Cases from the ICC International Commercial Mediation Competition by Christopher Miers

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International Chamber of Commerce

Cases For International Chamber of Commerce Mediation Competition 2015

by Christopher Miers

The Palm Leaf Shopping Mall | Role-Play by Christopher Miers | General Information

The Palm Leaf Shopping Mall Christopher Miers

GENERAL INFORMATION The Palm Leaf shopping mall (the Mall) is under construction in Mondolia. This is a prestige project in the capital and is due to be opened by the President on 1 October 2013, a particularly auspicious day in the Mondolian calendar.

The contractor is an international joint venture consortium, Ganamos S.A., (Ganamos) and the employer is the Mondolian Government (the Government). There is an Engineer appointed by the Government to administer the contract on site and who is deemed to act for the Government.

The contract requires Ganamos to design and construct the Mall (the Works) and to complete the Works by 1 May 2013. The fitting out of the stores for tenants by their chosen contractors is to follow on, all of which is to be completed by 16 September 2013. There is a final 2-week period for contingencies, stocking and staff training.

The Mall comprises 90,000m² of total floor area, or which 65,000m² is commercial lettable space. The Government has already let approximately 50,000m² of the Mall to major retailers including Inditex and LVMH as ‘anchor tenants’ who are taking 24,000m² and 12,000m² of space respectively.

The Works ran largely to programme. However the Government introduced a change to the fire suppression system requirements within the atrium areas which required additional works and acceleration measures by Ganamos to maintain the programme. The value of this variation to the contract is disputed; Ganamos has claimed US$800,000 more than has been certified for payment by the Engineer and paid by the Government.

Ganamos is now in the completion stages of the Works and has been commissioning the mechanical and electrical services, whilst it also completes the internal finishes and the external landscaping. The commissioning includes the testing of the three imported chillers providing the cooling system to the air conditioning.

Under testing two of the chillers failed to meet the contract performance requirements. Ganamos arranged for these two chillers to be partially stripped down and discovered on 7 January 2013 that the refrigerant was contaminated; and that this has caused damage. Replacement specialist parts and refrigerant are necessary which have to be ordered from abroad. The order would normally be expected to take 14 weeks from the date of order to arrive on site, including delivery to Mondolia, clearing customs and transport to the site.

However during the construction period the President of Mondolia was indicted by the International Criminal Court and this has led to the imposition of international trade sanctions which restrict imports. As a consequence, says Ganamos, they have had to find an alternative means for procuring the replacement parts and refrigerant and although they placed the order on 10 January 2013 the earliest date these will be on site is 1 June 2013, following which they require a further 4 weeks to install them and to complete the commissioning.

The contract provides for liquidated damages to be paid by Ganamos to the Government at the rate of US$18,000 per calendar day for every day that the Works are incomplete past 1 May 2013. Ganamos also have site and head office overhead costs of US$16,500 per day. The Engineer has written to Ganamos saying that the failure of the chillers is Ganamos’s responsibility and that the Government will require payment of the liquidated damages due under the terms of the contract if, as expected, Ganamos fails to hand over the project on 1 May 2013. Ganamos responded by letter disputing the Engineer’s assessment, asserting that the delay is attributable to the unforeseeable international trade sanctions, for which Ganamos cannot be held responsible, and stating that it will require reimbursement of its additional site and head office overhead costs for all time that it spends on site beyond 1 May 2013. The Engineer has rejected these claims.

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The Palm Leaf Shopping Mall | Role-Play by Christopher Miers | General Information

The tenants are expecting to have access to commence fit-out from 2 May 2013. The Government has informed Ganamos that under its agreements with the tenants, if the Government fails to deliver the stores to the tenants by 1 June 2013 the tenants will have the right to terminate their tenancy agreements or be paid compensation at the rate of US$1/m2 of space/calendar day of delay. Any loss of the ‘anchor tenants’ could prove disastrous for the development and also provide negative publicity for the President and the Government.

The contract provides for ICC International Commercial Arbitration of disputes, and both parties recognise that an arbitration will not address the immediate issue of project completion, and that any financial resolution might take years to achieve. On the recommendation of their legal advisers Ganamos and the Government have agreed to attempt to resolve the dispute by mediation under the ICC ADR procedures. They have agreed that Ganamos’s Managing Director will meet with the Government’s Deputy Head of Procurement in Paris, with their legal representatives present. Ganamos is the Requesting Party. © Christopher Miers 2012. All rights reserved. This work was especially prepared for the 8th ICC International Commercial Mediation Competition. Permission has been granted to ICC to reproduce it. No part of this work may be reproduced or copied in any form or by any means, or translated, without the prior permission in writing of the author or ICC. For Case Analysis and Commintary For Training see ICC International Commercial Mediation Training Role-Plays Publication 2015

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The Palm Leaf Shopping Mall | Role-Play by Christopher Miers | General Information

The Palm Leaf Shopping Mall Christopher Miers

CONFIDENTIAL INFORMATION FOR GANAMOS

Requesting Party The Ganamos joint venture partners consider this to be an important project, giving them a foothold in Mondolia and the Region from which they can be considered for tendering on other projects. The Region is forecast to achieve high annual growth when compared with the existing market areas in which the Ganamos partners operate where growth is flat and profit margins low.

There have been some differences of opinion within Ganamos during the project, especially concerning the partner company providing the mechanical and electrical (M&E) design services, which has been criticised within Ganamos for poor performance and inaccurate information.

However, Ganamos has overcome these deficiencies (at additional cost) and fortunately the internal differences within Ganamos have not come to the attention of the Mondolian Government so far.

Absorbing this additional cost is likely to leave the project with no more than nominal profit for Ganamos. The variation regarding the fire suppression system to the atrium remains an issue, although internally Ganamos recognises that the US$800,000 additional claim is inflated; Ganamos would be satisfied with a figure of US$550,000 but was seeking the higher sum to assist in partly restoring the profitability of the project.

Ganamos expects to complete the interior finishes and the external landscaping on time, and considers that the project could be handed over to the Government on 1 May 2013 without the chillers functioning, to allow the store fitting out work to be commenced while Ganamos would continue to complete the repairs to the chillers followed by the commissioning. This would allow Ganamos to reduce its site and head office overheads for the remaining period on site to approximately US$7,000 per day. However in order to create reasonable indoor working conditions for the fit-out contractors, some form of cooling would still have to be provided and the M&E Ganamos partner has proposed an option for Ganamos to install a temporary chiller unit locally procured which could provide a limited supply. It could be operational by around 14 April 2013. This will give some cooling, but not sufficient for the operation of the Mall once opened.

The temporary chiller and associated works will cost US$350,000. Ganamos considers this work, if carried out, would be a variation to the contract since in Ganamos’s view the principal benefit is to assist in overcoming the delay which Ganamos says is due to the effect of the unforeseeable international trade sanctions. Ganamos therefore considers that the cost should be paid for by the Government, although it might concede to share the cost.

However Ganamos would like the Government to agree to pay at least US$550,000 of the disputed additional US$800,000 for the variation regarding the fire suppression system to the atrium, and to pay for the costs of any prolonged period it needs to be on site beyond 1 May 2013.

Ganamos would also like to have the opportunity to undertake some of the tenant fit-out contracts. This would take advantage of its work force on site, and Ganamos thinks it could offer a price advantage over other outside contractors since it has fewer additional costs for bringing in and then repatriating specialist labour. Clearly the selection of contractors for the fit-out contracts is not a matter over which the Government has any control but Ganamos thinks the Government could introduce it to the various tenants and recommend it. Whilst the major fit-out contracts of the two anchor tenants may already be let, there may be many smaller retail outlet fit-outs which Ganamos could undertake.

Ganamos’s on-site Project Manager is due to get married and be on honeymoon during June 2013. Ganamos would need her/him on site during any period when construction works were taking place and if the wedding is delayed due to the project, (s) he is likely to be asking Ganamos to meet the unrecoverable cancellation costs of flights, venue hire and honeymoon suite, which could come to as much as US$15,000. © Christopher Miers 2012. All rights reserved. This work was especially prepared for the 8th ICC International Commercial Mediation Competition. Permission has been granted to ICC to reproduce it. No part of this work may be reproduced or copied in any form or by any means, or translated, without the prior permission in writing of the author or ICC. For Case Analysis and Commintary For Training see ICC International Commercial Mediation Training Role-Plays Publication 2015

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The Palm Leaf Shopping Mall | Role-Play by Christopher Miers | General Information

The Palm Leaf Shopping Mall Christopher Miers

CONFIDENTIAL INFORMATION FOR GOVERNMENT

Responding Party There is significant political and personal investment in this project. You are the Government’s Deputy Head of Procurement and you have your personal reputation on the line to meet the date for the President’s opening.

The Palm Leaf Mall is an important prestige project and its opening by the President will be given a high profile with media coverage. It is essential that the opening is achieved on time and that the Mall is promoted as a success.

Your Government Procurement department has reported suspicions and concerns that some tenants may wish to avoid their tenancy agreements if given an excuse, due to their difficulties arising from the international economic downturn. The recent reductions in forecasts of growth in Mondolia and the publication of reduced high street spending figures also reinforce this concern. Your team also reported hearing that Inditex was in disagreement with its normal fit-out contractor over the price of its fit-out works for the Mall and may need to find another fit-out contractor at short notice.

In your discussions with the anchor tenants for the Mall you have been informed that if the site were handed over to them late they may nevertheless be able to accelerate their fit-out works to reduce the time required on site and still achieve the planned opening date, but this will add to their fit out costs due to 24 hour working. If they are required to accelerate, the anchor tenants have indicated that they would want to be reimbursed these additional costs by the Government.

You consider that since Ganamos is responsible for the delay, Ganamos will have to pay this additional cost if it arises, which you estimate at US$15,000 / day of delay in total for the two anchor tenants, and a further US$6,000 / day for the other tenants in total.

You don’t want to get into discussion about Ganamos’s claim for an additional US$800,000 beyond what has been certified and paid for the change to the fire suppression system. The amount paid was on the basis of the Engineer’s valuation and it is a matter for the Engineer if the figure is to be increased. However if it is critical to reaching agreement on the other matters you will consider a further payment up to US$550,000.

The Government also is considering a new project to expand the airport and Ganamos may have the capability to undertake this and could be added to the Government’s tender list, but before any such discussion with Ganamos you would need to be reassured about their commitment to complete the Mall to allow the opening date to be met. You may also put Ganamos in contact with Inditex regarding Inditex’s need for a new fit-out contractor. © Christopher Miers 2012. All rights reserved. This work was especially prepared for the 8th ICC International Commercial Mediation Competition. Permission has been granted to ICC to reproduce it. No part of this work may be reproduced or copied in any form or by any means, or translated, without the prior permission in writing of the author or ICC. For Case Analysis and Commintary For Training see ICC International Commercial Mediation Training Role-Plays Publication 2015

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The Beachfront Condominiums | Role-Play by Christopher Miers | General Information

The Beachfront Condominiums Christopher Miers

GENERAL INFORMATION The Beachfront Condominiums is a new development of 65 apartments on Isle de Granola in the Caribbean. The apartments are generously sized, 2 and 3 bedrooms, and each has a large terrace with wonderful views over the ocean.

The project construction was fraught with difficulties, mostly driven by downward cost pressure from Granola Beach Limited (“GBL”) - a local long established three-generation family development company, by poor time management from the building contractor and by difficulties in obtaining the required quality of materials and workmanship on the island.

48 apartments were sold ‘off plan’ during construction, with a completion date of 20 December 2012 set out in each sale contract for the new owner to take over the apartment.

7 apartments are retained by the older generation GBL family members. The remaining 10 apartments currently remain unsold.

Project completion was delayed until 20 July 2013 and three purchasers, who had sold their other houses/apartments to coincide with the 20 December 2012 completion date of the Beachfront Condominiums development, were left homeless and had to find temporary rented accommodation. Furthermore the majority of the new owners rapidly formed an action group and during 2012 and the first half of 2013 these owners lobbied GBL for improvements to what they saw being constructed. GBL responded partly by turning to the designers, One Stop Design, and the building contractor, DDL, to achieve these improvements, and partly by explaining to the new owners what was and what was not provided for within the sale contracts.

Formal disputes have developed since the owners moved into their properties: 40 of the owners (“Owners”) have united in their negotiations with GBL and, since each sale contract contained an arbitration clause, each one of these 40 owners has commenced arbitration proceedings against GBL for breaches of contract. A sole arbitrator has been appointed in each case, and the 40 cases are shared equally between four different arbitrators – one Caribbean arbitrator, one European, one Russian and one Chilean. The disputes are not consolidated nor are they running to identical timetables.

The Owners’ claims in essence are for: 1.

Specific performance requiring GBL to change the design of the external sliding door and window system. The sliding door and window system allows rainwater in during heavy storms and appears too lightweight to withstand a Category 3 hurricane. Isle de Granola lies within a risk area for tropical storms and hurricanes. Although there has never been a Category 3 hurricane on the island, with the greater extremes of weather events being experienced worldwide the Owners consider that a Category 3 hurricane is a foreseeable risk and they say that the GBL sales representatives assured them during pre-purchase discussions that the building “would withstand all foreseeable weather conditions”. Damage in the event of such a hurricane will not be covered by insurance. The Owners request a higher specification system than that which has been installed; they want a system which keeps out water under all regular conditions and is tested to withstand a Category 3 hurricane.

2.

Specific performance requiring GBL to undertake improvements to the construction, or for damages in the alternative, to be assessed by the arbitrator. The Owners are concerned about cracking to the external paving, where the terracotta paving tiles are cracking in large areas of hard landscaping. This is unsightly and gives a poor impression when arriving at the properties.

Weeds are starting to grow up from the cracks. The replacement of the paving is estimated to cost US$32 500.

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The Beachfront Condominiums | Role-Play by Christopher Miers | General Information

3.

For 5 years from the project completion date, GBL to indemnify all Owners for maintenance costs exceeding a “cap” of US$1 000 per apartment/year, such that any maintenance costs above that cap will be met by GBL. The Owners say this cap is necessary because the poor standard of construction throughout the development would otherwise leave them at risk of higher than normal building maintenance costs. US$1 000 per apartment/year is generally considered normal on the island for properly constructed apartments.

4.

Compensation for rental costs of alternative accommodation between 20 December 2012 and 20 July 2013. This claim is brought by three owners only, seeking a total of US$54 000 between them.

5.

Compensation for loss of rental income due to delay in completion. This claim is brought by 20 owners, who claim they purchased apartments as investments to be rented out. They each say that the GBL sales representatives were aware that the apartment was being purchased for investment. Between them they seek compensation for average rental losses of US$4 000/month at 75% occupancy for the 7 months per apartment, being US$420 000.

6.

General damages for distress and inconvenience, the amount at the discretion of the arbitrator.

7.

Costs and interest.

GBL has also commenced arbitration proceedings against One Stop Design for failing to ensure that DDL properly constructed the apartments. GBL did not commence action against DDL - it negotiated for DDL to undertake repair work and improvements by agreement. This work is in hand but not yet complete. DDL has undertaken improvements and repairs to the private terraces and to the roofing. However work on the terracotta paving, which GBL is seeking to get DDL to remove and replace it in its entirety, has not been commenced.

GBL and the Owners have agreed to attempt to settle all of their disputes by mediation under the ICC Mediation Rules. The 40 arbitrations, which are all at early stages, have been stayed by agreement for three months while the parties attempt to settle the disputes. The mediation will be attended by the Chairman of GBL who is also one of the senior family members who has retained an apartment in the development, and by the representative of the Owners who has authority to settle on behalf of each owner. The Owners are the Requesting Party. The parties will be accompanied by their legal representatives. © Christopher Miers 2012. All rights reserved. This work was especially prepared for the 8th ICC International Commercial Mediation Competition. Permission has been granted to ICC to reproduce it. No part of this work may be reproduced or copied in any form or by any means, or translated, without the prior permission in writing of the author or ICC. For Case Analysis and Commintary For Training see ICC International Commercial Mediation Training Role-Plays Publication 2015

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The Beachfront Condominiums | Role-Play by Christopher Miers | General Information

The Beachfront Condominiums Christopher Miers

CONFIDENTIAL INFORMATION FOR THE OWNERS

Requesting Party As Owners your biggest concern is to get the development finished in a way that does not leave you all with an unexpectedly large ongoing maintenance problem. The Owners would like to put this matter behind them and get on with enjoying life in this beautiful corner of Isle de Granola – including with the neighbouring family members of GBL. However you all feel that GBL has cut corners and not delivered on its promises for your dream homes.

How the Owners go about persuading GBL is a matter of extensive discussion between the different owners and whilst you have presented a united front to GBL, there are many differences of opinion between the Owners as to the merits of the arguments, what relief you should be seeking, and how to go about achieving it. Several owners have said they cannot continue to fund arbitration proceedings, nor be at risk of the possibility of losing the arbitration with the possible consequence that they would have to pay GBL’s costs of the arbitration as well as their own. The Owners now recognise that there were many uncertainties within the contracts for sale, where the wording was unclear. Perhaps the Owners were a little naive in not insisting that some oral assurances made by the sales representatives appeared in the contracts. On the island, however, many things proceed on the basis of trust. The Owners consider that what they now ask for is reasonable, however they are advised that their legal basis is weak on several matters of claim: • Where they refer to the assurances of the sales representatives made pre-contract, there is no documentary evidence to support their claim. The Owners are aware that local law will enforce oral representations of this kind, but they also realise that being dependent solely on witness evidence to persuade the four different arbitrators is a risky basis for pursuing the claim.

However the sliding door and window system is a real worry, letting in rainwater as it does. If this can be solved, the Owners may not feel it essential to have a system which can withstand a possible future Category 3 hurricane. After all, if there is a Category 3 hurricane, there will be so much damage to the buildings and on the island that the windows may seem a rather minor issue.

• The Owners are advised that they have no legal basis for demanding a cap on future maintenance costs, but they would like to negotiate this if possible. This is a major concern, because the quality of construction has fallen short of what they expected, so the Owners may find themselves burdened with higher annual maintenance costs in the future. However you have expert opinion that many parts of the construction work fall below a normal, reasonable standard so higher than normal annual maintenance costs are to be expected, possibly US$2 000 per apartment/year and this you consider will give you leverage in this mediation.

• Where DDL/GBL is currently remedying some problems to the private terraces, roofs and entrance doors which GBL accepts it is bound to do, the Owners realise these parts of the claim will most probably be resolved. You have not yet seen a satisfactory proposal for remedying the problems with the terracotta paving.

The Owners are seeking to reach a mediated agreement and would really like to avoid having to pursue these arbitrations. However they do not want to give a weak impression to GBL. The Owners have agreed that in relation to the main claims: they are prepared to compromise on the sliding door and window system providing that it is improved to keep out rainwater during storms; they want the terracotta paving to be replaced; the cap on maintenance is essential but they would accept a higher cap of US$1 250 per apartment/year provided this can be for 6 years, and would like to see a management committee formed with GBL and the Owners on the committee and with the task of drawing up a managed annual maintenance plan; the rental costs for alternative accommodation must be paid in part – the three owners would accept US$36 000 between them since they accept that there was a risk of delay; and the 20 investors also accept there was a risk of delay and are prepared to accept a payment of US$12 500 to each of them.

If you can settle the dispute at mediation, the Owners agree that they are prepared to forgo any recovery in respect of their final claims for general damages and costs and interest.

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The Beachfront Condominiums | Role-Play by Christopher Miers | General Information

The Owners have each contributed into a “fighting fund” to pay for you to attend the mediation in Paris. While you are in Paris, you heard that the famous Blues band of Buddy Giselli is performing here, and - as an avid jazz trumpet player - you hoped to hear them play but all the tickets have been sold.

The 20 investor owners are also looking at other property purchases for further investment on the island. GBL has some further projects in hand and were it not for this dispute, ten investors have said these other GBL developments would seem quite attractive for them to buy apartments. You noted GBL’s ‘Corals’ development which is now well advanced on the most expensive part of the island, and it would be interesting to see what standard of sliding doors and windows have been used there. © Christopher Miers 2012. All rights reserved. This work was especially prepared for the 8th ICC International Commercial Mediation Competition. Permission has been granted to ICC to reproduce it. No part of this work may be reproduced or copied in any form or by any means, or translated, without the prior permission in writing of the author or ICC. For Case Analysis and Commintary For Training see ICC International Commercial Mediation Training Role-Plays Publication 2015

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The Beachfront Condominiums | Role-Play by Christopher Miers | General Information

The Beachfront Condominiums Christopher Miers

CONFIDENTIAL INFORMATION FOR GBL

Responding Party For GBL, credibility in the island market is vital to your on-going business interests on Isle de Granola. Through your series of family companies GBL is involved in property investment and development, property maintenance, and insurance, and you have a good reputation which brings in clients through the door. Damage to your reputation would be likely to lead to a loss of future business and would damage profits. You have various other developments under construction and would like to get some sales moving, and this dispute could lead to bad publicity.

On the Beachfront Condominiums development GBL was always aware that it was on a very tight budget to achieve the quality of development promised to purchasers. DDL’s price for the project was very low in comparison with other tenders and GBL anticipated difficulties in project delivery.

In retrospect, GBL thinks the sales team may have overstated things a bit in discussions with prospective purchasers in order to make the sales. So you suspect that promises made by the sales team about the highest quality were not always consistent with the building specification and construction price. However, your lawyers have checked all of the documentation and have confirmed that such promises as might have been made in relation to the construction withstanding “all foreseeable weather conditions” were not made in writing and they do not appear in the sales contracts.

Members of three generations of the family work in GBL and differences have arisen between them regarding blame for the problems and the strategy for how to handle the numerous disputes. GBL now faces multiple arbitrations with the Owners and its lawyers’ costs are rising and are of concern to all family members. The older generation of GBL, who are living in the Beachfront Condominiums development, wish for peaceful relationships in the future with other neighbouring owners and they are pushing the other GBL family members for generous, rapid settlements with the Owners.

Regarding the particular issues in the Owners’ claims: DDL have advised you that they can make some improvements to the windows. They cannot be sure whether they will keep out all rainwater, but think it likely. You have discussed with them the possibility of running some trials in one of the GBL family apartments. At your ‘Corals’ development which is currently under construction, for the first time you are installing sliding doors and windows designed to withstand a Category 3 hurricane, but this is because the market demand is changing for higher specifications (with higher sales prices) and the ‘Corals’ development is on the most expensive part of the island, unlike the Beachfront Condominiums project.

Regarding the problem with the terracotta paving, DDL say it is a fault in One Stop Design’s specification. DDL have refused to remedy the problem. You would like this to be dealt with as an on-going maintenance issue, but if this is important to achieve agreement on other matters you think you could meet the cost of this work and then claim it in your separate dispute with One Stop Design.

With reference to the cap on maintenance, you cannot see why you should be obliged to give such an undertaking, but also you think there are areas where the building is not well finished.

DDL estimates that around US$130 000 per annum should be budgeted for maintenance.

However, if you use your own family building maintenance company, Granola Property Maintenance Limited, you think you could do this work at cost for around US$75 000 per annum.

For the rental costs for the three families, GBL agrees that this should be paid. This is the kind of thing that could look very poor in the local newspaper otherwise.

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The Beachfront Condominiums | Role-Play by Christopher Miers | General Information

In respect of the investors’ claims for loss of rent, your lawyer advises that the Owners have a low prospect of succeeding with this claim since GBL was not formally informed in writing that these properties were bought as investments to be rented out; and whilst local law will enforce an oral agreement or representation, the Owners will have to persuade the arbitrators on the basis of witness evidence that the potential for loss of rent was in the reasonable contemplation of the parties at the time of entering into the contracts. Your lawyer therefore has advised that you should resist this claim. However your business needs may take priority here and if the investors can be satisfied with a deal, perhaps US$10-15 000 each, then this could assist in keeping them and others in the market for further purchases of apartments in other projects.

If investors were prepared to buy into another development, this could even be provided as a discount on the purchase price.

You are also quite keen to see a bit of Paris while over here. You heard that the Owner’s representative used to play jazz trumpet and if you can get things on to a positive footing with him/her, you have been able to get four tickets to a concert being given by the famous jazz musician Buddy Giselli to which you could invite the Owner and his/her lawyer.

© Christopher Miers 2012. All rights reserved. This work was especially prepared for the 8th ICC International Commercial Mediation Competition. Permission has been granted to ICC to reproduce it. No part of this work may be reproduced or copied in any form or by any means, or translated, without the prior permission in writing of the author or ICC. For Case Analysis and Commintary For Training see ICC International Commercial Mediation Training Role-Plays Publication 2015

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