1. Case Overview
The Applicant (Company A) and the Respondent (City of B) entered into a Build-Transfer-Operate (BTO) concession agreement (the "Concession Agreement") for the construction and operation of a public sewage treatment facility. Under the Concession Agreement, the Applicant was to construct the public sewage treatment facility (the "Facility"), upon which ownership of the Facility would vest in the Respondent. In return, the Applicant was granted the right to operate the Facility for a specified period and receive usage fees from the Respondent based on the volume of sewage treated. In accordance with the agreement, the Applicant subsequently completed the construction of the Facility and has been operating it.
At the time of entering into the Concession Agreement, the usage fees were calculated based on the assumption that the Facility would treat sewage generated from public housing to be developed as part of the OO Public Housing District Development Project. However, the development project was subsequently delayed for a significant period, during which no sewage was generated from the relevant public housing district, and the Applicant consequently did not receive the usage fee revenue corresponding to that volume.
In addition, the construction period for certain parts of the Facility was extended due to delays in land compensation by the Respondent. As a result, the Applicant became liable for paying the contractor additional indirect costs arising from such construction delays.
To secure a prompt resolution of the dispute, D&A represented the Applicant and filed an arbitration claim against the Respondent with the Korean Commercial Arbitration Board, seeking compensation for losses corresponding to the lost usage fees and additional indirect costs.
2. Key Issues and Summary of the Arbitral Award
I. Loss of Usage Fee Revenues
Since the Concession Agreement stipulates that the project implementer shall bear the risk of demand forecasting, the key issue was whether the absence of sewage generation resulting from the delay of the OO District Public Housing Development Project fell within the scope of demand risk assumed by the project implementer.
On this issue, the Arbitral Tribunal held that the provision concerning the project implementer’s liability for discrepancies between forecasted and actual demand appeared to be based on the premise that the initially expected population had moved into the housing district. Therefore, the Tribunal found it difficult to interpret the provision as intending to hold the Applicant liable even for situations where the population could not move in due to delays in the OO District Public Housing Development Project.
Furthermore, the Arbitral Tribunal held that, taking the provisions of the Concession Agreement as a whole, circumstances such as “changes in government policies or plans, excluding changes in private investment policies” should be deemed to constitute “grounds deemed equivalent to willful misconduct or negligence” on the part of the Respondent, the competent authority. In reaching this conclusion, the Tribunal noted that the OO District Public Housing Development Project had been carried out pursuant to the approval of the Minister of Land, Infrastructure and Transport (a government agency), and in accordance with the project implementation schedule and population accommodation plans determined by the Korea Land and Housing Corporation, the project implementer. On that basis, the Tribunal found that the delay of the development project and the resulting loss of service fee revenue were attributable to the Respondent on grounds deemed equivalent to willful misconduct or negligence, and consequently ruled that the Respondent is obligated to compensate the Applicant for such loss of usage fees.
II. Additional Indirect Costs
The Arbitral Tribunal held that delays in land compensation constituted an event attributable to the Respondent under the Concession Agreement. Accordingly, the Tribunal found that the Respondent was liable to compensate the Applicant for losses equivalent to the additional indirect costs payable to the contractor as a result of the extension of the construction period.
3. Implications
In concession agreements for BTO projects, it is standard to provide that the project implementer shall bear the risk of demand forecasting. Accordingly, in similar disputes, project implementers’ arguments are often rejected. Although the Concession Agreement also allocated demand forecasting risk to the Applicant, D&A distinguished between the demand forecast itself and the underlying assumption upon which such forecast was based. In particular, D&A actively argued that the OO District Public Housing Development Project and the resulting sewage-generating population constituted underlying assumptions of the demand forecast, and therefore fell outside of the scope of demand risk for which the Applicant should be held responsible.
The Arbitral Tribunal found that the risk of demand forecasting assumed by the project implementer under the Concession Agreement was limited to the discrepancies between forecasted and actual demand, on the premise that the anticipated population had moved into the district as expected. The Tribunal therefore determined that the failure of the anticipated population to move into the district due to delays in the OO District Public Housing Development Project fell outside the scope of risk assumed by the Applicant.
The Tribunal further confirmed that the Respondent was obligated to compensate the Applicant for losses corresponding to the additional indirect costs incurred as a result of the extension of the construction period under the Applicant’s construction agreement with the contractor, to the extent that such extension was attributable to the Respondent’s fault as the competent authority.
This arbitral award is expected to serve as an important precedent for future BTO projects, where project implementers suffer losses, such as reduced operating revenue or additional construction costs, due to causes beyond their control, and seek compensation from competent authorities.
