When Megadeals Stumble: Resolving Project Finance and Arbitration Crossroads

Introduction

In recent times, the growth of complex infrastructure and energy ventures has elevated project finance into one of the most sophisticated financing structures in global commerce. Megaprojects involve multilayered contractual frameworks, extensive security packages, and diverse stakeholder commitments, combined with high risk and capital intensity.1 As a result, disputes frequently arise even where projects are carefully structured.

Disputes in such projects are inevitable, and certain issues recur in project finance arbitration, irrespective of the project type. This article identifies key flashpoints and outlines strategies for lenders, sponsors, and governments to achieve commercially viable resolutions. It highlights that aligning contractual safeguards with bankability is key to preventing disputes and maintaining project progress.

Three Pillars of Project Finance Risk

01 Contractual 02 Capital 03 Stakeholder Layering Intensity Diversity

Multi-party agreements, High-leverage financing reliant Lenders, sponsors, security packages, concession on projected cash flows. States, contractors and terms. operators.

Common Triggers of Project Disputes: Delay, Default, Force Majeure, and Regulatory Change

Disputes in project finance transactions are In recent years, force majeure provisions usually caused by a handful of stress have become even more important due to points that keep reappearing and are pandemics, geopolitical instability, and deeply embedded in construction and extreme weather conditions.7 Legal and financing agreements.2 arbitration cases often focus on whether the incident falls within the contractual One of these stress points is definition of force majeure, whether it was delay.

Construction delays, which may foreseeable, and whether the affected range from contractor underperformance parties took reasonable steps to mitigate to supply chain disruption, damages.8 The financial effects such as changes in design, or even interference extension of time, payment of costs, or from the employer, can disrupt the rights to terminate, are of great significance timelines set by the parties.3 Since financing financially. agreements are set up based on expected cash flows, any delay, however small, can Another controversial issue is regulatory lead to extra costs, penalties, or the need change, especially in emerging for additional financial commitment from markets. Changes in tariffs, tax regimes, sponsors.4 environmental standards, or currency controls can significantly affect project Another major trigger is default.

Usually, economics. Stabilisation and change-in-law project finance agreements contain very clauses are often the main detailed financial covenants and issues in arbitration because the parties obligations.

A default will usually arise from dispute the risk-allocation and the right to failure to meet financial targets or any of compensation.9 the obligations agreed by the parties.5 A breach of these can be failure to meet a debt service coverage ratio or failure to achieve commercial operation by a certain date, which might be deemed as Tribunal Test events of default.6 Project sponsors (i.e., the Was the event within the clause? equity investors or project owners) often Was it foreseeable? debate whether a breach is serious or Were mitigation steps reasonable? fixable, while lenders consider whether to enforce the rules or allow a waiver to protect value.

The Lender's Toolkit: Security Enforcement vs. Project Rescue

1. Enforcement remedies: In project finance, lenders commonly take Special Purpose Vehicle (SPV) shares, contract rights, and cash flows as collateral. Enforcement typically involves foreclosure or the sale of these assets. Where lenders offer to accept the collateral in full satisfaction of the debt, they are not required to obtain the borrower’s consent before proceeding with foreclosure.11 Under United States (U. S.) law, foreclosure automatically occurs 20 days after notice is given to the borrower, and if the lender does not receive a written objection from the borrower to the proposed foreclosure. Under the English law, a properly structured share pledge under the Financial Collateral Arrangements (FCAR) allows the lender to appropriate the shares outrightly without a court sale.12 In both cases, the lender (or its nominee) assumes control of the project company and may also take on its liabilities, unless the project is refinanced or restructured. 2. Project-continuity clauses:

To maintain project operations, agreements often give lenders step-in rights. These allow lenders to take over the SPV’s contracts or transfer them to an approved replacement operator when needed.13 These clauses typically require lenders to remedy any existing defaults before exercising their step-in rights.14 In concession agreements (e.g. public-private partnership (PPP) contracts) developers typically negotiate that permits and tariffs remain in force and not terminate solely due to a lender enforcement.15 Model PF terms16 expressly extend the concession or provide adequate compensation to ensure debt repayment on enforcement.17

3. Enforcement vs. viability tension:

Aggressive enforcement can threaten project viability. Foreclosure or sale of the SPV may breach change of control covenants or trigger defaults, risking project shutdown. In Cukurovav. Alfa,18 the court allowed the lender to take collateral under English law, but required proper‐ no‐tice and fair valuation.19 Similarly, direct agreements generally require lenders to remedy any project defaults before exercising their step-in rights.20 The primary objective is to preserve the project as an ongoing concern,21 so transaction documents typically impose cure periods, notice requirements and consent rights to keep the project running even during enforcement.

Jurisdictional Snapshot — Two Roads to Foreclosure

United States England & Wales 20 FCAR days Foreclosure occurs automatically 20 days after A properly structured share pledge under the notice — absent a written borrower objection. Financial Collateral Arrangements allows outright

Arbitrating Technical Issues: Experts, Delay Analysis, and Damages Modeling

In project finance arbitrations, technical disputes often determine whether a commercial project succeeds or fails.22 These cases are not just about breaches of contract; they are most often about how delays, construction problems, or underperformance affect the project's complex financing and cash flows.23

Delay analysis is a fundamental element. Tribunals often review project schedules to figure out what caused the delay, whether delays overlapped, and whether they were excusable.24 Usually, the problem is not whether the delay occurred, it is deciding who will assume liability for the delay when there are several contributors, contractors, sponsors, and even unforeseen regulatory or force majeure events, at the same time.25

Disputes over technical performance require extensive knowledge. Arbitrators determine whether engineering, procurement, and construction (EPC)26 contractors fulfilled their contractual guarantees and whether they met the specified efficiency levels or complied with the requirements for commissioning.27 Minor variations could lead to multimillion-dollar claims unless carefully considered within the contract's tolerance levels.

Similarly, damage modelling converts technical information into its financial consequences. In this process, experts recreate the financial flows, measure the loss of profits, and also consider the risks of overruns, interest during construction, and financing gaps.28 Tariffs, inflation, discount rates, and assumptions about plant availability are highly debatable elements; even small differences can change claims by significant amount.

Modern arbitration procedures, such as experts appointed by the tribunal and hot-tubbing,29 are essential to reconcile conflicting technical narratives. The most successful cases combine precise technical evidence with rigorous financial modelling and translate complex engineering and operational realities into coherent, tribunal-ready arguments that protect both legal rights and the project’s economic viability.

Damages Model · Sensitivity Drivers Small shifts in any one variable can change a claim by a significant amount. ± ± Tariff assumptions Inflation indices

± ± Discount rates Plant availability

Preserving the Project: Dispute Resolution Mechanisms that Keep the Deal Alive

Multi-tier dispute clauses in Project continuity focus: infrastructure deals:

Project agreements usually require ADR in The net effect and objective of these stages before arbitration. Typical steps dispute resolution mechanisms is to keep include good-faith negotiation, referral to a the deal alive. Arbitration’s confidentiality technical expert or engineer, and (in FIDIC- and flexibility mean core stakeholders style contracts) a Dispute Adjudication (lenders, sponsors, authorities) can stay Board (DAB) decision.30 This step-by-step involved rather than withdrawing. The approach allows parties to pause, reassess, structured escalation (negotiation, and resolve smaller issues early, helping to expert/DAB, and arbitration) provides preserve commercial relationships. Courts multiple chances to fix problems.

Experts now uphold such multi-level dispute in project deals have also emphasised that resolution clauses as a matter of policy; for staged and structured dispute resolution example, Cable & Wireless v IBM31 “saves time and costs, as well as helping confirmed the enforceability of a (parties) preserve their commercial mandatory ADR clause.32 Requiring relationship”.39 negotiation or expert determination first helps keep stakeholders engaged and the project running, avoiding an immediate final award.33

In arbitration for instance, well-drafted clauses spell out scope, seat, law, and tribunal composition. Most of the highly complex project disputes use international arbitration rules: ICC34 or LCIA.35 The clause will often list essential issues (“any dispute arising out of or relating to this contract”) and specify a seat in an enforcing jurisdiction. If one party is a state, BITs36/ICSID37 treaties supplement or replace commercial rules.38 Overall, the clause is structured to minimise challenges and maximise enforceability.

“ Staged and structured dispute resolution saves time and costs —as well as helping parties preserve their commercial relationship.”

Key Takeaways

01 02 Progressive resolution Balanced contracts Adopt a progressive dispute resolution Draft contracts to protect both lenders' process to address issues promptly and rights and keep the project running protect relationships smoothly. .

03 04 Quantify accurately Engage early Use technical and financial analysis to Engage stakeholders proactively to measure delays, performance, and losses address problems before escalation. accurately.

05 06 Anticipate external risk Arbitrate to preserve value Anticipate regulatory and external risks to Use arbitration as a tool to resolve reduce uncertainty. disputes while safeguarding the value and finances of the project.

Conclusion

When major deals stumble, the problems are usually not limited to a sole issue in contract terms; it often involves the whole financial and operational network being put under pressure.

Late payment, non-payment, force majeure events, regulatory changes, or failure to meet technical requirements will each test whether the agreed allocation of risk between the parties is sound and effective.

That is why arbitration is no longer a place for just apportioning blame, but rather it is a tool for restoring the financial balance.

Endnotes 12

1. J D Finnerty, Project Financing: Asset Based Financial Engineering (3rd edn, John Wiley & Sons 2013) 2. Christophe Dugue, ‘Dispute Resolution in International Project Finance Transactions’ (2000) 24 Fordham International Law Journal 1064 <https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/frdint24&section=45> accessed 12 February 2026. 3. Elizabeth Moon, Delays in Global Engineering Procurement and Construction Projects: Main Factors in Project Management (2020) <https://www.theseus.fi/handle/10024/348935> accessed 12 February 2026. 4. Ibid 5. RM Lloyd, ‘Financial Covenants in Commercial Loan Documentation: Uses and Limitations’ (1990) 58 Tennessee Law Review 335 <https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/tenn58&section=19> accessed 12 February 2026. 6. Ibid (n5). 7.

Henrik Svensmark, Force Majeure (The Global Warming Policy Foundation GWPF Report 33, 2019) <https://climate-science.press/wp-content/uploads/2022/03/0SvensmarkSolar2019-1.pdf> accessed 12 February 2026. 8. Seng Hansen, ‘Does the COVID-19 Outbreak Constitute a Force Majeure Event?

A Pandemic Impact on Construction Contracts’ (2020) 6(1) Journal of the Civil Engineering Forum 201 <https://www.academia.edu/download/97397102/27686.pdf> accessed 12 February 2026. 9. Peter D Cameron, ‘Stabilization Clauses: Do They Have a Future?’ (2020) 7(1) BCDR International Arbitration Review <https://kluwerlawonline.com/journalarticle/BCDR+International+Arbitration+Review/7.1/BCDR2021018> accessed 12 February 2026. 10. U. S. law Uniform Commercial Code (UCC) 11. See Article 9 of the Uniform Commercial Code. See also Chris Groobey, Project Finance, <https://www.projectfinance.law/publications/2003/june/when-banks-foreclose> accessed 12 February 2026. 12.

Freilibertas Truly Independent Counsel, Security Enforcement – the strange case of the quiet Security Enforcement remedy which packs a punch, <https://www.freilibertas.com/blog/security-enforcement-the-strange-case-of-the-quiet-security-enforcement-remedy-which-packs-a-punchnbsp#> accessed 12 February 2026 13. Public-Private Partnership Resource Center, Lender Protections and Government Support in PPPs <https://ppp.worldbank.org/lender-protections-and-government-support-ppps#> accessed 12 February 2026 14. David Armstrong and Gregory Howling, The Project Finance Law Review (Lender Relationship With Project Counterparties) <https://www.skadden.com/- /media/files/publications/2019/05/lender_relationship_with_project_counterparties.pdf> accessed 12 February 2026 15.

Pinsent Masons (Out-Law Guide), Key issues for lenders in project finance agreements <https://www.pinsentmasons.com/out-law/guides/key-issues-for-lenders-in-project-finance-agreements#> accessed 12 February 2026 16. Model PF terms are basically standardised project finance provisions that set out risk allocation, lender protections and enforcement rights. 17. European Banks for Reconstruction and Development, Introduction to direct agreements for public-private partnership projects <https://www.ebrd.com/content/dam/ebrd_dxp/assets/pdfs/legal-reform/infrastructure-and-natural-resources/public-private-partnerships-and-concessions/volume- 1/vol1_chap11.pdf#> accessed 12 February 2026 18. [2009] ECSC J0916-1

Endnotes 12

19. Freilibertas Truly Independent Counsel, Security Enforcement – the strange case of the quiet Security Enforcement remedy which packs a punch, <https://www.freilibertas.com/blog/security-enforcement-the-strange-case-of-the-quiet-security-enforcement-remedy-which-packs-a-punchnbsp#> accessed 12 February 2026 20. David Armstrong and Gregory Howling, The Project Finance Law Review (Lender Relationship With Project Counterparties) <https://www.skadden.com/- /media/files/publications/2019/05/lender_relationship_with_project_counterparties.pdf> accessed 12 February 2026 21. Ibid 22. Enrique Ballestero, ‘Project Finance: A Multi-Criteria Approach to Arbitration’ (2000) 51(2) Journal of the Operational Research Society 183 <https://www.tandfonline.com/doi/abs/10.1057/palgrave.jors.2600852> accessed 12 February 2026. 23.

A Chadee, H Ali, S Gallage and U Rathnayake, Modelling the Implications of Delayed Payments on Contractors’ Cashflows on Infrastructure Projects (2023) <https://rda.sliit.lk/bitstreams/57c73806-94fb- 417d-8055-7ad6bd692c71/download> accessed 12 February 2026. 24. OM Azzam, AM Saleh and N Eleshmawy, ‘Delay Analysis in Construction Contracts: Assessing Claims and Legal Implications’ (2025) 17(1) Journal of Legal Affairs and Dispute Resolution in Engineering and Construction 04524032 <https://ascelibrary.org/doi/abs/10.1061/JLADAH. LADR-1198> accessed 12 February 2026. 25. Andrew Burr, Delay and Disruption in Construction Contracts (Informa Law from Routledge 2024) <https://www.taylorfrancis.com/books/mono/10.4324/9780429196676/delay-disruption-construction-contracts-andrew-burr> accessed 12 February 2026. 26.

Engineering, Procurement, and Construction 27. Mihaela Dana Kosmas, The Applicability of Engineering, Procurement, and Construction (EPC) Contracts in the Energy Sector with a Focus on Risk Allocation and Applicable Law Aspects (MS thesis, University of Piraeus 2025) 67 <https://dione.lib.unipi.gr/xmlui/bitstream/handle/unipi/18375/Thesis%20Mihaela%20Kosma.pdf?seque nce=1> accessed 12 February 2026. 28. Dominic D Ahiaga-Dagbui and Simon D Smith, ‘Rethinking Construction Cost Overruns: Cognition, Learning and Estimation’ (2014) 19(1) Journal of Financial Management of Property and Construction 38 <https://www.emerald.com/insight/content/doi/10.1108/JFMPC-06-2013-0027/full/html> accessed 12 February 2026.

29. ‘Hot-tubbing’ in arbitration refers to the practice of calling opposing expert witnesses to give their evidence concurrently rather than separately as is more typical. 30. Roberta Downey and Marie Devereux, Jumping Through (Enforceable) Hoops: The Importance of Certainty in Multi-tier Dispute Resolution Clauses <https://www.velaw.com/insights/jumping-through-enforceable-hoops-the-importance-of-certainty-in-multi-tier-dispute-resolution-clauses/> accessed 12 February 2026 31. [2002] 2 All ER (Comm) 1041 32. Ibid 33. Ibid 34. International Chamber of Commerce 35. London Court of International Arbitration; Chris Groobey, Project Finance, <https://www.projectfinance.law/publications/2003/june/when-banks-foreclose> accessed 12 February 2026. 36. Bilateral Investment Treaties 37.

International Centre for Settlement of Investment Disputes 38. Ibid 39. Roberta Downey and Marie Devereux, Jumping Through (Enforceable) Hoops: The Importance of Certainty in Multi-tier Dispute Resolution Clauses <https://www.velaw.com/insights/jumping-through-enforceable-hoops-the-importance-of-certainty-in-multi-tier-dispute-resolution-clauses/> accessed 12 February 2026