Construction Industry - CMGuide

U.S. Crackdown is Raising the Price of Corruption

by Andrew Ness

The principal weapon of the U.S. government to combat corruption in international business dealings is the Foreign Corrupt Practices Act (FCPA). To say that the U.S. is now aggressively pursuing FCPA cases is an understatement. In the past year, we have seen billions of dollars of fines, sting operations, and the pursuit of individuals around the world. Here are some of the latest FCPA headlines:

 Hefty penalties are the order of the day – In the past year, companies have settled with regulators to the tune of billions of dollars in penalties, fines and disgorgement.

• Halliburton/KBR paid $600 million;

• Siemens paid $1.6 billion;

• BAE paid $450 million; and

• It is reported that Daimler will pay an estimated $200 million.

Not factored in here is the cost of these investigations. Technip recently reported a charge of approximately $500 million related to government investigations into its involvement in the TSKJ joint venture in Nigeria (the Halliburton/KBR settlement). By contrast, investment in a comprehensive compliance program and FCPA due diligence on agents and consultants looks like an inexpensive way to protect a healthy bottom line.

 Sting operations – In a very aggressive move, the US Dept. of Justice’s sting operation in conjunction with the UK authorities caught everyone by surprise. In tactics often reserved for crime syndicates, the DOJ and UK police arrested 22 individuals who allegedly attempted to make improper payments to FBI agents posing as representatives of procurement officers for a top minister of an African country. The improper payments were intended to obtain the award of contracts to sell military and law enforcement supplies. In an unusual twist, no actual foreign officials were involved.

 Intergovernmental cooperation – On February 5, 2010, BAE settled with both the DOJ and the UK’s Serious Fraud Office. In addition to pleading guilty to one count of conspiracy to making false statements to the U.S. government, BAE also pled guilty to a charge that it failed “to keep reasonably accurate accounting records in relation to its activities in Tanzania.” BAE’s settlement included a payment of $400 million to the US and £30 million to the Crown Court (with a designated use to benefit the people of Tanzania). The Siemens settlement of $1.6 billion included a payment of approximately $560 million to the Munich Public Prosecutors Office for corporate failure to supervise officers and employees.

The February 11, 2009 Halliburton/KBR settlement only resolved issues with U.S. regulators, and investigations by French, British and Nigerian authorities remain unresolved. Additionally, as mentioned above, the FBI and City of London Police coordinated efforts in the January 19, 2010 sting operation that captured 22 individuals.

According to public reports, the US SEC made over 750 requests for assistance from foreign regulators in fiscal 2009, an increase of almost 200 requests from the prior year. Geographic and economic boundaries have all but dissolved, making it more difficult to hide corrupt payments in offshore entities and far flung subsidiaries.

 Individual prosecutions and more litigation – The U.S. government has also sent a clear signal that it is willing to go after individuals and to litigate when necessary. Regulators are pursuing the middlemen and agents (as in the Siemens and Halliburton investigations) who conceal the corrupt payments to government officials. 2009 alone saw three FCPA trials against four individuals. That equals the total number of trials in the prior seven years.

 Increased scrutiny on agents and consultants – Companies subject to the FCPA need to exercise due diligence to ensure that they form business relationships with responsible and qualified agents and consultants. The DOJ has provided companies with a list of “red flags” which, if present, should trigger heightened scrutiny. Red flags include unusual payment patterns, high commissions, a refusal by the agent or consultant to provide FCPA certifications, a lack of qualifications or expertise to perform the services being offered, and a referral to the agent or consultant by an official of a potential governmental customer. As highlighted in the Siemens, Halliburton and BAE settlements, failure to conduct comprehensive due diligence, or turning a blind-eye to any one of these “red flags” can be highly damaging to a company’s reputation and bottom line.

Kluwer Construction Blog

“Clause pénale” v. liquidated damages – any similarities?

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by Joanne Clarke

Delays are of course a common problem in construction projects. French law (like English law) allows for a pre-estimation of damages for delay. However, the common law and the civil law approaches to such pre-estimation appear to differ, as pan-European construction professionals may have encountered.

English lawyers turn towards liquidated damages for delay. These involve the pre-determination, at the time the contract is entered into, of the loss which a delay would cause. However, these ascertained damages must be based on a genuine estimate of the likely loss and not amount to a penalty.

French lawyers rely upon “clauses pénales”, which also involve a pre-determined amount to be paid out in the event of delay but which, as their name suggests, are punitive in nature.

In this post, we consider the distinction between “clauses pénales” and liquidated damages and whether they are reconcilable.

Conceptual distinction

Under English law, for a liquidated damages clause to be enforceable, its purpose must be to compensate the innocent party for breach of the contract, not to deter the other party from breaching it. The amount in question should be a genuine pre-estimate of loss as perceived at the time the contract was entered into. A clause whose purpose is to deter, or which sets an extravagant or unconscionable level of damages in comparison with the greatest loss which could be proved to have followed the occurrence of a particular breach, is likely to be struck out by an English judge on the basis that it amounts to a penalty. In this case, the party attempting to rely upon such provision would have to prove its loss.

The French Civil Code defines a “clause pénale” as “… a clause by which a person, in order to ensure performance of an agreement, binds himself to something in case of non-performance” (Article 1226) and “… a compensation for the damages which the creditor suffers from the non-performance of the principal obligation” (Article 1229). A provision classified as a “clause pénale” explicitly encompasses a combination of both coercive and compensatory elements. Therefore, the mere punitive nature of such a clause will not make it unenforceable.

In France, the philosophical considerations behind the 1804 Civil Code, in particular the belief in freedom of contract, meant that the “clause pénale” remained outside the control of French judges until 1975. By that date, however, tension raised by parties’ differing bargaining powers and contract disequilibrium necessitated a change in the law. Since then, the “clause pénale” has been subject to the possible control of French judges under Article 1152 of the Code. If the amount in a “clause pénale” is “obviously excessive” or “ridiculously low”, the judge may decide to adjust it, in line with certain guidelines. Unlike in England, however, an excessively onerous “clause pénale” will not be struck out.

Notwithstanding their common compensatory and pre-determined nature, liquidated damages and “clauses pénales” thus appear incompatible, since the hybrid character of the latter conflicts with the “no penalty” approach of the former.

Practical implications

Even though English law does not allow a liquidated damages clause if it is in fact a “penalty” clause, in practice there have only been a handful of English cases striking out liquidated damages as penalties. English courts are unwilling to interfere with the parties’ bargain in this respect, especially in a commercial context, when it is clear that the clause was freely negotiated.

Whilst “clauses pénales” are binding and enforceable in France, the risk of abuse is limited by the possible intervention of the judiciary to reduce or increase the amount in question.

Just as in England, a French judge must consider the existence or otherwise of a coercive (deterrent) element by looking at the intention of the parties when the contract was concluded. However, the French judge will do it not to determine whether the clause should be struck out but to establish whether it amounts to a “clause pénale” and, as such, falls under his control. If the clause lacks either the compensatory or the coercive element, the French judge will not have discretion to reduce or increase the amount in question.

Both French and English judges and arbitrators are cautious about interfering with liquidated damages and “clauses pénales” but the guidelines and criteria they have adopted differ in significant ways.

In particular, French judges may take into account the difference between the amount fixed in the clause and the actual loss suffered, a difference which is not directly relevant in England. In fact, English courts have consistently held that the comparison should be between the amount fixed in the provision and the loss as could reasonably be anticipated at the time the contract was entered into.

Conclusion

Although in principle the prohibition of penalty clauses under English law appears irreconcilable with the enforceability of “clause pénales” under French law, judges and arbitrators face similar tensions both in England and France between the risk of abuse and necessary judicial intervention on one hand and freedom of contract and legal certainty on the other.

Kluwer Construction Blog

Construction Industry, Construction Law

New Tort Law Firms up Liability for Tofu Buildings

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by Hew Kian Heong

On 26 December 2009, the PRC Tort Liability Law (the “Tort Law”) was promulgated following a seven-year period of discussions and debate. The law will enter into effect on 1 July 2010.

The Tort Law marks a milestone in PRC legislative history, and will have myriad implications for diverse areas of private and commercial activity.

As a construction lawyer, I am particularly interested in Article 86 of the Tort Law concerning liability for loss and damage caused by collapse of construction works.

Although the Tort Law has been in planning for some time, it seems to have been influenced by some very recent events. Much attention has been focused on the recent milk scandals as a catalyst for the product liability aspects of the legislation. But it is also widely speculated that Article 86 was driven by the recent case of a building collapse in Shanghai in June 2009. The collapse of a 13-floor building at Shanghai’s “Lotus Riverside” apartment complex was perhaps one of the top 10 local news events of 2009 in Shanghai. The accident killed one worker on site and left 489 home buyers without their expected homes (in many cases, costing all of their life savings). The collapse has been blamed on improper construction methods.

Quality problems have long plagued the construction industry in China. “Tofu Building” is the cheeky term used by the local press to describe such shoddy construction projects. Clearly, to some extent, this situation reflects a failure of the current legal and regulatory regime. Hence, there is little humor in this situation for Chinese policymakers.

Although there are administrative sanctions and contractual remedies for poor construction quality, tort legislation has been less than robust. Tort protections are especially important in addressing harm to innocent third parties who would not be entitled to compensation as a matter of contract.

No doubt in recognition of this, the Tort Law has clearly placed liability for collapse of construction works on the contractors and developers who are best able to avoid them in the first place.

Since 1987, Article 126 of General Principles of Civil Law (”GPCL”) has provided that:

“If a building or any other installation or an object placed or hung on a structure collapses, detaches or drops down and causes damages to others, its owner or manager shall bear civil liability, unless he can prove himself not a fault.”

GPCL Article 126 creates a rebuttable presumption that the current property owner or manager is liable in these cases. But these are quite disparate cases – there is a potentially immense difference between the types of causation involved in items falling from a building and in a building itself collapsing. In cases where the building itself collapses, the current owners or managers would have very little opportunity to prevent the harm. Hence, there seems to be little reason to hold them primarily liable. On the other hand, the original contractor and developer, the parties best situated to prevent catastrophic building collapse, are not included (even secondarily) as potentially liable persons here.

To remedy this and other issues in relation to personal injury liability under the GPCL, in 2003 the Supreme People’s Court issued an interpretation (”Interpretation”) that, among other things, clarified the application of GPCL Article 126. Specifically, Article 16 of the Interpretation clarified that, if the collapse is caused by design or construction defects, the responsible designer and contractor can also be held directly liable to injured parties.

Article 86 of the Tort Law deals only with collapse, providing:

”Where any building, structure or facility collapses, causing any harm to another person, the construction employer and contractor shall be liable jointly and severally. After making compensation, the construction employer or contractor shall be entitled to be reimbursed by other liable persons if any.

Where the collapse of any building, structure or facility, which causes any harm to another person, is attributed to any other liable person, the other liable person shall assume the tort liability.”

With this new Article 86, we have a new bright-line rule for primary liability in the case of construction collapse. Article 86 rests primary liability for building collapse squarely with the employer and contractor. In place of the previous rebuttable presumption of fault for current owners / managers, there is now strict liability for employers and contractors. We also have a broader and more objective rule of reason in relation to secondary or contributory liability, insofar as any other person contributing to the collapse, whether contemporaneous, upstream or downstream to the original employer/contractor, can also be held liable.

Although the Tort Law has changed the formal statutory liability rules in relation to collapse of construction works in China, in the final analysis, the formal and practical significance of this change may not be very great.

Formally, the Supreme People’s Court has long since clarified that the original employers and contractors could be liable in building collapse. Practically, those parties are the most obvious targets for liability in the event of building collapse, and under current practice the employer and contractor are already joined whenever possible, even without the new rule. But, since most developers in practice usually use special purpose vehicles (SPVs) to carry out their projects, dissolving the SPVs on completion, recourse to the original developing parties may be less available than the Tort Law seems to assume. It therefore appears that the contractors may well end up being the easiest targets at the end of the day.

Hence, while Article 86 represents a rationalization and refinement of the liability rules in this area, it will no doubt take much more than this marginal formal change to begin to reverse the deeply entrenched incentives causing the proliferation of Tofu Buildings in China.

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Kluwer Construction Blog

Construction Industry, Construction Law, Contract Administration

The Procurement Process in Canada after the Supreme Court of Canada Tercon Decision*

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by Joel Heard

The tendering and procurement process in Canada has traditionally been treated by the courts as a special area of contract law in which fairness and protecting the integrity of the tender process have been guiding principles. Courts have implied terms into contract “A” bid contracts that have obliged owners to act fairly, and wide discretionary clauses have been interpreted narrowly to ensure the integrity of the tendering process. …

The Procurement Process in Canada after the Supreme Court of Canada Tercon Decision*Read More »

Construction Industry, Construction Law, Contract Administration

When a ‘notice’ need not be ‘noticed’

by Vincent Connor

Opening the mailbox at my Hong Kong apartment block brings the usual array of bills, more bills, flyers and…what appear to be ‘notices’ (usually from my landlord): but as we know from the world of construction law, often it is argued that what is intended to be a ‘notice’ fails to meet up to the strict requirements of the contract.

Yet, how many reported cases are there where the notice provision is strictly enforced? Most commentators struggle to point to a decision where a contractor was deprived of his ability to claim an extension of time solely on the basis of non-compliance with a notice provision. The point sometimes seems more of academic interest than practical application.

The good news for the academics is that this struggle may now be partially over. In the Scottish case of Education 4 Ayrshire Limited v South Ayrshire Council , a contractor tried to claim an extension of time due to the discovery of asbestos. This was a “neutral event”, outside the control of the parties, but one which entitled the contractor to bring a claim.

The court “was minded to dismiss” a claim by a contractor who got into a bit of a contractual and semantic muddle with its notices. (Instead of being actually dismissed, the case was “put out By Order”, a Scottish procedure whereby the case is “returned” to the parties for further consideration in light of the court’s decision.)

The contractual muddle arose in that the contractor gave notice under clause 17.1 of the relevant contract, when it should perhaps have given notice under clause 17.6.1 as well. In terms of semantics, the contractor said “we will submit our full claim in accordance with clause 17.6 of the project agreement”, instead of saying something along the lines of “we hereby give notice of our claim”.

It was accepted by both parties that compliance with the notice requirements was a condition precedent to the right to bring a claim.

The bad news for contractors is that the Judge held that this condition precedent had not been complied with, despite the clear intention of the contractor’s letter.

Most pieces on notices conclude with the usual sage advice about getting notices right. This piece is no exception. In Education 4 Ayrshire the parties accepted that the employer was fully aware of the position regarding the asbestos. He was sent a survey report and attended a meeting to discuss its implications. The employer was also aware that the sub-contractor had claimed an extension of time against the contractor as a result of the same event. Yet the Judge still held the contractor to a very exacting standard regarding the provision of notices.

This was despite the fact that the basic commercial intention of the notice provisions had been satisfied. The employer suffered no prejudice as result of any muddle which the contractor may have got into, semantic or otherwise. However, that did not change the outcome of the case. Just when we were getting our heads round the application of the UK (Technology & Construction Court’s) 2007 decision in Steria Limited v Sigma Wireless Communications Limited, it seems that we are back in the danger zone if there is not strict compliance with contract terms regarding notices’ provisions.

So, just how bad is the news for contractors? As mentioned above, this case concerned a “neutral event”. Had a court reached the same decision following a delay caused by an employer breach or act of prevention, the news for contractors would be worse. It would certainly be very bad news for contractors if decisions like this were handed down by those courts or tribunals in Hong Kong who deal regularly with construction matters. But surely, that would never happen. Or would it…?
With that thought, just as I’m discarding the detritus from my mailbox into the trashcan, I stop: maybe that carelessly-drafted note from my landlord does deserve greater scrutiny, after all…Or maybe on the strength of Education 4 Ayrshire I am safe to ‘bin’ it, with impunity?!

Kluwer Construction Blog

Construction Industry, Contract Administration

A new year brings fresh thinking from FIDIC and new developments…

by Sarah Thomas

I thought that I would hail in the new year with an update on some interesting construction developments. Put it down to a period of reflection over the Christmas break! As I want to cover a number of areas, I have split this update into 2 postings.

In this first update, I am going to cover the latest FIDIC news and the new Bribery Bill currently going through the UK parliament. In my next posting I will look at two recent construction cases in English law, the first covering recoverability of damages and the English “remoteness” rule, the second covering treatment of contractual notice bars for claims.

Firstly, on FIDIC. I presented at the annual FIDIC conference in London in December of last year and can report some interesting developments:

FIDIC have just published a new Subcontract form (termed the Conditions of Sub-Contract for Construction). This is specifically designed as a construction only subcontract – to be used by main contractors operating under either the 1999 FIDIC Conditions of Contract for Construction for Building and Engineering Works designed by the Employer (known as the “Red Book”) or the Multilateral Development Bank’s Harmonised Edition of these FIDIC Conditions of Contract. The subcontract is drafted very much on the basis of a “total pass down of risk”, although there are some interesting features (particularly from an English law perspective).

For example, the payment provisions are effectively tied to payment under the “Main Contract” and include “pay when paid” clauses (Sub-Clause 14.6 (c)) in that the Contractor can withhold monies where “the Employer has failed to make payment in full to the Contractor in respect of those amounts…”. Of course, this protection will not apply where the reason for non-certification under the Main Contract is because of Contractor default or the Employer’s insolvency. Whilst common in subcontracts in Europe, any construction contract signed in England and Wales is subject to the UK Housing Grants, Construction and Regeneration Act and this prohibits pay when paid provisions. It will be interesting to see how this plays out in the market – readers will no doubt be conscious of the current harsher market conditions for contractors generally – so this may be more palatable to subcontractors in these straitened times. What it means in practice is that subcontractors will have to take a good deal more notice of what the main contract says about payment, and certification of payments, to ensure they are comfortable with these risks flowing down into their subcontracts.

As for other key features,

• Whilst the underlying principle is direct risk pass down, there is no general provision (as appears in many “pass-down” subcontracts) saying, for example, that the Sub-Contractor shall carry out the Sub-Contract Works such that he does not put the Contractor in breach of the Main Contract.

• The Sub-Contract assumes that the Main Contract will be the FIDIC Red Book and directly refers to Main Contract Clauses. Of course, the numbering will not necessarily work if the Main Contract is either not FIDIC or is an amended form of FIDIC.

• Not surprisingly, there are provisions allowing for immediate termination where the Main Contract terminates (Clause 15). Where the Main Contract is terminated for default the Sub-Contractor only gets the value of work and documents produced up to the date of termination (less amounts recovered by the Employer and any other losses and damages incurred by the Contractor and, notably in my view, its other sub-contractors). If not in breach, the Sub-Contractor gets paid the value of works/documents to date, demobilisation and reasonable repatriation costs, any other costs “reasonably incurred” in expectation of completing the Sub-Contract Works plus loss of profit. This is all fairly standard, although I suspect a number of main contractors may wish to curb the ‘loss of profit’ claim. However, the biggest potential issue is I think Sub-Clause 15.6. This allows the Sub-Contractor to terminate where there would be a right to do so under the Main Contract. The clause simply refers to the termination events in the Main Contract equally applying to the Sub-Contract. I query whether this actually works or makes the Contractor’s other termination rights sufficiently clear. It would be preferable to spell them out for such an important clause.

FIDIC is also proposing to issue a new user guide to accompany the Design Build and Operate form (Gold Book). Just to remind readers, the current form (first published in September 2008) covers design, build and long term operation of facilities on green field sites. The new guide will include provisions allowing this to be used for brown field sites. No doubt FIDIC hope that this will lead to a much greater use of the Book as most DBO projects involve some element of upgrade of existing facilities alongside new build. However, as this form is still in its infancy I am yet to hear from anyone who has actually used this form (- readers please get in touch if you have), it remains to be seen whether this will lead to wholesale take up of this new form. I think one reason for the lack of use so far may be that the form has no provision for funding by the Contractor and so is not suitable for PPP projects.

At the same time, FIDIC are proposing a review of all the contract forms in their current “1999 Rainbow Suite” (i.e. principally the Red, Yellow and Silver Books) and plan to amend these in line with current business practices and in response to request for amendments over the last decade. For example, one likely amendment is to include the amendment FIDIC has already made to Sub-Clause 20.1 in the DBO form dealing with the procedure for Contractor’s claims. Just to recap, Sub-Clause 20.1 has always been a sticking point for contractors as it essentially precludes any entitlement to claim for time/money if the conditions of this clause are not strictly complied with. What the Gold Book has introduced is a slight relaxation of this absolute notice bar, allowing the Contractor to apply to the Dispute Adjudication Board for a ruling if he considers there are circumstances which justify the late submission of a notice. If the DAB agrees that in all the circumstances “it is fair and reasonable that the late submission be accepted”, it can overrule the 28 day notice limit.

FIDIC canvassed views at our London conference as to what other clauses should be amended. There were a number of requests for a review of the variations clause (Sub-Clause 13) and in particular to the right of the Contractor to payment for value engineering changes. Currently under all the forms, the Contractor bears the cost of any proposal and only if it is accepted by the Employer, does he then get remunerated. This has always been something of a disincentive to propose value added changes.

Before signing off on this first update, I would like to touch upon the Bribery Bill 2009 which is currently going through the UK Parliament. The reason this has been introduced is because the UK has come under foreign criticism from the Organisation of Economic Co-Operation and Development (OECD), amongst others, because of its perceived failure to carry out its obligations under the OECD Convention, which the UK ratified in 1998. The new Act, if it becomes law, will impact upon all commercial organisations seeking contracts with the public sector both in the UK and abroad.

Key features to watch out for if you are a UK contractor are the proposed new offences of bribing a foreign public official and the corporate offence of failure to prevent bribery by persons working on behalf of the business, including employees, agents and subsidiaries (whether domestic or foreign). The corporate offence applies to companies or partnerships which are either formed under UK law or which carry on business in any part of the UK – in other words, it could also impact on foreign companies doing business in the UK. The offence is punishable by an unlimited fine for the company whilst company individuals with responsibility for anti-corruption measures face personal criminal liability and up to 10 years’ imprisonment.

It will be a defence to the corporate charge for a company to show that “adequate procedures” to prevent corruption were in place at the time. The Bill does not detail what “adequate procedures” means but this month the Government agreed to add an amendment that will require the Secretary of State to provide guidance on this. All UK companies and overseas companies doing business in the UK should probably review their internal procedures carefully and update training, policies and contracts of employment to reflect the new law.

Some of you may ask whether there is sufficient parliamentary time to push this through before the UK election (which most commentators are forecasting in early May this year). The current view is that while the Bill is generally understood to have cross-party support, timing is very tight as there are a number of further stages that the Bill must complete in the House of Commons before it can be passed into law. If the Bill is not passed in time, it will need to be re-introduced in the next Parliament.

Any thoughts on the latest FIDIC development or indeed on the UK’s proposed anti corruption measures are of course always welcome!

Kluwer Construction Blog

Construction Industry, Construction Law, Contract Administration

Let’s talk about it: is mediation a viable option in Dubai?

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by Melanie Grimmitt

Mediation has become established in the West as a useful alternative to more confrontational and adversarial forms of dispute resolution. Here in Dubai it is uncommon, but in our experience the number of disputes is on the increase, so could it, or should it, have a role to play?

Mediation is an alternative dispute resolution procedure that allows parties with a dispute to engage a neutral third party to facilitate communication between the parties, with the aim of resolving the dispute. As it is a voluntary and consensual process, parties must agree to mediate and are free to withdraw at anytime. Mediation is also non-binding and it may well not lead to a resolution of the dispute. However, if the parties do reach agreement on the dispute, they then record that agreement in writing and it then becomes enforceable in the usual way.

The pros

Mediation is inexpensive when compared with litigation and arbitration which are also far more time intensive, so there is a significant time and cost saving if the dispute is successfully resolved without reference to these more traditional dispute resolution methods It is also quicker: specifically in Dubai, arbitration can take up to two years and parties may face issues in relation to enforceability of arbitral awards in the local courts. Mediations usually last one or two days, although to ensure the greatest chance of success it is important that significant preparation is done in advance, and that perhaps a programme for the mediation is agreed, although flexibility on the day will be important.

Further, mediation, as with arbitration, should also be a confidential process. This is important so parties feel able to make concessions without fear of repurcussions. If everyone attends feeling that whatever they say may be used against them, then there will be little movement from entrenched positions. The confidentiality of proceedings and presence of an experienced mediator also allows a party to test out an argument and perhaps even get an opinion from the mediator as to its chances of success. This may make it more or less amenable to settlement.

Moreover mediation is often regarded as having a number of significant commercial benefits. More often than not, a contractor will wish to be seen as cooperative and will want to try and preserve, to the extent possible, a good relationship with its employer. As anyone who has been a party to litigation or arbitration will testify, it is very difficult to maintain even civil relations with the other side. Avoiding the loss of a business relationship is a benefit that surely cannot be overestimated in the market conditions facing contractors in Dubai and elsewhere

Culturally, mediation would seem to fit in Dubai and the Gulf where bargaining is an art form and where, in the construction industry, we see instinctive reluctance to take drastic action against an employer.

Cons

The most obvious down side with mediation is that neither party can force the other to use it, unlike litigation or abitration which once prescribed in a contract, must be adopted to resolve any disputes arising from that contract. However, the pros outlined above are in both parties interests and even if a party is convinced that right is on its side, it will still incur a degree of irrecoverable costs and considerable time expended if it brings or defends litigation or arbitration proceedings.

In addition, the increase in disputes in Dubai will inevitably lead to pressure on resources in the Dubai courts and the Dubai International Arbitration Centre, which may well lead to an increase in the time taken to litigate or arbitrate a dispute, thereby increasing the financial and human cost of these routes, which only benefits lawyers!

The current position

Dubai does have a mediation centre already for property disputes, which was established as a direct result of the high case load of the property court (only those of you living on another planet will not have heard about the downturn in the Dubai property market and the difficulties caused for investers and developers).

Within the construction industry, again, as has been covered extensively in the media, there has also been a considerable downturn resulting in projects being delayed or stalled (latest figures suggest over 300 stalled projects) and contractors and consultants are experiencing delays in payments and severe payment shortfalls. Only yesterday Lord Mandelson representing the British Government was in Dubai seeking to further the cause of British contractors and consultants still owed vast sums. Could this pressured situation be ripe for resolution of dispute by mediation?

It is probably important here to make a distinction between issues of non-payment and disputes about termination, defects etc. In the former case it is hard to see the benefit of mediation – the sum is owed, but the money is either not available or not being made available. Mediation will not advance the creditors position and a more definitive step is probably required. However, if a contractor does see some benefit in maintaining a business relationship with that employer, mediation may still have some value in allowing parties to consider more creative ways for the debt to be repaid.

Contrast issues of termination and defects where a mediation, if properly approached, may provide a genuine alternative to parties spending the next two years absorbed in and paying for resolution of such issues by litigation or arbitration.

Conclusion

Mediation is useful if there is a genuine dispute and/or relationship issues and certainly has a place in Dubai. The current increase in construction disputes enhances the case for mediation and probably the likelihood of its use increasing. However if faced with a non-payment claim where there is a lack of money or lack of willingness to pay undisputed sums and no ongoing relationship issues to be considered, a more definitive and enforceable approach is probably necessary.

Kluwer Construction Blog

Construction Industry, Construction Law, Contract Administration

Debt Recovery in the UAE

by Sachin Kerur

We are all still feeling the impact the global downturn is having on the construction sector in the UAE. Not only is it a challenge to find work in this market, increasing numbers of contractors and consultants are finding it difficult to recover payment for work they have already undertaken.

In the past many companies working in the region have been wary of pursuing their entitlements through formal dispute resolution processes, due to perceived cultural sensitivities, many now feel that they have no choice but to consider the available debt recovery options.

In many instances, the amounts owed are not disputed. However, in the current market some developers/contractors consider that they should not be obliged to pay their debts in full, and are attempting to avoid, defer, reduce and/or make piecemeal payments over a substantial period of time.

How to Recover Your Debts in the UAE?

Wherever you are from, outstanding payments can be frustrating, not to mention costly. However, a contractor will usually be aware of the tools available in its home jurisdiction in order to speed payment along.

When working overseas, however, the different cultural, legal and practical issues can make the whole process much more challenging. In the UAE, this challenge is in part due to the local civil legal system. Those instruments that common law practitioners are so used to wielding are not present in quite the same form.

The options available to pursue non-payment of due monies will depend on the dispute resolution mechanisms contained within the relevant contract. Typically, a contractor/consultant will have to litigate or arbitrate to recover payments.

In addition, there are a number of procedures available under local laws that could assist in the recovery of debts. Potential options available under UAE law include:

1. An Order of Payment

1.1 An order for payment within the UAE is a developing area of law. It can therefore often be hard to determine the likelihood of success before the UAE Courts when making such an application.

1.2 It is a procedure where a party applies to the Courts for summary judgment against a defendant for commercial debts, substantiated by a commercial instrument such as a bill of exchange, promissory note or cheque, which are valid, but not paid.

1.3 If a party has a successful application for an order for payment, the outcome would be a direction from the Courts for the outstanding debts to be paid by the debtor. Success is by no means guaranteed, but the mere threat of an order for payment can be a persuasive tool for the creditor, as an outstanding debt can bring with it considerable public embarrassment within the local community. This in turn can act as an incentive for the debtor to settle any outstanding debts.

2. Precautionary Attachment Order

2.1 A precautionary attachment order, if granted, essentially allows the Court to seize the assets in question at the claimant’s request prior to judgment/arbitral award in order to preserve those assets during the trial. It is as close to seeking injunctive relief as it gets in the UAE. The procedure, timing and effect of precautionary attachment orders can at times be somewhat unclear.

2.2 Precautionary attachment orders are made in absence of the other party and are ordinarily used as a tool to ensure that assets are not disposed of prior to receiving the court’s judgment/arbitration.

2.3 The order can be made against any assets in the UAE, including machinery, bank accounts, goods or other assets owned by the defendant and under his possession or owned by a defendant, but in the possession of a third party. It should be noted that the assets, money or material to be attached must be client specified before the application will be granted.

2.4 If a precautionary attachment order is granted, the substantive case must be filed at Court within eight days.

3. An Order for Sale

3.1 This is a procedure whereby a claimant applies to Court for an order that a property or part thereof be sold where a defendant has failed to pay for material and equipment supplied for that property.

4. An Order for a Lien Over Property:

4.1 In certain circumstances a contractor can exercise a form of lien over a property on which it is doing work until payment for that work is received.

Substantive Action

As discussed above, pursing substantive action is also a possibility, either through the local courts or via arbitration. Litigation in Dubai can be both costly and time-consuming. There are cases that continue for five years or more and only local advocates can appear and plead before the Courts. Arbitration might allow a claimant to remain within their common law comfort zone, however cases usually take at least a year to reach a decision and the costs are not insignificant.

Practical tips

(a) Examine the payment terms in the contract;
(b) Ascertain your entitlement to the outstanding debt and collate all the documentation in support of it;
(c) Review the dispute resolution mechanism in the contract, if any;
(d) Determine what assets the debtor owns and where these assets are held; and
(e) Review the amount in question and determine what is the best avenue for recovery.

Final thoughts

The road to debt recovery within the UAE, as in many countries, can be a protracted one. A supplier of services should, as far as possible, try to recover the amounts outstanding from the debtor before bringing any action for recovery through the Courts. A claimant needs to demonstrate clear and strong evidence of the outstanding debts if their application before the Courts is to be successful. With advocacy and court fees included, the process can be a long and costly one, so you should make sure that the amount outstanding will offset the cost. If you have an arbitration agreement then this can be a less costly mechanism for substantive recovery if the other avenues, such as the payment order, fail.

Kluwer Construction Blog

Construction Industry, Construction Law

Is your Arbitrator too busy?

by Martin Harman

In the autumn of this year I had the dubious pleasure of celebrating the 10th Anniversary of the publication of the Terms of Reference in an administered arbitration, which is still lumbering towards its own uncertain conclusion. At the time of our appointment as lawyers for one of the parties, which was shortly after the issue of the Terms of Reference, I toyed with the idea of proposing to my client a fixed fee for taking the case to conclusion. It seemed to me that this was quite a “cutting edge” concept at the time and I thought to myself that whilst the risk of such a course of action taken at the outset of hostilities could be very high, I mused that following close of pleadings and the crystallisation of the issues in dispute within the Terms of Reference, the task of assessing the likely future costs would not be beyond the whit of the reasonably experienced lawyer. I therefore felt that the risk of taking a bath on the fixed fee would not be that great. However, some little voice within me clearly counselled caution and as a result I did not make that proposal. Whilst this has saved me from a personal embarrassment and possible lynching by my partners, nevertheless my client has suffered because the case has taken a course which nobody could have predicted at the time when the Terms of Reference were agreed.

Regrettably this sort of situation is not an isolated occurrence. In another non administered arbitration, there was a thirteen month delay between the conclusion of the Hearing and the issue of a Partial Award which, although eagerly anticipated proved somewhat of a disappointment since it merely ordered the appointment of a Tribunal Expert to deal with all the difficult issues which had in any event been before the tribunal at the original hearing. As a consequence the Tribunal Expert effectively had to replicate a substantial part of the original evidential hearing, leading to further delay and increased cost.

The reason behind both of the above examples was essentially arbitrator unavailability. It was therefore with a gladdening heart that I read the recent ICC press release on the issue of their new Statement of Acceptance Availability Independence for ICC Arbitrators. This now requires prospective arbitrators not only to sign a statement of independence but also a statement confirming that they “can devote the time necessary to conduct this arbitration diligently, efficiently and in accordance with the time limits in the rules”. The statement reminds prospective arbitrators that the conduct of the arbitration and its duration will be taken into account when fixing the arbitrators fees. Thus the ICC can now impose financial penalties upon recalcitrant arbitrators and, as a last resort, can require the removal of such arbitrators.

Whilst the statement of the ICC and its sanctions are to be welcomed, it remains the case that it is the long suffering client who has to foot the bill for an extended hearing or, worse still, the delay and disruption caused by the removal of an arbitrator. However one must not cavil unreasonably since the ICC are clearly endeavouring to cure a particular ill and they have armed themselves accordingly. My musings then took a different turn to wonder to what extent parties give consideration to the legal relationship which they establish when they incorporate into their contract a clause which names an Arbitral Institution as the body which will appoint their tribunal in default of agreement and oversee and manage the dispute resolution process. In my experience it is rare for parties even to get remotely exercised in the content of the arbitration clause generally let alone to devote time considering the somewhat esoteric concept of the legal relationship which they are entering into with the appointing body. This is unfortunate and such issues should be addressed before contract signature.

If the relationship is one of contract, what are its terms and what are the obligations on each party? More importantly what are the immunities which the Institution may enjoy by law? Under English law, such immunities are limited and reflect, broadly, insofar as the appointment process is concerned, the type of immunity enjoyed by arbitrators themselves. But query what if there is a failure by an Institution, such as the ICC, properly to police the conduct of the arbitration or indeed to avail itself of the sanctions with which it has expressly equipped itself to overcome delay. Loss will be suffered by the parties, is the Institution’s failure actionable by the parties to recover that loss? If so, what would be the extent of any immunity from suit?

The answers to these questions may be found in the rules of the Institutions concerned but the essential point which I want to emphasis is that parties and their advisors should at least ask themselves certain questions before they simply incorporate a clause which grants to an Institution a hugely significant role in the processing and resolution of disputes. A properly considered and drafted dispute resolution clause in a contract will always pay dividends. It will be a disincentive to the party who wishes to embark upon proceedings simply to delay a matter or to achieve another non project specific strategic objective. Equally a poorly drafted dispute resolution cause and a failure properly to have regard to the role of the Institution whose function is of such critical importance, could lead to parties waiting ten years or more for their disputes to be resolved. The choice is that of the client and its advisors. I urge parties and their lawyers to give these matters careful attention at the contract preparation stage and I would counsel caution before surrendering control over the dispute resolution process by simply cutting and pasting into your contract, a standard institutional clause.

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Construction Industry, Construction Law

Litigating a dispute with French connections – the rule of exorbitant jurisdiction applied by the French courts

by Gauthier Van Nieuwenhuyse

Continuing our discussion on issues to consider when litigating a dispute with French connections (see our last post “A Growing Trend In French Construction Law? The Recognition of Mandatory Rules by the Court of Cassation”), the following contribution highlights a further issue to be considered by parties to a construction contract when litigating as, or with, a French party to the contract.

Article 14 and Article 15 of the French civil code give the French Courts jurisdiction on the basis of, respectively, the claimant’s or the defendant’s French nationality. Accordingly, a French party can sue at home on any cause of action, whether or not the events in issue relate to France, and regardless of the defendant’s nationality, connections and interests. However, these articles are not mandatory and this jurisdictional privilege can easily be waived if one of the parties sues abroad and there is no challenge to the jurisdiction of the foreign Court, or if the relevant contract contains a jurisdiction clause. These rather controversial provisions are often criticized as being too nationalistic but the French legal system is by no means the only one with this rule of “privilège de juridiction” (“exorbitant jurisdiction”).

Despite such criticism, the French Court of cassation has recently applied the rule of exorbitant jurisdiction based on the nationality of the claimant in a dispute between a Saudi employer and a French contractor.

In a judgment dated September 30, 2009 (No. 08-17587), the Court of cassation had to deal with the following situation: a Saudi company concluded a contract for the construction of its headquarter in Riyadh with a construction company incorporated in France. It is noteworthy that the construction company had a business establishment in Saudi Arabia. The contract, written in Arabic, included a clause conferring jurisdiction to a particular Saudi Court (the Grievance Bureau). Following difficulties with the performance of the contract, the French company issued proceedings before the Saudi Court designated by the jurisdiction clause. The Saudi Court rendered a judgment which was later annulled by the Saudi Court of appeal on the ground that the nature of the dispute was civil, not commercial, and the Saudi Court seized lacked jurisdiction over this type of dispute.

The French company later brought the same dispute before the French Commercial Tribunal of Paris on the basis of Article 14 of the French civil code which provides that:

“An alien, even if not residing in France, may be cited before French Courts for the performance of obligations contracted by him in France with a French person; he may be called before the Courts of France for obligations contracted by him in a foreign country towards French persons.”

The dispute proceeded to the Paris Court of appeal and finally to the Court of cassation. The question addressed by the Court of cassation was whether French Courts have jurisdiction over a dispute despite a jurisdiction clause included in the contract designating a foreign court which, seized by one of the parties to the contract, holds that it lacks jurisdiction.

In each stage of the proceedings, the jurisdiction of the French Courts was challenged by the Saudi company based on three main arguments. First, as Article 14 of the French civil code is not mandatory, the French judges should decline jurisdiction because the connection with France was not strong enough to give jurisdiction to French Courts. Indeed, the contract was performed in Saudi Arabia, governed by Saudi laws and entered into by a Saudi company and a construction company with a business establishment in Saudi Arabia (which happened to be incorporated in France). Second, the incorporation in France of the construction company was a sham as no minutes of meetings of the board were produced and as this company had no actual business activity in France. Third, French judges could not have jurisdiction over the dispute because the jurisdiction clause designated a Saudi Court and thus excluded the possibility of bringing the dispute before French judges.

The Court of cassation, in its judgment, applied the rule of exorbitant jurisdiction contained in Article 14 of the French civil code. The Court found that it was sufficient to show that the construction company was formally incorporated in France to consider it as French for the purposes of Article 14. Moreover, the Court found that the French judges had jurisdiction over the dispute because, in spite of the jurisdiction clause, the Saudi judges had found that they lacked jurisdiction over the dispute in question, and the dispute had not been brought before another foreign judge, which would have had the effect of a waiver of Article 14.

Thus, parties contracting as, or with, a French party should be aware that if the Court designated by a jurisdiction clause decides that it does not have jurisdiction over a contract-related dispute, French Courts might have jurisdiction over it because of Article 14 (and Article 15) of the French civil code.

Kluwer Construction Blog

Construction Industry, Contract Administration

Construction Claims

2 Comments

by Sarah Thomas

Question:
I am a project manager for the employer on a power plant project based in Europe. We have been on quite good terms with the contractor up until now. Last week the contractor sent us a claim for 12 weeks’ delay to the programme and for compensation costs (we are using the FIDIC Yellow Book (Plant and Design Build) 1999 form and English governing law). They are saying that dealing with contamination in the ground discovered in the last few weeks will cause a delay. We had a couple of site meetings with the contractor and sub-contractor about the programme and the potential delays, prior to the contractor sending the claim. I have two issues with the claim: firstly, we do not believe that the ground conditions will cause 12 weeks’ delay; our estimate would be closer to about 6 weeks. Secondly, the contractor’s written notice of claim is just a couple of lines in an email to me and I am not sure this counts as proper “notice”.
I do not want to jeopardise our relationship with the contractor, but obviously I am concerned to limit our exposure to any delay costs. I would appreciate any advice about how we can deal with this claim from our contractor.

Answer:
Let’s start by considering whether or not the contractor has given valid notice of the claim. In fact, even before we come onto that, I should just touch on whether or not the contractor has a claim in the first place. You do not say that you are disputing the existence of the pollution nor that it was “Unforeseeable” for the purposes of the contract (for the benefit of others reading this, “Unforeseeable” and “physical conditions” are defined in the FIDIC Yellow Book as not reasonably foreseeable by an experienced contractor by the date for submission of the tender and “physical conditions” means “natural physical conditions and man-made and other physical obstructions and pollutants which the contractor encounters at the Site when executing the Works”). Therefore as ground pollutants are expressly covered, I assume that you accept that the contractor has encountered unforeseeable physical conditions at the site which in principle give it the right to claim an extension of time and payment of costs under Sub-Clause 4.12.4 of the contract.
But Sub-Clause 4.12.4 makes that right to claim expressly subject to Sub-Clause 20.1. Sub-Clause 20.1 sets out strict time-limits for giving notice. Again, you do not say that the contractor’s notice was given late so I am assuming that you accept that it was given on time but I suggest that you check this carefully anyway. As a reminder, 20.1 requires the notice to be given as soon as practicable, and not later than 28 days after the contractor became aware, or should have become aware, of the event or circumstance giving rise to the delay. Note that this is days, not business days. You say that the pollution was discovered in the last few weeks so timing could be pretty tight. However, it is worth bearing in mind whether the Contractor has in fact given valid notice before the email. 20.1 talks about the notice needing to make a claim for extension of time and costs under Sub-Clause 20.1 and describe the event or circumstance giving rise to the claim. So the contractor can potentially fulfil this requirement in just a couple of lines and it is also not clear that he even has to issue this in a separate notice (i.e. separate from communications on other matters such as Programme, progress of Works, etc). Could any previous correspondence/documentation issued to the Engineer conceivably satisfy this requirement?
Also, significantly, I note that the email was sent to you. Was the Engineer copied in as well? Clause 20.1 actually requires the notice to be sent to the Engineer. You need to find out when, if at all, the Engineer received the notice and whether or not this was before the 28 day deadline. It is also worth checking whether your particular contract provides for notice formalities and whether this precludes email. FIDIC unamended simply says that notices shall be in writing and delivered by hand, mail or courier “or transmitted using any agreed system of electronic transmission as stated in the Appendix to Tender”. So you need to check this to see if email is allowed.
Sub-Clause 20.1.2 sets out quite clearly what is the effect of a failure to comply with this timescale: the contractor will not be entitled to any extension of time or costs and the employer will be discharged from all liability in connection with the claim.
In addition to the initial notice, the contractor must send to the Engineer a fully detailed claim which includes full supporting particulars of the basis of the claim and of the extension of time and/or additional payment claimed, in accordance with Sub-Clause 20.1.5. This must be sent within 42 days after the contractor became aware/should have been aware of the event or circumstances giving rise to the claim, unless any other period has been agreed between the contractor and the Engineer. The contractor is also obliged to keep such contemporary records as may be necessary to substantiate any claim (Sub-Clause 20.1.4). You will need to check whether or not these further obligations have been complied with in time.
Turning to your other issue with this claim – the length of the delay claimed by the contractor. As you know, the Engineer can respond with “disapproval” or with “detailed comments” if he considers that the delay claimed is too long. He can also request any necessary further information to help him assess the claim, but note that he must respond on the principles of the claim within the time limit set out in Sub-Clause 20.1.6, namely 42 days after receiving the claim or any other period he has agreed with the contractor. For that reason I am hoping that the Engineer’s assessment is well underway and even though there are queries about the validity of the claim, you need to make sure that this is the case.
Of course, he will also need to comply with Sub-Clause 3.5 (Determinations) which means he has to consult with both employer and contractor firstly to try and reach an agreement. This will be your opportunity to put forward your case for any notice non-compliances and regarding the length of delay impact. If the parties don’t agree he makes a “fair determination”. If at this point, you don’t agree with this determination it is always open to you to invoke the dispute resolution procedure and seek the decision of the Dispute Adjudication Board if there is one in your Contract.
To sum up, the contractor has to overcome several hurdles relating to the form, content and timing of the notice in order to benefit from its entitlements resulting from delays due to unforeseeable physical conditions. You will need to review the notice carefully against the contractual requirements referred to above and consider whether all the information has been provided in time, in the right format, to the right people. Given the clear language of Sub-Clause 20.1 it would be hard for the contractor to argue that compliance with clause 20.1.1 is not a condition precedent – i.e. if it does not comply, it cannot benefit from the relief. This strict approach was in fact adopted in a recent Scottish case. You may find that the contractor has not submitted a valid claim at all. Concurrently, the Engineer will need to continue his assessment of the claim and preparation of his response in relation to the length of delay.

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Construction Industry, Contract Administration

A fixed price may not always be fixed in China

1 Comment

by Hew Kian Heong

I bought a painting a couple of months ago which I really liked. I did not have a place to hang it at the time. The gallery owner was eager to make the sale and so agreed I could pick it up later when I had found a place to hang it. So I agreed a price with the gallery owner and paid her a 10% deposit. When I turned up to collect the painting recently, the gallery owner sheepishly asked if I could pay a little more for the painting. The reason she gave was that her landlord had increased her rent significantly and she was struggling to keep the gallery going. I had also driven a hard bargain on the price. I was a little annoyed by the request but agreed to pay 10% more as the gallery owner is a really nice lady and I knew it was true her landlord had increased her rent by a ridiculous amount.

Most employers like the certainty of a fixed price contract from their contractors for their construction projects. Usually, they are required to have fixed price contracts by their financiers. In return for keeping to a fixed price, contractors in theory are allowed to charge a premium for assuming greater risks. This does not however happen in practice very much. But contractors continue to sign up to fixed price contracts because competition for contracts in China is very keen and employers are generally in a much stronger bargaining position than contractors, at least at the tender stage.

However, contractors who find themselves in a position where the contract price is fixed but their costs have increased since signing the contract may have a possible way out. The Interpretation II on Several Issues Concerning the Application of the PRC Contract Law promulgated by the PRC Supreme Court on 13 May 2009 introduced a principle of “significant change of circumstances” into the law of contract in China. Under this principle, the court is entitled to vary a contract or declare a contract discharged if a significant change in the objective circumstances occurring after contract formation renders the fulfillment of the purpose of the contract impossible or the continued performance of the contract manifestly unfair to one party.

In the context of construction contracts, the rule of “significant change of circumstances” provides a potential ground for a contractor to apply to the court to increase the contract price on the basis that the circumstances upon which the fixed price was originally agreed have changed significantly since the signing of the contract. The contractor must however prove a number of things to the court.
Firstly, the contractor needs to show the court that the new circumstances do not constitute a “commercial risk”. The Interpretation does not define the term “commercial risk”. The Guidance Opinion of the Interpretation issued by the Supreme Court however requires the court to take into consideration the market conditions and the circumstances of a particular case together with the following important factors to differentiate a “commercial risk” from a “significant change of circumstances”. A new circumstance will not be a “commercial risk” if:

(a) it is generally not foreseeable in the view of the general public;

b) its effect is far beyond the contemplation of a reasonable man;

c) it is not capable of being prevented or controlled; and

d) the nature of the transaction in question is not one of high risk and high return.

Secondly, the contractor will need to prove that the continued performance of the contract will render the fulfillment of the purpose of the contract impossible or manifestly unfair to the contractor. It is not often that the purpose of a contract becomes impossible to fulfill due to a change of circumstances. It is likely that we will see more reliance on the “manifestly unfair” argument. In this regard, the overriding principle of “fairness” in Chinese contract law comes into play and it requires the rights and obligations of contracting parties to be agreed on the basis of “fairness”. What is “manifestly unfair” is not defined in the Interpretation but the courts in China generally have a wide discretion in determining what is fair or unfair.

I personally do not think that the Chinese courts will apply the principle of “significant change of circumstances” liberally to vary or discharge a contract. If the courts apply the guidelines of the Guidance Opinion strictly, I think it will be difficult for a contractor to be able to prove a “significant change of circumstances”. After all, an experienced contractor will find it difficult to prove that a circumstance or its effects, in particular price fluctuation of materials or labour, is not foreseeable or cannot be prevented or mitigated in some way. More often than not, the particular circumstance was foreseeable but the contractor had to under price to win the contract and therefore left no margin of error in his price. This is perhaps best reflected by the fact that for the contracting business in China, a profit margin of 1 to 3% is the norm.

Although the principle of “significant change of circumstances” is a useful argument to employ for a contractor seeking to vary a fixed contract price, it is likely that most contractors will continue to rely more on the overriding Chinese contract law principle of fairness to achieve the same objective. In conclusion, it is perhaps interesting to note that in the context of liquidated damages, the Supreme Court in a recent opinion said (roughly translated) “In the current more difficult market conditions in doing business faced by companies, with respect to the issue of the amount of an agreed penalty being significantly higher than the actual loss caused by a breach, the contract law principles of good faith and fairness should be applied, and the purpose of a penalty being mainly compensatory and secondarily punitive in nature adhered to, so as to prevent parties using party autonomy as a reason to agree excessive penalties”.

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