Contracts must be fair to all if prices rise far beyond reason

Contracts must be fair to all if prices rise far beyond reason
 
by Eudore Chand 
 
A lot is at stake|~|It was early afternoon and the office on the 7th floor of Al Khaleej
 
Centre was hushed. But it was the deceptive quietness of people busy at their desks with
 
having too much to do and too little time
 
In walks Jeremy Cama, new country manager of Berrymans Lace Mawer, legal consultants and
 
specialists in the construction sector.
 
He is courteous and polite, but with the distracted air of a man who has not yet switched
 
off the high-intensity thought-process regarding the job he has just left waiting at his
 
desk.
But in a few seconds and without losing a stitch, Cama is full attention rapidly
 
translating his focus to the new job at hand.
 
In a wide-ranging interview with Construction Week’s editor Eudore Chand, Cama felt
 
strongly that the solution to the construction industry’s traditional woes, was the
 
inclusion of proper dispute resolution clauses right at the time of formulating the
 
contract.
 
CW: You must have found out that dispute resolution is a historic problem in the UAE
 
construction sector. How can it be dealt with to any level of general satisfaction?
 
Cama: As lawyers, we feel that this problem should be dealt with right at the inception of
 
the contract. If you can deal with it at that stage, that is, you allow for re-pricing of
 
the contract in an equitable style if price increases take place beyond a reasonable and
 
specified amount or percentage, it will be a balanced contract. When formulating a
 
contract, care should be taken to allow for sensible redistribution of risk.
 
CW: If it were that easy, why have contracts not been done this way before?
 
Cama: The environment here not been conducive to that type of arrangement. But, do we need
 
to have bankruptcies or a major failure or some commercial catastrophe to happen before
 
realisation comes in that something needs to be done?
 
CW: Cannot legal and other advisors play a role in bringing about this kind of change in
 
the way the construction industry operates in this market?
 
Cama: It is a challenge to lawyers specialising in construction. If a client wished to
 
address this issue, he would turn to lawyers to set the conditions for equitable
 
distribution of future or perceived risk among various parties to the contract. This
 
problem needs to be dealt with, and one way it could be done is that the industry itself
 
comes to the same conclusion that there is a requirement to have a mechanism in place to
 
deal with such issues. Nobody wants a dispute. No one wants a project to get delayed or
 
stopped. There is too much to lose and it is just not worth taking the risk. It is in
 
everybody’s best interests to think of these issues at the tender stage.
 
CW: What other advice do you have for the construction sector in terms of finding solutions
 
to some of its more popular problems? Should the government step in and enforce
 
regulations?
 
Cama: I think that the market should be more grown up about its issues and should be
 
courageous enough to deal with them. In terms of intervention, I don’t think that markets
 
generally favour systematic intervention by governments. This inevitably leads to greater
 
distortions. The best is to leave it to the markets-driven mechanism of supply and demand.
 
CW: In the present circumstances when the price of basic raw materials like steel are
 
surging, how would this work?
 
Cama: It was known from previously that a steel crunch was coming. Articles had been
 
written about it. Steel company shares were going up, boosted by the demand for their
 
company products. People knew that China was sucking up steel and would continue to suck up
 
a lot more. The market knew all this. Under such circumstances, market solutions are
 
potentially interesting. Contractors knew the crunch was coming and, for example, could
 
have bought forward. I heard that the London Metals Exchange is working on contracting that
 
has to do with buying of steel futures.
 
CW: But does that kind of sophistication exist in this market?
 
Cama: The commodity market here is not developed where contractors can hedge. The markets
 
here do not allow for the hedging process to take place externally to a contract. Risk here
 
falls directly on the contractor and this creates problems.
 
CW: So, what can be done to solve the sector’s problems?
 
Cama: The market here does not have appropriate mechanisms in place. As I mentioned,
 
unilateral government action is unlikely. Also, multilateral, bilateral or regional
 
solutions through government agencies, too, are unlikely. Therefore, the only mechanism
 
left is an equitable distribution of risk at the time the contract is entered
 
into.||**||Clients are in a relatively stronger position|~||~||~|CW: What do you think is
 
the current situation in the market?
 
Cama: We are hearing that a number of contractors and subcontractors are struggling to get
 
paid, at times not getting anything at all. This situation may even be driving the problems
 
in the labour market, driving these unfortunate people to present their case at the
 
Ministry of Labour and Social Affairs. This is regrettable.
 
CW: What is the situation of the project owners or developers?
 
Cama: Employers are in a relatively stronger position. The issue in the market is that of
 
withholding payments. Sometimes it is correct to withhold payment if the work is not done
 
properly or is late. But when the engineers have certified the work, then not paying up is
 
a breach of contract.
 
CW: What can contractors do in such a situation?
 
Cama: There are remedies that contractors can take. In the UAE, the vast majority of
 
construction contracts are led with an arbitration clause. The courts recognise that as a
 
means of resolving disputes through a tribunal here or abroad.
 
CW: But aren’t delays also a problem?
Cama: It can be a long and slow process and unfortunately, not inexpensive. The process can
 
take some time, especially in complex cases, where it can take as much as a year or two to
 
get a dispute heard by an arbitrator and a decision to be handed down. It becomes worse if
 
the decision is not accepted and has to go to UAE courts because at that point the courts
 
can reopen the whole case. In the interest of justice, it is not ideal to have a system
 
that results in protracted delays in getting a decision and getting it enforced.
Sometimes a lot is at stake. But sometimes it is better to settle as soon as is possible.
 
We advise an amicable and commercially acceptable settlement ahead of arbitration. But that
 
always does not happen, especially if a case is complex and the parties are in an
 
entrenched position.
 
CW: What other legal avenue are possible?
 
Cama: There is talk of the ‘adjudication procedure’ that provides for solution prior to
 
full-blown arbitration. An adjudicator is appointed at the inception of the contract to
 
deal with any disputes as they come up during the life of the contract. This can be final
 
and binding. In the industry, there is now recognition that adjudication exists in other
 
jurisdictions. People are talking about it. Whether it is introduced in the UAE is a moot
 
point. Here it is not statutorily backed.
 
CW: What is your overall view of the construction sector in the region and the UAE?
 
Cama: My perspective would have to come from where I’ve been operating, and that is South
 
East Asia. I have been here for two or three months as country manager and what I have
 
picked up from employers and contractors here, breaks down into similar and typical types
 
of contractual issues of civil projects. I have worked in Malaysia, Singapore, Indonesia,
 
Vietnam and Hong Kong and I have observed that wherever a significant amount of English
 
style influence has been brought to bear on the way in which projects are contracted,
 
issues and problems are similar.
 
CW: What is most common in this part of the world?
 
Cama: I have often confronted here the issue relating to extension of time by contractors
 
and issues relating to variations, where employers have varied the design. In both cases,
 
contractors have to bear additional cost. The issue then is ‘how much, if at all, must be
 
paid ‘. Issues are more germane to payment and to certification of payments. In South East
 
Asia, my experience was that people did get paid. Here there is marked reluctance to pay on
 
time. This inevitably has consequences downstream and raises issues where the parties
 
involved, require legal advice. That seems to be a major issue.
 
CW: Why the problem?
 
Cama: Cash flow is king in projects. To sustain a project, you have to maintain cash flow
 
from start to finish. The issue is that in some cases, this is not happening, sometimes for
 
good reasons and sometimes for not so good reasons.
 
CW: Could you tell us a bit about your company?
 
Cama: Berryman Lace Mawer is a firm of specialist lawyers and is more than 100 years old.
 
It has its headquarters in UK. It covers Gulf operations out of Dubai, where it has been
 
for the past ten years. We also have an associate office in Abu Dhabi. My arrival here is
 
in anticipation to move our expertise in advising on construction-related matters. This
 
area has a lot of infrastructure projects and we think we can play a part in all sectors or
 
in target areas such as oil and gas, roads, rail or utilities.
 
Source: Construction Week