Contractors must check the fine print

Amid the current global financial crisis, the construction market has seen a downturn, exposing contractors to risks. JONATHAN BRUFAL* discusses crucial issues contractors might face if the contracted party calls for a change in terms.

WHILE the construction market in the UAE has experienced phenomenal growth over the past decade, the last few months have seen a significant change in the market with a number of high-profile projects having been cancelled, put on hold or scaled back.

Numerous contractors are reporting delays in payment under existing contracts and developers are increasingly looking to renegotiate contract terms, with contractors being asked to reduce previously agreed prices by up to 30 per cent. The volume of formal disputes in the construction sector is also increasing significantly.
In such times, it is critical that contractors fully understand the rights and remedies available to them under their existing contracts. Contractors may be looking to enforce those rights and remedies contractually or to use them as a means of commercial leverage when negotiating with developers looking to re-programme or scale back existing projects.
Accordingly, it is important that contractors carry out risk audits of their existing contracts. Some of the key issues and local law questions that contractors should be looking into include:

Given the pressure developers are currently facing, there may increasingly be valid grounds for contractors to make extension of time claims in respect of non-payment, delay in the provision of information and the like. Developers will naturally be looking to defend such claims, so contractors should check the terms of their contracts and review the grounds on which developers are able to do so.
It should be noted that developers often amend standard forms to include numerous conditions precedent that a contractor must satisfy before it can make an extension-of-time claim. Whilst there is some debate as to the effectiveness of such provisions under English law, there is nothing to suggest they would not work under UAE law. As a result, contractors must fully understand the written procedures for making such claims in their contracts to ensure that they are not, as a consequence of missing any time limits or other conditions precedent, prohibited from making such claims.

Contractors should familiarise themselves with the dispute resolution provisions in their contracts. Do they provide for litigation or arbitration? Under UAE law, litigation is always available unless the right to it has been expressly and unequivocally waived in the contract by both parties, with the inclusion of an arbitration clause duly stamped and signed by the parties’ authorised signatories.
Awards or opinions issued pursuant to methods of dispute resolution other than litigation and arbitration are not strictly enforceable (that is, contractual arbitration or expert determination). That said, contractual clauses that refer to a dispute resolution procedure mutually agreed between the parties, are generally enforced by UAE courts.
The UAE legal system does not allow recovery of legal expenses by the successful party (that is, the loser does not pay the winner’s cost) and a contractor may wish to ensure that adequate provision is made for this in the contract.
The UAE has recently acceded to the New York Convention on the Enforcement of Foreign Arbitral Awards and, therefore, any award made by an arbitrator under the jurisdiction of another signatory country will be capable of being recognised and enforced by the UAE Courts. As such, an arbitration clause that states the seat of arbitration as being outside the UAE, is no longer the mechanism for deflecting claims that it may once have been.

Many developers are currently putting projects on hold and trying to suspend works under existing contracts. Contractors should review their contracts to see whether such express rights exist. If they do, contractors should also confirm their obligations in terms of maintaining a site presence in order to ensure the safety of the works during the periods of suspension. Contractors should be aware of the strict site rules imposed by various municipalities in the UAE in respect of health and safety when considering making sites safe during periods of suspension.
Contractors should also check that they are entitled to be paid for shoring-up and maintaining the safety of incomplete works during any period of prolonged suspension. Most standard forms do provide for some such costs to be reimbursed by the developer but whether this covers the full cost of demobilisation, resumption of work (which may include making good deterioration or defects in works, plant or materials) and/or a profit margin will vary from contract to contract.

Contractors should check the termination provisions in their contracts closely. In the absence of contractor default, developers can generally only terminate a contract, on a non-default basis, if it contains a termination-for-convenience clause. Where there is no such clause, contractors should closely review the express grounds that would entitle a developer to issue a termination notice in order to check that there are no current circumstances existing that could give rise to such an entitlement.
In addition, contractors should check what measure of compensation they are entitled to if a developer does validly exercise its right to terminate for convenience. There is some uncertainty under UAE law as to the recoverability of consequential and indirect losses but it is important that contractors check whether there are any contractual restrictions on the recoverability of such losses.

Developers may try to omit work from a contract by way of a variation order. The terms of the contract need to be reviewed closely to see whether a developer is permitted to use a variation order in this way. In the absence of an express provision in the contract, there is some uncertainty under English law as to whether a developer can do this and the position is not currently clear under UAE law.
However, if a contractor does find work being omitted from a contract, it should consider whether it can secure any commercial upside in agreeing to such an omission either through a renegotiation of the terms governing the work not omitted or through securing a “right of first refusal” in the future in respect of the omitted works.

Reports that developers are delaying payment in the UAE are widespread. Accordingly, it is important that contractors look closely at their contracts to ensure that any payments withheld by developers have been withheld validly and in accordance with the terms of the contract. If not, contractors should examine what contractual remedies are available to them.
Generally, this will either be a right to suspend performance of the works or to terminate the contract. However, care should be taken before exercising a right to suspend. If it later transpires that the developer was correct to withhold payment (say, by way of permitted set-off) and the developer incurs losses due to delay to the completion date as a result of a wrongful suspension, the contractor may be exposed to general damages claim in excess of the liquidated damages set out in the contract.
Any cap on the contractor’s liquidated damages, agreed between the parties, may be reviewed by a UAE court exercising its discretion. If the actual damages sustained are shown to be well in excess of the agreed cap, a UAE court may look beyond the cap and award damages that are quantifiably closer to the actual losses incurred. It should, however, be noted that the reverse could also be true. The UAE civil code provisions cannot be excluded by agreement between the parties.
Contractors should also carry out thorough due diligence on the party with which it has contracted. If a project is experiencing difficulties and a developer is looking to renegotiate terms with a contractor, the contractor should, in return, seek to ensure that it is provided with a full payment guarantee from the entity within the developer’s group structure that has the best covenant strength.

Those contractors that are asked to re-price their contracts should not assume that all is lost and should in turn look to their sub-contractors to share some of the pain and reconsider their own contract prices. To the extent that the contractor is able to pass price changes down the supply chain, the reduction in profit margins can be managed.
To ensure an ability to do this, contractors should check existing sub-contracts and going forward should ensure that all new sub-contracts entered into are as flexible as possible, and provide the contractor with the right to call for price revisions and, if necessary, terminate a sub-contract and re-tender the works.
The above gives a flavour of the key issues contractors should be considering but, given the state of the market, it would be an ill-advised contractor that did not take the time to take its contrac

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