Project finance and lender dispute risks occupy a significant part of the landscape of Construction & Projects Disputes because major infrastructure, energy and real estate developments rely on complex financing structures that link contractors, developers, lenders, sponsors and government stakeholders. Where financing conditions, drawdowns, milestones or risk allocations break down, disputes quickly emerge between lenders and project companies over delays, cost overruns, covenant breaches, defective work, performance failures or termination events. These disputes carry serious implications, including suspension of funding, acceleration of debt, enforcement over security packages and project collapse. Understanding the sources of lender risk, the contractual framework of project finance and the legal tools used to manage disputes is essential for sponsors, financiers and contractors operating in capital intensive projects.
Project finance typically relies on non recourse or limited recourse structures where lenders’ repayment depends primarily on project revenues rather than sponsor balance sheets. This creates a highly interdependent structure: lenders require strong security packages and strict contractual protections, while project companies rely on consistent funding to maintain progress. Any breakdown in construction, regulatory approvals, land access or supply chain reliability can trigger lender concerns and contractual remedies.
Several recurring issues trigger friction between lenders and project developers.
Delays in achieving milestone dates, testing, commissioning or commercial operation can breach loan covenants and prevent further drawdowns. Cost overruns may force sponsors to provide additional equity or renegotiate financing terms. Lenders may challenge entitlement to extensions of time or dispute whether delays result from project company failings.
Lenders rely on performance guarantees and completion tests to ensure the project generates the expected revenue. Defects, shortfalls in output, or failure to satisfy technical performance criteria can derail financing structures and trigger disputes over contractor obligations and lender enforcement rights.
Misstatements or failure to meet ongoing obligations such as reporting, maintenance of insurance, compliance with environmental regulations or financial ratios can trigger lender default rights, including acceleration of debt or enforcement over security packages.
Lenders may refuse to release further financing if conditions precedent or milestone evidence are defective. Project companies often challenge refusals, arguing that lenders act unreasonably or rely on immaterial breaches.
Project finance structures include a network of security rights such as mortgages, share pledges, assignment of project rights, direct agreements and step in rights. When disputes arise, lenders may seek enforcement, while project companies and sponsors attempt to resist or negotiate restructuring.
Direct agreements often permit lenders to assume control of the project or appoint a replacement contractor if the project company defaults. Exercising these rights can lead to disputes over whether termination conditions are satisfied and whether lenders are acting within the contractual framework.
Lenders may push project companies to call on performance bonds or guarantees when contractors fail to perform. Contractors may resist or seek injunctions, arguing improper or abusive calls.
EPC contractors often find themselves drawn into lender related disputes when lenders question programme delays, testing failures or claims for additional time and money. Lenders scrutinise contractor records and claims, challenging the sufficiency of evidence and compliance with contractual procedures.
Maintaining transparent and accurate communication with lenders is essential to avoid escalations. Key steps include providing timely updates on progress, addressing delays early, managing change events formally and keeping robust project controls.
Depending on the contract suite, disputes may be resolved through negotiation, mediation, expert determination, arbitration or court proceedings. Because project finance disputes often involve technical, commercial and financial issues, expert evidence from engineers, financial analysts and project controls specialists plays a significant role in determining liability and quantifying losses.
Project finance and lender disputes arise where the financial structure of a major development intersects with construction, performance and regulatory risks. Because lenders, sponsors and contractors depend on each other to deliver complex assets, breakdowns in communication or performance can quickly escalate into high stakes legal disputes. By maintaining strong project governance, disciplined records, transparent communication and clear contractual compliance, stakeholders can mitigate lender related risks and preserve project viability.
