Expect The Unexpected

By Pamela Mcdonald

All contractors, whether in Qatar or elsewhere, want certainty as to their contractual obligations. Contractors want to know well in advance what their potential exposure is if those obligations are breached.

What are they liable for if they are late in completing the works? How secure are the damages for late completion that are specified in advance in the contract?

Liquidated damages (LD) provisions in construction contracts fix a sum that is payable by the contractor in the event that it is late in completing works.

A LD provision entitles the employer to compensation calculated using a pre-agreed ‘per day’ or ‘per week’ rate.
There is no burden on the employer to prove it incurred those damages. The intention is that the provision gives some certainty for the parties as to what they are liable for, or entitled to, as the case may be, if completion is delayed.

English law distinguishes between a delay penalty, which seeks to ‘punish’ the contractor and is therefore prohibited, and LD provisions. which represent a ‘genuine pre-estimate of loss’.

In recent years, the English courts have moved away from this distinction and tend to consider the ‘commercial justification’ of the clause: is the LD provision extravagant or oppressive and is its predominant purpose to deter breach? If so, it may be unenforceable.

In Qatar, this distinction between an unenforceable delay penalty and valid LD provisions does not have the same significance.

While Qatar’s Civil Code respects parties’ freedom to agree whatever contract terms they choose, when it comes to compensation, regardless of what the parties have agreed, damages can be adjusted.

There is no requirement in Qatar for the liquidated damages to be a ‘genuine pre-estimate of loss’ or ‘commercially justifiable’: the LDs can be as excessive as the parties agree them to be.

However, the court or arbitrator applying the Qatari Civil Code has a discretion to adjust the amount of LDs to reflect the injured party’s actual loss.

Article 266 of Qatar’s Civil Code prevails over contractual provisions and provides that compensation shall not be payable, or shall be reduced, if the injured party did not suffer any damage, or if the level of damages stipulated does not reflect, or greatly exceeds, the actual loss suffered.

It can therefore assist contractors by reducing the compensation payable if the LDs in the contract overstate the employer’s actual loss. The Civil Code does not allow the rate of LDs to be adjusted upwards unless there is evidence of fraud.

Contractors may also be able to challenge liability for LDs, either in part or in whole, under Articles 256 and 257 of the Qatari Civil Code.

There is potential for some relief from or reduction of LDs if the delay resulted from an “extraneous cause” for which the contractor was not responsible (Article 256) or if the employer’s own act or omission contributed to the delay (Article 257).

For example, these articles could be relied on if a delay resulted from a force majeure event which rendered performance impossible, or a mistake by a third party unrelated to the contract, or a breach by the employer.
Articles 256 and 257 could be very helpful to contractors. However, they should be aware that – unlike Article 266 – these provisions of the Qatari Civil Code are non-mandatory and can be excluded by agreement.

Construction Week

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