FUTURE CITIES PROJECT: THE MATTER OF YAGRIEBVILLE BUILDING AUTHORITY V HONSHU

CONSTRUCTION CO. LTD

A. GENERAL INFORMATON (KNOWN TO ALL)

1. In 1964, oil was discovered in the Kingdom of Koti (Kingdom). Until that point, the Kingdom

– a little known microstate situated in northeast Africa – had largely been a subsistence

economy. Today the Kingdom has a GDP per capita comparable to the wealthiest States in

Central and Western Europe, North America, and Australasia.

2. The Kingdom was able to achieve such extraordinary growth and development under the

stewardship of King Yagrieb the Great, who ruled the country from 1960 until 2018.

3. King Yagrieb was both a master diplomat and an economic genius. He had the foresight to

secure the best markets for the Kingdom’s oil, while ensuring that most of the profits

associated with those sales stayed in the Kingdom. While widely admired abroad for its

rapid economic development, the Kingdom remains an absolute monarchy where opposition

groups are suppressed, and citizens are afforded no political freedoms.

4. On King Yagrieb’s death, his son, Prince Heffetz, ascended to the throne. The now King

Heffetz is a moderniser and has embarked on a program of major reforms. The centre piece

for the King’s modernisation program is popularly known as “Koti Foresight 2043”. Under

that plan, the King has pledged that, by 2043, the Kingdom will: (i) transition from being an

absolute monarchy to being a constitutional monarchy; (ii) diversify its economy away from

oil and encourage foreign investment in order to achieve that goal; (iii) build three brand

new “cities of the future” on land reclaimed from the sea, including ports for those cities on

the coast; and (iv) stamp out all corruption in the Kingdom.

5. The first city to be built will be named Yagriebville, in honour of the late King. The Kingdom

incorporated the Yagriebville Building Authority (YBA) as the special purpose vehicle

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 responsible for the development of the new city. In July 2020, YBA put out a tender to all of

the globe’s major construction companies to be primarily responsible for the construction of

the city.

6. On 30 September 2020, the YBA announced that the Honshu Construction Co. Ltd ( HCCL), a

previously little-known Japanese construction firm, won the tender. Shortly after, on 15

October 2020, YBA and HCCL (Parties) entered into a voluminous engineering, procurement,

and construction (EPC) contract.

7. For present purposes, it is relevant to note that the contract provided:

(a) that HCCL shall be responsible for all engineering, procuring and construction

work associated with building Yagriebville;

(b) details of the scope of works which HCCL was required to perform;

(c) that the scope of such works could be amended by YBA, provided that it gives

HCCL fair compensation for any change;

(d) that, in consideration for HCCL performing the scope of works, YBA agrees to

pay HCCL the sum of USD$3 billion by way of monthly tranches over the life of

the project;

(e) that HCCL is required to post a performance bond in the amount of USD$200

million to guarantee that it will perform the scope of works;

(f) the contract is governed by the law of the Kingdom (which, reflecting its colonial

history, is a complicated mixture of civil law, common law, and the religious law

which pre-dated colonisation);

(g) all disputes under the contract shall be referred for arbitration to a panel of

three arbitrators who shall administer the arbitration in accordance with the ICC

Rules; and

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 (h) that before any party commences an arbitration, the Parties shall engage in a

mediation.

8. On January 2021, HCCL commenced work on the project. Initially, the Parties worked

together cooperatively, but it was not long before difficulties arose. In broad terms, the

Parties fell out over two issues.

9. First, not long after HCCL commenced work, it became apparent that the land reclaimed

from the sea on which the city was to be built was inherently unstable. As a consequence,

the designs of many of the buildings must be altered to ensure that they remain structurally

sound. This will result in significantly greater costs than HCCL had budgeted for. HCCL

contends that in order for it to complete the extra work, it will need to expend at least an

additional USD$75 million. By contrast, YBA’s position is that it was clear on the face of the

tender documents that the reclaimed land was likely to be unstable. Accordingly, YBA

contends that HCCL should have made an allowance for the issue in its cost estimates.

10. Second, in February 2021, after consultations with the King, the CEO of YBA decided that the

new city should have its own underground metro railway. YBA issued a variation to the

scope of works which HCCL was required to perform. The variation relevantly provided that

YBA would give HCCL “fair compensation” in the amount of USD$1 billion for the variation.

HCCL considers this amount to be woefully inadequate for such a major variation. It has

indicated that it will require at least USD$1.75 billion to compensate it for the late change in

scope. In addition, HCCL says that being required to construct an underground metro

railway will radically delay the other works it is required to perform.

11. In an attempt to resolve the dispute, HCCL sent its chief engineer, Mr Tan, to the Kingdom in

April 2021 for negotiations. Unfortunately, those negotiations did not go well. Shortly after

arriving in the Kingdom, Mr Tan was taken to a meeting with the CEO of YGA and a senior

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 member of the Kingdom’s foreign ministry. There are conflicting accounts of what

happened at the meeting, although it is common ground that Mr Tan was arrested by the

police during the course of the meeting. YGA contends that Mr Tan was arrested because he

attempted to bribe both YGA’s CEO and the individual from the Kingdom’s foreign ministry

with the aim of securing preferential treatment in future “cities of the future” projects. By

contrast, HCCL says that Mr Tan’s arrest was orchestrated to put pressure on him to sign a

letter on behalf of HCCL which stated that:

“HCCL accepts YBA’s proposed amendments to the scope of works regarding the

metro and agrees that any extra costs associated with the instability of the

reclaimed land will be the responsibility of HCCL.”

12. In the months which followed, the Parties’ respective lawyers have engaged in voluminous

correspondence concerning the dispute. Mr Tan remains in custody.

13. HCCL’s position in that correspondence was that: (i) it should be compensated for all the

extra work it is required to perform as a result of the reclaimed land being unstable; (ii) it

should be afforded extra compensation to complete the underground metro; and (iii) that

the letter signed by its chief engineer is of no effect because he signed it under duress.

14. YBA’s position in that correspondence was that: (i) under the contract, any costs associated

with the instability of the land must be met by HCCL; (ii) the variation to the scope of works

was made in conformity with YBA’s contractual right to make variations; and (iii) Mr Tan’s

letter makes clear that HCCL has, in any event, waived all claims against YBA.

15. Pursuant to the contract, the Parties’ respective CEOs, accompanied by their respective

Counsel, have agreed to mediate the dispute under the ICC Mediation Rules as is required

under their contract.

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FUTURE CITIES PROJECT: THE MATTER OF YAGRIEBVILLE BUILDING AUTHORITY V HONSHU

CONSTRUCTION CO. LTD

B. CONFIDENTIAL INFORMATION: CEO OF HCCL (RESPONDING PARTY)

1. HCCL has taken advice from both a local law firm and a London law firm which specialises

in international arbitration. The advice conflicts. The local law firm considers that YGA is

likely to succeed in any arbitration. On the other hand, the London law firm has cautioned

that an international arbitration tribunal is unlikely to apply local law strictly and is more

likely to look to more broad notions of commerciality and fairness when determining the

dispute.

2. HCCL has also advised that enforcing any arbitral award against YGA may be difficult given

that it has no assets outside of the Kingdom and it is very unlikely that the courts of the

Kingdom will enforce an award against a state-owned enterprise.

3. HCCL has only recently entered the market for such large-scale international

megaprojects. It is concerned that if any dispute were to become public, its chances of

securing similar work in the future may be compromised. It is also concerned about the

legal costs associated with prosecuting a large and complex arbitration against a state-

owned entity with (theoretically) unlimited resources. Additionally, HCCL has been

plagued by corruption scandals in the past and is eager to avoid any suggestion that it

continues to secure work by such means.

4. By the same token, HCCL feels genuinely aggrieved by the conduct of YGA. From its

perspective, YGA has abused its position of power as a state-owned entity and changed

the goalposts once the contract was signed. It has also attempted to use the coercive

power of the state to bully HCCL into backing down. The scale of the projects HCCL plans

to be involved in in the future means that it will probably work with state owned

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 enterprises again in both the Kingdom and in other countries, and it does not want to

develop a reputation for weakness.

5. In relation to the variation to the contract, HCCL consider that, at a push, it could perform

the work for USD$1.5 billion (although HCCL has informed its CEO that they should push

for as large an amount as possible). At that price, it would be just breaking even. If HCCL

is to agree to perform the work, it requires that there to be an amendment to the

contract such that in the future no variations can be made unless both Parties agree to

the quantum of the “fair compensation.” In the event of a dispute as to that amount, the

“fair compensation” will be determined by an independent expert.

6. In relation to the stability of the land on which the city is to be built, HCCL acknowledges

internally that it should probably have realised that such issues were likely to arise. But

the commercial reality is that if it is solely responsible for addressing these issues, it is

likely to make substantial losses on that part of the project. Given that HCCL will shortly

be commencing a new round of share offerings on the Japanese Stock Exchange, it

cannot afford to have such losses recorded on its books. It is, therefore, essential that

HCCL is not required to perform this work unless it receives some form of compensation.

7. HCCL is mindful that the Yagriebville project is only one of the three cities which will be

built under Koti Foresight 2042. And it considers that, but for this dispute, its experience

in this project is likely to stand it in good stead to win any future tender.

8. Finally, it should be remembered that Mr Tan remains in custody. Any settlement will

need to secure his release.

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