The Finance Lawyer
Written by changthai11 on Tuesday, September 23rd, 2008
The Finance Lawyer
WIROT POONSUWAN
In competing for and executing a government consultancy agreement in relation to an infrastructure project in Thailand, international engineering consulting firms often team up with their local counterparts to form a consortium to deal with the government client as “the consultant”, a single unit.
The participating consultants will need a formal agreement between themselves to share the benefits and liabilities of the project. There are issues to consider when a consortium arrangement is being contemplated.
Payment of remuneration: Besides the sharing of profits and losses, the consortium agreement should provide clearly how remuneration and expenses from the project will be paid and shared. The clarity of the provision might have to wait for the consultancy agreement to be concluded with the client.
By and large, it is common for the government client to pay the remuneration on a monthly basis directly to each member of the consortium, provided that work has been performed and reports sent on schedule as well as approved by the client. A work plan and specific schedule for payments tied to it are normally attached to the consultancy agreement together with details of the reports to be submitted.
Risk exposure: The government client will always require a joint and several liability as a primary obligor from all the consortium members, however small their contribution compared to the other members. There have been cases where a member is entitled to receive only 2% of the entire remuneration of the consultancy agreement, but has to accept 100% liability to the client, jointly and severally with the other senior members of the consortium.
The consortium agreement among the members needs to reflect this joint and several liability back to back with the main consultancy agreement - one member will be required to fully indemnify another for all liabilities and damages it has to pay the client, especially arising from the fault of that member.
To avoid full liability to the client, the junior member could choose a sub-consultancy arrangement with the senior consultant instead of a consortium agreement and be responsible to the senior consultant only for his small share of work. But this approach is likely to face opposition from the government client as the consultancy agreement will typically bar sub-consultancy and will require the consortium members to carry out the work themselves. Thus, a consortium agreement sharing equal liability might be inevitable even for a small player in the team.
Limit of consultant’s liability: Legally speaking, it is possible for the consortium or consultant to limit its liability to the government client under the main consultancy agreement up to the amount of the remuneration. The effort to seek a limit is to be expected in an international consultancy agreement; even the popular FIDIC form of consultancy agreement invariably contains a clause limiting the consultant’s liability.
Commercially, the overwhelming negotiating power of the Thai government client will dictate the scope of the consultant’s liability at 100% of actual liability with no limit. Government lawyers who review the draft agreement will agree to a limit of the liability if it doesn’t cover negligence and wilful misconduct. In other words, the limit will apply unless the liability arises from the consultant’s negligence or wilful misconduct. A blanket limit without any exception will be struck down by the government lawyer as it will be seen as exempting liability arising from “gross negligence”, in violation of Thai law and contrary to public policy. Thai law equates gross negligence with wilful misconduct, a very serious wrongdoing.
Agreeing to be liable in case of gross negligence and wilful misconduct and limiting liability only to cases of ordinary “negligence” will satisfy Thai law and public policy but not government lawyers, who will follow their established practice in not allowing a limit of liability in a negligence case, whether gross or ordinary. In the mind of the government lawyer, the government client can have an exposure to a third party arising from the consultant’s ordinary negligence greater than the remuneration paid to the consultant and the shortfall should be met by the consultant.
Despite the leeway given by the government lawyer to permit a limit of liability except for negligence and wilful misconduct, in practical terms government clients, aware of their commercial leverage and their past successes in negotiations, play it safe by not entertaining a consultant’s request for a limit of liability. They allow virtually none.
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Wirot Poonsuwan is a former chairman and managing partner of Clifford Chance Wirot as well as a former partner of Baker & McKenzie in Bangkok. He now has his own firm, Poon & Poon, Attorneys at Law. He can be reached at wirotp@poonandpoon.com
