Effect of civil code on supply contracts

By James Williams

In terms of the large-scale construction projects familiar to Dubai, the building contract has received more attention than any other agreements, which include development agreements and deals to lease, the contractor’s security package, warranty documents and documents relating to the provision of finance.

From the contractor’s perspective, it is important to ensure the negotiation and execution of supply agreements and the relevant subcontracts is not delayed so as to ensure the contractor is able to comply with the required programme.

This article, which is in two parts, looks at some common issues arising in supply contracts and considers those issues in the light of relevant provisions of Federal Law No5 of 1985, as amended by Law No1 of 1987 (the Civil Code).

Delivery and setting down
It is important that the contract adequately deals with delivery and setting down of the goods. From the contractor’s point of view, he will want to make sure of delivery of the goods at a certain time in accordance with his programme and the supplier will want to be sure that the contractor is obliged to take delivery of the goods at that time and provide adequate space for them to be set down.

The Civil Code contains certain provisions dealing with delivery of goods. Article 514 of the Civil Code provides that the seller must deliver the goods free of any third party right or encumbrances and Article 567 provides that the seller shall bear the cost of delivery of the goods unless agreed to the contrary.

Article 530(1) provides that ‘the seller shall be obliged to deliver the goods at the place where they are at the time the contract is made’, although the parties can agree under Article 530(2) for the goods to be sent to the purchaser in which case the delivery will only be made if the goods reach the purchaser.

In supply contracts, this option is more usual with delivery being deemed to have taken place when the goods have been delivered to the site or the contractor’s storage facility, or even sometimes unloaded. However, pursuant to Article 525, delivery shall be by actual delivery or by the seller ‘leaving the way open to the purchaser to take the goods’. It is, therefore, possible for the parties to agree that the purchaser shall organise and effect the delivery.

Other issues such as the risk of unloading the goods, the party responsible for unloading, the method of delivery, packaging, protection and insurance during delivery will need to be resolved in the supply contract.

Testing on site
It is usual in cases where special items of equipment are ordered, such as generators or elevators, for them to be tested when on site. From the contractor’s perspective the contractor will want to ensure the equipment is operating according to the specification before making the final payment in respect of it. The same is also true of the supplier who will want to ensure he has fulfilled his requirements under the supply contract and is therefore entitled to full payment.

Articles 494 and 495 of the Civil Code relate to testing. It is possible, pursuant to Article 494 to make a sale subject to testing and the seller is obliged to give the buyer the opportunity to test the equipment. Under Article 495, the purchaser may, within the testing period, either affirm or reject the sale.

Article 502 deals with the product of any tests and provides: ‘The proceeds of the goods during the testing period shall belong to the seller and the costs thereof shall be borne by him, but the proceeds shall be treated as part of the goods and shall belong to the purchaser if the sale becomes final’.

This means any product produced as part of the tests (for example, where electricity generation equipment is tested which produces electricity during the testing period which is sold to a grid or network) shall belong to the purchaser if the transaction is completed provided the purchaser has paid for the product as part of the goods. However, the Civil Code is silent on other issues such as responsibility for installation of the equipment (if necessary), the consequences of any failed tests, rejection of part only of the equipment if a discrete part of the equipment does not comply with the specification and the return to the seller of any equipment that does not meet the required standards. These issues will need to be dealt with in the supply contract.

Payment a critical issue
Payment is a critical issue that must be comprehensively dealt with in the supply contract. In normal circumstances, the contractor will only want to pay for the goods once they have been tested and found to comply with the specification or, in terms of standard goods, once they have been delivered to the site and checked against the contractor’s order. The goods must, of course, also be free from encumbrances and title must pass to the contractor on full payment. From the supplier’s point of view, if specialist equipment is ordered, an initial payment will normally be required in order that the supplier can start fabrication or design of the equipment. Even where more standard materials are ordered such as reinforcing steel, the supplier requires payment by instalments.

Payment by installments is permitted under Article 508 of the Civil Code, which states that ‘the price shall be payable immediately unless there is an agreement or custom that it should be deferred or paid in installments over a known period’. It is, therefore, up to the parties to agree on payment by instalments and this is usually what occurs in practice.

The number and timing of installments must, therefore, be agreed in the supply contract as well as other issues regarding payment such as a procedure for checking that the correct goods have been delivered and that the goods comply with the specification. Contractors also generally seek to retain a right of set off in their supply contracts in cases of late delivery or other non-compliance by the supplier.

In summary, while certain articles of the Civil Code will impact on supply contracts, many issues such as those referred to above are not dealt with by the Civil Code and contractors must ensure their supply contracts contain adequate provisions in respect of these matters.

Tomorrow, in the second part of this article, the author will look at other common issues in supply contracts such as ownership of the goods, the assumption of risk and remedies in respect of the supply of defective goods.

– James Williams is an associate in the Dubai construction team at law firm Trowers & Hamlins

© Emirates Business 24/7

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