Front end advice

Despite the harsh lessons learnt over the latter part of 2009 and first quarter of 2010 it is still patently obvious that parties to contracts are falling into a number of age old pitfalls, many of whom are convinced that they have no other viable choice but to accept top-down back-to-back arrangements and in some cases a scramble of documents that barely resemble a contract at all.

There is still an overwhelming market tendency to order mobilisation and commence work on the back of a very brief Letter of Intent (LOI), particularly if the commissioned works are minor works or low value. This is a particularly high risk practice.

LOIs do not provide sufficient contract certainty or indeed any firm degree of security to the committed parties. Comparable to Memorandums of Understanding or Heads of Agreement in providing a record of intention only, it is of no surprise that LOIs are commonly known as ‘discussion sheets’.  By and large LOIs are not legally binding. In other words they carry no force of law. Given that LOIs are signed by one party only, questions of fact as to acceptance are left unanswered.  Its weight in contract will therefore depend largely on the paper trail that follows. LOIs are not, therefore, interchangeable with the formal contract.

Commercial reality however does not always follow best form. In situations where LOIs and Letters of Acceptance (LOAs) are the only de facto contractual documents issued between the contracting parties, the following terms should be mandatory by way of minimum: a clear scope of works, a defined and approved programme of works, provisions dealing with delay and extension of time to the approved programme, comprehensive price and payment terms, retention provisions, insurance provisions, a record of the contracting parties’ contractual responsibilities, heads of liability, dispute resolution provisions, enforceability and jurisdiction provisions.

As per Article 874 of Federal Law 5 (1985) (the ‘Civil Code’), minimum requirements for a Muqawala contract include (i) a description of the subject matter, (ii) particulars of the type and amount thereof, (iii) the manner of performance, (iv) the period for performance, and (v) the consideration. The concept of a void, voidable or defective contract is inherent in the Civil Code and hence form cannot be ignored.

In practice Federal laws such as the above provide the ideal motive to revisit non-compliant contractual documentation. Signing of any and all agreements

In a hungered market, where bargaining power is heavily weighed in favour of the employer, the obsession with getting ‘the account’ on the books rapidly dwarfs the exercise of care, caution or due diligence. This practice is particularly unsound in an immature market where more often than not the usual round-the-mill model contract is issued against any scope of work. Getting the right advice pre-signature cannot be understated: parties will rarely be in better position to agree a variation of the contract terms at a later juncture. Muqawala provisions entertain variation in a restricted sense in the case of a change to the basis of an agreed plan. The continued observance of the existing agreement in connection with any variation and/or addition is however mandatory. Hence an obvious difficulty arises where the existing agreement proves deficient in enumerating agreed procedure.

As per Article 262 of the Civil Code stating: “an unconditional provision shall be so construed unless there is evidence… restricting it” serves as a powerful reminder of the profound commercial implications a poorly drafted contract can result in. The commercial implication of this, in context of an open-ended liability or indemnity provision for example, can be staggering. Yet caveats containing total aggregate monetary caps are not been routinely negotiated into such provisions.

Comfort in the local laws

The local federal laws provide limited respite. Like many western jurisdictions, federal laws place primary importance on parties’ consensus ad idemor mutual intention. Hence the integral importance to get the contract right ab initio, ie from the start.

Some limited comfort can be found in various federal provisions, such as Article 884 of the Civil Code requiring an employer to accept delivery of work done when placed at his disposal, or Article 888 of the Civil Code entitling the contractor to fair remuneration plus value of the materials provided in situations where price and payment provisions are deficient. Relief is however short, and no doubt due to the fact that the laws were not drafted with the intention to substitute the contract agreement.

Suffice to let Article 259 of the Civil Code speak for itself: “There shall be no scope for implications in the face of clear words”.

Carefully considered front-end legal advice has never been so key at a time when entities are both heavily under-capitalised and over-exposed in a market couched with uncertainty, and at the mercy of a heavily over-subscribed dispute system.


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