The Contractual Sandwich Case—Managing Vertical Integration Through Contracts

This case study deals with a large construction project within a US refinery and a defective piece of equipment, an undersized pipe rack. Questions are raised regarding who is responsible for the defect, who has to pay for the repair work and how the issue can be dealt with in a way causing minimal disruption of the project progress as well as the parties’ business relationships. The case addresses in particular problems associated with a vertical enterprise network consisting of the plant owner, the main contractor and a subcontractor. This setting represents a multi-dimensional contractual management issue since the EPC contractor is bound in two directions: (1) by a main contract with its client, the plant owner, and (2) by an installation and construction contract with its subcontractor. As both contracts are partially overlapping, owner and subcontractor try to take advantage of the situation and influence the decision of the EPC contractor’s project manager with the goal of benefiting from his decision. Therefore, only detailed knowledge of both contracts and a clever contractual management allow the project manager to make reasonable decisions and to enforce them effectively. But not only legal aspects need to be considered. To achieve the best results for his employer, the project manager needs to consider the impact of his decisions on the enterprise as a whole, i.e. on its corporate and financial management, its relationship with the owner and on its future business opportunities.