MDA Law
Mining industry encouraged to use standard building and construction contracts to reduce costs and manage risks
8 June 2016
Costs on mining projects can be reduced by using standard legal contracts instead of drafting tailored contracts per project, according to Ian Massey, director of MDA Attorneys.
“While there are certain differences between mining contracts and those used in the building and construction sector, a bespoke mining contract document is seldom necessary as standard contracts cover most considerations,” he says.
The major difference between a mining contract and a construction contract is how the contractor gets paid for his services. “This difference does not warrant the drawing up of a completely bespoke contract because standard forms of contract recognise payment risk and allow different payment options so that the agreement can be adapted to suit the risk appetite of the employer. Often, this is the starting point from which the employer’s implementation strategy for the project is launched,” explains Massey.
A further benefit of using standard form contracts is that they have been drawn up by internationally acclaimed experts. They are tried and tested and there is precedent from various legal actions around the world to assist in their interpretation and application. They are respected and imbue confidence, which can even lead to reduced prices.
On construction contracts, payment to the contractor is measured relative to the progress of his work – in meters of concrete poured, square meters of bricks laid and so forth.
Mining contracts, on the other hand, often have different imperatives. To mitigate costs, it invariably suits the employer to provide some or all of the plant to be used for mining operations and the spares to be used in servicing the plant. Similarly, tyres for very large earthmoving equipment are a major expense. These too are often provided by the employer to the mining contractor. So the challenge is, how should the contractor be paid for operating and maintaining the employer’s fleet and how should he be rewarded and/or penalised if he doesn’t operate and service the plant properly and incurs excessive costs?
“A standard form contract, using specially drafted particular conditions, can include addendums to deal with the method of payment risk. But we always recommend avoiding an adversarial approach, which sadly is on the rise in South Africa. We believe that on mining contracts, a collaborative approach is not just beneficial, it is a necessity,” says Massey.
Risks
Mechanisms to allocate and manage risks need to be included into the contract form. Risks could include escalation, forex fluctuation and market influences on commodity demand and prices.
“The reliability and performance of the contractor is also a significant risk, which can be managed either by a pre-qualification process or via adjudication criteria stipulated in the enquiry document. Another risk lies in the geotechnical information – there needs to be a high level of confidence as this determines the type of mining operation and the process which will be adopted to extract the ore. Stories of overstated reserves and failed process plants must be avoided by thorough investigative work,” warns Massey.
If there is a conflict, there are traditional dispute resolution techniques ranging from executive tribunals through to arbitration and litigation. The success of these techniques depends largely on the people involved and the circumstances under which the work is being carried out, but mining contract disputes have been known to drag out for long periods of times.
“Adjudication has demonstrated impressive results and has now been adopted as a means of resolving construction disputes in South Africa. It will shortly be Gazetted as a statutory requirement under the Amendment to the CIDB Act, which is expected to be promulgated in the first quarter of 2016,” he says.
Project launch workshops facilitated by MDA can identify risk and devise appropriate risk responses. Communication channels and the collection of information and data and the meaningful storage and access to records can also be arranged. The choice of candidates for the role of adjudicator and the procedures to be followed are also included in MDA’s suite of services.
For further information, please contact Despina Harito, Turquoise PR & Marketing Communications on despina@turquoisepr.co.za or 011 452 1840 / 084 453 1755.
