The Project Finance Law Review: Dispute Resolution and Conflict of Laws Risks

In a world where the enforcement of laws continues to be dominated by domestic legal systems, participants in any cross-border project finance transaction are faced with the risk that the rules applicable in case of a later dispute may differ from those familiar to them. Because of the high degree of international integration in the energy and infrastructure sectors, this phenomenon affects most major and mid-size projects, which are typically governed by a combination of different laws. While the challenges of structuring multi-jurisdictional projects are obvious to legal practitioners (who are themselves typically admitted in a single jurisdiction) it is eventually their clients who will have to contend with the resulting complexities throughout the construction and operation phases of the project.

Conceptually, the specific risks associated with multi-jurisdictional transactions can be differentiated into two categories: which laws will apply in case of a dispute, and how these will be applied. The first category (i.e., which laws will apply) is governed by the choice of law rules of the courts and tribunals exercising jurisdiction in the matter. Although these rules themselves differ between jurisdictions, the underlying concepts are universally accepted, and there is a strong international trend to harmonise the choice of law rules themselves through international treaties and other instruments such as arbitration rules. As a result, conflict of laws risk, which comprises both choice of law and jurisdiction, can for the most part be successfully managed by asking the right questions of the right people when structuring the transaction.

The second category (i.e., how the law will be applied in a multi-jurisdictional setting) is much more difficult to grasp. This is fundamentally because of the fact that legal certainty is eventually a psychological construct composed of three elements: (1) knowledge of the applicable rules and contractual terms; (2) experience as to how these rules and contractual terms will be typically understood by the parties and applied by a court or tribunal; and (3) most importantly, trust in the legitimacy of the final judgment or award even if the result does not conform to one's own expectations. Bringing these three elements together within the boundaries of a single jurisdiction is already a considerable challenge, which is further (if not exponentially) increased if two or more jurisdictions are implicated. However, as with all practical challenges for commercial activity, market participants have developed strategies to mitigate the resulting risks as best as possible.2

It follows from these preliminary considerations that dispute resolution and conflict of laws risks are very much a lawyer's topic that is even further removed from the day-to-day reality of their clients than other legal issues. It is, therefore, all the more important to bear in mind that any mitigation strategy must provide practical solutions for those directly involved in the implementation of the project (i.e., without creating the need for external legal advice at every traffic light). Although there is no magic formula, this goal is typically best served by opting for the law most familiar to the party that must comply with the most complex obligations,3 and by reducing the number of applicable laws (i.e., the potential interfaces between different jurisdictions) to the largest extent possible.

Due to the nature of the topic, this chapter will make cursory reference to a broad variety of legal aspects of project finance. These references are obviously not intended to provide guidance on the substance of the relevant areas of law but are merely meant to assist the reader in locating them for the purposes of a systematic analysis of conflict of laws and dispute resolution risks.


As indicated above, it is universally accepted that every court or tribunal will take its own choice of law rules as a starting point to determine which laws should be applied to resolve a dispute. These rules may be rudimentary and may themselves largely refer to the choice of laws rules of another jurisdiction, as is typically the case for the choice of law provisions contained in arbitration rules. But the basic concept is as inevitable as the principle that any court or tribunal will operate by its own procedural rules.

i Jurisdiction

From a transaction structuring perspective, this means that the first step in the mitigation of conflict of laws risk is to analyse which courts or tribunals could exercise jurisdiction in the matter. These can be grouped into courts that will exercise mandatory jurisdiction, notably on matters of public law, and those courts and tribunals whose jurisdiction may be based on, or derogated from, by means of agreement between the litigants. Conflict of laws analysis usually focuses on the latter category, which encompasses most contractual matters between commercial parties, and by its very nature becomes a matter of contractual negotiation. However, all project finance transactions are inevitably also subject to mandatory jurisdiction in some respects, which must therefore be the starting point of any conflict of laws risk assessment.


Host country

The jurisdiction most directly affected by a project finance transaction obviously is the country where the project is physically located. In addition to all areas of public law,4 the courts of the host country will always assert jurisdiction in such matters of private law that are considered to also affect the public interest. While these must eventually be ascertained under the civil procedure rules of the relevant jurisdiction, Article 2 of the (Hague) Convention of 30 June 2005 on Choice of Court Agreements5 provides good guidance as to which types of commercial disputes are typically subject to mandatory jurisdiction. In the specific context of a project finance transaction, the following sub-items listed in Article 2 of the Convention may become relevant:

  1. 1b: contracts of employment, including collective agreements;
  2. 2e: insolvency, composition and analogous matters;
  3. 2h: anti-trust (competition) matters;
  4. 2l: rights in rem in immovable property, and tenancies of immovable property;
  5. 2m: the validity, nullity, or dissolution of legal persons, and the validity of decisions of their organs;
  6. 2n: the validity of intellectual property rights other than copyright;
  7. 2o: infringement of intellectual property rights other than copyright; and
  8. 2p: the validity of entries in public registers.6

Because mandatory jurisdiction is inherently justified by the strong public interest in the relevant matter, the corresponding choice of laws rules almost inevitably refer to the substantive laws of the country whose courts are exercising jurisdiction. In other words, the application of foreign law in matters of mandatory jurisdiction is typically restricted to preliminary questions such as the existence of a foreign corporate entity or the validity of a contract being relied upon.

From a practical perspective, legal risks associated with the mandatory jurisdiction of the host country are usually the very subject matter of the legal due diligence report (and of compliance representations and undertakings in the finance contracts). While the appropriate scoping of the report can be a challenge not only for transaction counsel from another jurisdiction but also for their local co-counsel, the application of the laws of the host country never really comes as a surprise and is, therefore, usually not perceived as a conflict of laws risk.7

Outside the host country

The conflict of laws risk inherent in mandatory jurisdiction becomes much more apparent in cases where it is asserted by courts outside the host country. Besides the extra-territorial jurisdiction of long-arm statutes, notably in matters of economic sanctions and personal jurisdiction under anti-money laundering laws, projects may simply be affected by the territorial application of mandatory laws in respect of project parties located outside the host country.

Depending on the features of the individual project, the following areas of mandatory jurisdiction should be considered not only for the host country, but also for the home jurisdictions of other project parties:

 Contractors and suppliersOff-takersDebt and equity providers
Economic sanctionsAlwaysAlwaysAlways
Anti-money launderingCase-by-case basisCase-by-case basisAlways
Export controlsAlways  
Foreign exchange controls AlwaysAlways
Anti-corruption and briberyAlwaysAlwaysAlways
ProcurementCase-by-case basisAlways 
AntitrustCase-by-case basisAlways 
Intellectual propertyCase-by-case basisAlways 
InsolvencyCase-by-case basisCase-by-case basisCase-by-case basis
TaxCase-by-case basisCase-by-case basisCase-by-case basis

As a practical matter, legal risks resulting from mandatory jurisdiction of countries outside the host country are predominantly addressed by means of representations and undertakings in the finance contracts, as well as in the project contracts entered into with counterparties located in the relevant jurisdictions. The underlying rationale is that a reputable counterparty will typically be best positioned to monitor compliance with all applicable laws of its home jurisdiction and will do so as part of its general business operations.

In addition to representations and undertakings, different parties will typically require clearance of their own 'know-your-customer' (KYC) checks as a condition to entering into the transaction. While these processes also reflect internal policies that may go well beyond legal requirements, they are usually designed to comply with the laws of all jurisdictions to which the relevant party is exposed.

While representations, undertakings and KYC checks are helpful to identify legal risks, they are not designed to serve as a basis for a thorough assessment and evaluation. Hence, they are usually considered mere check-the-box items by the parties, unless they do reveal a significant issue. If that is the case, or if it becomes otherwise evident that mandatory jurisdiction outside the host country may actually affect the project, the parties will typically extend the legal due diligence to the relevant laws of that jurisdiction.

Conflicts of mandatory jurisdiction

Countries typically assert mandatory jurisdiction to defend their own policies and the interests of their own citizens. While these often extend beyond the territory of the relevant country, governments are conscious that their ability to enforce their laws is generally limited to their own territory. They also mostly accept that imposing legal obligations on their citizens that conflict with the laws of the host state will discourage investment altogether, typically for the benefit of competitors from other countries. As this result is rarely intended, conflicts of laws in the narrow sense (i.e., a situation where the laws of one jurisdiction mandate a course of action that is explicitly prohibited by the laws of another jurisdiction for the same fact pattern) are rather rare. They can, however, arise in the context of economic sanctions, notably where US economic sanctions can be enforced against the US operations of foreign undertakings whose home jurisdictions prohibit the participation in a foreign boycott.8 Although in these circumstances the US government typically does not enforce statutory remedies against the affected foreign undertakings as a matter of practice, there is a strong tendency to avoid confrontation by abstaining from the criminalised activities (which, as a negative fact, is much more difficult to police).

Much more common than an actual conflict of mandatory jurisdiction is a mere overlap (i.e., situations where more than one government asserts mandatory jurisdiction in respect of the same activity to enforce a common policy). Besides those economic sanctions that are based on resolutions of the United Nations Security Council, this is regularly the case for anti-money laundering and anti-bribery and corruption laws, and for other legislation based on international legal instruments. Although these situations do not result in a conflict in the narrow sense, parties have to be bear in mind that the implementation of international instruments may differ from one jurisdiction to another and that the strictest implementation in domestic law will eventually set the benchmark for the structuring of the transaction.


As mentioned above, mandatory jurisdiction generally does not extend to disputes between commercial parties, who are thus free to agree on a court or arbitral tribunal of their choice for such matters. While the choice is conceptually subject to acceptance by the court, and must therefore be validated under the civil procedure rules of the relevant country, this is unlikely to prove an obstacle in practice because most governments welcome commercial litigation as an economic activity irrespective of the location of the litigants.9 Acceptance of jurisdiction is even less of a barrier to entry if the parties have opted for commercial arbitration as a private form of dispute settlement.

Beyond a choice of jurisdiction or submission to arbitration, the laws of civil procedure usually allow for the combination of different forms of commercial dispute resolution, provided that the overall arrangement does not lead to conflicting results and does not grant excessive tactical advantages to one of the parties. Typical examples for such combinations are mandatory preliminary conciliation procedures, expert determination of factual matters, and optional recourse to other courts of competent jurisdiction until either party has commenced proceedings in the chosen court or arbitral tribunal.

Although a choice of jurisdiction or arbitration is optional and the laws of civil procedure will always provide for one or several courts of competent jurisdiction,10 the common interest of the parties to increase predictability is a strong incentive to agree on a mutually acceptable forum in almost every cross-border contract. The more intricate question is how to select that forum and whether the choice should be exclusive or, alternatively, allow for recourse to other courts or forms of dispute resolution for some or all aspects of a future dispute. The most important considerations underlying this decision are:

  1. neutrality of the forum;
  2. experience of the court or tribunal, including familiarity with applicable (contract) law;
  3. language barriers;
  4. proximity of forum to parties and evidence;
  5. enforceability of the final judgment or award;
  6. concentration of all disputes relating to the project in (ideally) one forum, so as to minimise the risk of conflicting decisions on the same substantive issue;
  7. speed and efficiency of process in general;
  8. cost; and
  9. policy constraints of the parties, notably as regards the submission of state-owned entities to foreign courts or commercial arbitration.

Except for the last, and arguably the two preceding, considerations, all of the above tend to support the argument for commercial arbitration as the preferred form of dispute resolution for cross-border project finance transactions in all but the most trusted jurisdictions. The typical process whereby one arbitrator is selected by each party subject to impartiality requirements, and the third arbitrator is selected through agreement of these two, is inherently designed to ensure both neutrality and optimal qualification of the tribunal. Likewise, parties can prescribe the language of the proceedings and the seat of the arbitral tribunal to accommodate their preferences to an extent that is not available in regular courts. The same flexibility applies for consolidation of several arbitration proceedings administered by the same institution.11

Moreover, commercial arbitral awards benefit from almost universal enforceability under the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).12 While speed and efficiency of proceedings may very much depend on the choice of arbitrators, and cost can to some extent be managed by the parties themselves, arbitration is not inherently less favourable than court proceedings in this respect either.13

Against this background, the main limiting factor for the use of commercial arbitration in cross-border project finance transactions is often policy constraints. These will often preclude arbitration or submission to foreign jurisdiction for disputes involving government agencies or government-owned entities of the host country.14 On the other hand, commercial lenders tend to prefer the jurisdiction of London, New York or other courts that have a strong reputation for high-quality commercial dispute resolution and are institutionally better protected against erratic decisions and consensualism than an arbitral tribunal. As a result, the typical choice of forum for a cross-border project finance transaction is likely to comprise a combination of courts of the host country, which will in any event exercise mandatory jurisdiction over many aspects of the project as set out above, and commercial arbitration, potentially complemented by optional court jurisdiction under the finance documents. While this is a sensible and – in relation to the host country – inevitable compromise, it should be borne in mind that every additional choice of forum will create additional interfaces and thereby increase the risk of inconsistent and unpredictable decisions. It is hence preferable to reduce the number of fora as much as possible, and to agree on a uniform arbitration clause providing for a single arbitration institution15 and seat of arbitration,16 ideally in the form of a multi-party arbitration agreement covering all relevant transaction documents.

ii Applicable law

As mentioned above, the choice of forum will also determine the choice of law rules under which the court or tribunal will identify the substantive laws applicable to the dispute. Even where choice of law rules are harmonised through treaties of other international instruments, their application may differ from one signatory state to another. Moreover, under the theory of renvoi, a court may follow the choice of law rules of a foreign jurisdiction to which its own rules refer if these refer back to its own substantive laws, or to the laws of a third country. There are, however, a few universally accepted connecting factors that will assist in identifying the jurisdictions whose laws are likely to apply to a given project finance transaction:

Connecting factorLegal issues coveredCustomary term
Contractual choice of governing lawFormation, validity, performance, discharge and transfer of contractual obligationsLex contractus
Place of performanceInternationally mandatory laws that may interfere with performanceLex loci solutionis
Physical location of property and other tangible assetsRights in rem in respect of such assetsLex rei sitae
Corporate domicile (civil law jurisdictions) or place of incorporation (common law jurisdictions)Corporate existence, capacity, powers and representation, shareholders' rights and obligationsLex societatis
Jurisdiction of the court (based on location of assets in enforcement matters)Procedural matters (including enforceability of foreign judgments and arbitral awards)Lex fori
Public policyOrdre public
Debtor domicile or location of assets (as heads of mandatory jurisdiction)InsolvencyLex concursus

It follows from the above that besides the laws of the host state, a cross-border project finance transaction will typically involve the leges contractuum of the various transaction documents and the leges societatum of those parties not domiciled in the host state. The generally accepted approach to mitigate the risks that may result from the application of these different laws is to obtain legal opinions from all jurisdictions that have been identified as potentially relevant based on the different connecting factors in the context of the specific transaction as a closing condition.

Although legal opinions are often discussed with a focus on liability of the issuing law firm, and tend to be overcharged with assumptions and qualifications to minimise that risk, they are meaningful tools to conceptualise and identify legal risks that may (in particular) arise under foreign laws (which are presumptively unfamiliar to the recipient). This function is largely aided by the use of an established basic format and uniform English terminology to describe the basic legal concepts underlying commercial transactions, as promoted by the TriBar Opinion Committee Reports and the Reports of the ABA Business Law Section. In a typical project finance transaction, the following opinion statements should therefore be obtained from counsel from the relevant jurisdictions in respect of all relevant parties, contracts, assets, locations and jurisdictions:

Opinion statementApplicable law
Corporate existence, power and capacityLex societatis
Due authorisation and execution17Lex societatis
Immunity from suitLex societatis
No violation of lawsLex societatis
Lex loci solutionis
Validity and enforceability of contractual obligationsLex contractus
Notarisations, filings and government consentsLex contractus Lex loci solutionis
Choice of lawLex contractus (formation)
Lex fori (recognition and public policy)
Lex loci solutionis (unlawfulness of performance)
Submission to jurisdiction or arbitrationLex contractus (formation)
Lex fori (recognition)
Enforceability of foreign judgments and arbitral awardsLex fori (location of assets of judgment debtor, typically host country and home jurisdiction)
Creation of security interestsLex rei sitae
Recognition of security interests in insolvencyLex concursus

If systematically applied, this frame of reference can serve as an efficient tool to identify legal risks arising under foreign laws across a multi-jurisdictional web of contractual and corporate relationships.


While legal opinions can give assurance as to the legal enforceability of contractual obligations and security interests, they provide little insight as to how the law will be applied in the context of an actual dispute. This is due both to the high level of abstraction of the opinion statements and to the myriad of different scenarios that can give rise to enforcement actions. Although commercial actors regularly accept this uncertainty as inevitable in a domestic setting, it is often perceived as a significant risk in cross-border transactions.

The increased sense of dispute resolution risk in cross-border transactions can be explained by the complex nature of legal certainty as a construct of elements referred to in the introduction hereto (i.e., knowledge of the applicable rules and contract terms, experience as to how these rules and contract terms will be understood by the parties and applied by a court or tribunal, and trust in the legitimacy of the final judgment or award). While a legal opinion together with the transaction documentation can convey knowledge, experience can only be acquired over time, and trust is very much a reflection of authority earned through social interaction. Hence, it is not surprising that lawyers around the world tend to consider the legal system in which they themselves have been trained as the natural benchmark for legal certainty and the choice of its courts and law as the best possible protection against dispute resolution risk.

It follows from this analysis that, rather than arguing the respective benefits of different legal systems in the abstract, dispute resolution risk in cross-border transactions is best addressed by considering all three elements of legal certainty in the specific context. The natural starting point of any such solution should of course be that the ideal strategy to mitigate dispute resolution risk is to avoid disputes, which in turn is best achieved by ensuring that all commercial parties have the same understanding of their contractual rights and obligations.

i Knowledge

The need to establish common knowledge of contractual rights and obligations is most efficiently served by spelling out the contractual terms in sufficient detail as to make references to the underlying law (feel) unnecessary. This rationale also applies for domestic transactions, but even more so in a cross-border context where preconceptions of what 'the law' or 'fairness' would require may often differ. It is, therefore, no surprise that comprehensive standard documentation like the FIDIC forms for construction contracts, the UCP600 and ISP98 rules for documentary credit and demand guarantees, and LMA or LSTA formats for loan agreements18 are particularly popular in international project finance transactions.

Although documentation based on internationally used standard forms can greatly facilitate a common understanding of what is required from the parties, it is a treacherous misconception that a sufficiently detailed contract can anticipate all potential future disputes. Indeed, extensive detail may support the argument that the parties consciously left out other scenarios because they considered them irrelevant. Moreover, a court of law will always have to refer to the laws of some jurisdiction to evaluate the validity of the contract and to provide a frame of reference for its application, and although arbitration clauses may prescribe the application of general principles of law rather than the law of any specific country, this is a rare exception and will not enhance legal certainty.19 It is therefore both customary and prudent to include a choice of law in any cross-border contract to allow the parties to inform themselves of the applicable law and thereby reduce legal uncertainty, for both the purposes of day-to-day contract management and the facilitation of dispute resolution.

Knowledge of the applicable law presupposes accessibility, which itself has several aspects: from a linguistic aspect, the laws of common law jurisdictions benefit from the obvious advantage of being available in English, whereas basic rules can often be more easily accessed in codified legal systems. From yet another angle, the observation that the body of law in larger jurisdictions is more comprehensive, and therefore more likely to offer a response to any given fact pattern, may be outweighed by the consideration that smaller jurisdictions are less prone to hidden traps and conflicting opinions.

ii Experience

The use of international standard documentation like the FIDIC also allows market participants to gain experience as to how customary contract terms may be applied independent of the applicable law in a cross-border setting: if there is a FIDIC concept of force majeure, that concept will to some extent inform the understanding of market participants irrespective of the application of the same concept by the courts of any given country. However, as mentioned above, the terms of the contract and market practice as to their interpretation will eventually be complemented by the laws of some jurisdiction in almost all situations. If disputes are to be avoided through better understanding of the law, the best approach to this choice usually is to opt for the home jurisdiction of the party whose performance defines the nature of the contract, and who therefore must comply with the more complex set of obligations.20

Besides their own familiarity with the applicable law, commercial parties should take care that their choices of law and forum do not contradict each other: while courts of law are generally well-equipped to analyse preliminary questions governed by foreign law, their qualification and experience naturally centres in their own jurisdiction. Hence, dispute resolution risk is usually best managed by aligning the choices of law and forum and, more generally, by reducing the number of interfaces between different laws that may become relevant in case of a later dispute.21 Where application of several laws in the same dispute are to be expected, as is often the case in international project finance transactions, the possibility of bringing experience from all relevant laws to the adjudication process through the selection of suitably qualified arbitrators from these jurisdictions further strengthens the argument for arbitration as the most suitable forum in many cases.

iii Trust

Trust in the dispute resolution mechanism, notably the willingness to accept a judgment or award that is contrary to one's own interests and beliefs, constitutes the final and most crucial element of successful dispute resolution risk mitigation. Besides the experience of the judges or the arbitrators in the subject matter of the dispute and the governing law, as set forth in the preceding sub-section, the paramount consideration in this respect is neutrality of the court or tribunal. From the point of view of an international investor, this will often rule out accepting jurisdiction of the host state wherever it is not mandatory. On the other hand, the courts of capital-exporting countries may be seen critically by other parties because of their (previously) rigorous approach to vested rights. Again, arbitration offers itself as a middle ground if the parties are willing to accept the lack of appeals procedures and other institutional safeguards.

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