full capacity, with large order books. These supply chain
constraints and capacity restrictions have resulted in longer delivery times and delays, uncertainty in meeting production capacities and new project delivery deadlines.3 Managing these supply constraints is a long-term planning exercise, and increasingly, major mining companies and contractors are entering into long-term relationships, or “alliances”, to manage better long-term expectations and their commitments to deliveries. This also allows the major suppliers to manage fewer relationships, and to simplify supplier management issues. However, the global credit crisis may have relieved some of the tensions regarding long lead times and given purchasers more leverage in negotiations.
1 The author would like to thank the editors, HH Humphrey LLoyd, QC, and Doug Jones, and also Peter Carter and Geoff Wood of Mallesons for their comments.
2 “The GFC: What Happened? What Next? Challenges for Policymakers”, a presentation by Access Economic to Mallesons, February 2009.
This paper provides an overview of the following key commercial and legal issues when negotiating the major long-term equipment and material procurement and supply contracts that establish and define these “alliances”:
United Nations Convention on Contracts for the International Sale of Goods 1980 (“Convention”)
The Convention applies to contracts for the sale of the goods between parties whose places of business are in different states if those states are contracting parties to the Convention.
Australia is a party to the Convention4 and all the states and territories in Australia have also adopted the Convention.5 More than 70 countries have ratified the Convention, including many of Australia’s major trading partners (including the United States of America, China and Japan). A significant exception is the United Kingdom (which has adopted the Uniform Law on International Sales instead).
The parties to a contract may contract out of the application of the Convention or “derogate from or vary the effect” of any of its provisions.6
The Convention is widely used in Europe, but less widely in common law based countries (such as Australia and the United States of America). Most supply contracts originating from Australia contract out of the application of the Convention. Although the reasons for this are not clear, one reason could be the unpredictability of the interpretation of the law pertaining to international sales transactions under the Convention, as the application of the Convention and its treatment, has a largely civil law character.7
The Convention is essentially a code for setting up a contract of sale. It deals with two basic aspects of sales contracts. Part II governs the formation of the contract and includes rules on the definitiveness required of offers, the power to revoke an offer and the requisites for the binding acceptance of an offer. Part III governs the obligations of the parties under the contract (such as the quality of the goods, freedom of the goods from third party claims, obligations to pay for the goods, allocation of risk of loss and remedies available to the parties in the event of breach).
Even if the parties have not contracted out of the application of the Convention, the sales contract must still interact with, and operate within the framework of the governing law. For example, if the governing law is Australian, consideration needs to be given to the adoption of “good faith” obligations8 and relevant statutory concepts such as misleading and deceptive conduct under the Trade Practices Act 1974 (Cth).
Some of the key differences between contracts governed by Australian law (to which the Convention does not apply) include:
4 All the states and territories have effected legislation to give effect to the Vienna Sales Convention—see Sale of Goods (Vienna Convention) Act 1986 (NSW), etc.
5 Sale of Goods (Vienna Convention) Act 1987 (ACT); Sale of Goods (Vienna Convention) Act 1986 (NSW); Sale of Goods (Vienna Convention) Act 1987 (NT); Sale of Goods (Vienna Convention) Act 1986 (Qld); Sale of Goods (Vienna Convention) Act 1986 (SA); Sale of Goods (Vienna Convention) Act 1987 (Tas); Sale of Goods (Vienna Convention) Act 1987 (Vic); Sale of Goods (Vienna Convention) Act 1986 (WA). See also Trade Practices Act 1974 (Cth), s. 66A.
6 Vienna Sales Convention, Art 6.
7 M Jacobs, K Cutbush-Sabine and P Bambagiotti, “The CISG in Australia to-Date: An Illusive Quest for Global Harmonisation?”, 17 Mealey’s International Arbitration Report (August 2002) 24–46.
8 See the discussion on good faith below, p, 322.
| Australian contracts (where the Convention does not apply) | Convention contracts |
|---|---|
| An offer is always revocable prior to acceptance. | Convention interprets offer and acceptance in particular ways. For example, a proposal is an offer if the proposal is sufficiently definite and indicates the intention of the offeror to be bound. |