Construction Industry - CMGuide

A fixed price may not always be fixed in China

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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”.

Kluwer Construction Blog

Construction Industry, Construction Law, Contract Administration

Making Demands on Advance Payment Guarantees and Performance Bonds – the “fraud exception”

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by Karen Gough

The general principle is that subject only to the “fraud exception” claims for payment under Advance Payment Guarantees (“APGs”) and Performance Guarantees or Bonds (“PGs”) should be met on demand. The Courts have not been kind to those resisting payment, even when the claims are doubtful, potentially dishonest and/or clearly overstated.

The case of R.D. Harbottle (Mercantile) Limited v National Westminster Bank Limited and Others [1977] 1 WLR 752 concerned guarantees by sellers, confirmed by banks, in favour of buyers. The amount secured was payable on the buyers’ demand. The sellers had provided cross indemnities in very wide terms to the banks, enabling the banks to deduct any payments made from their account; the bank’s demand being conclusive evidence of the sum due.

The buyers demanded payment from the banks (Nat West and others) but the sellers contended that there was no justification for the demands and made an application to the court seeking declaratory relief to that effect and also applied for injunctions restraining the banks from paying, and the buyers from demanding payment, under the guarantees. On an interim basis, the Plaintiffs secured ex parte injunctions against the banks.

Nat West applied successfully to have the injunction against them discharged. Kerr J (as he then was) explained the rationale behind the Court’s approach to such cases:

“It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life blood of international commerce… Except possibly in clear cases of fraud of which the banks have notice, the courts will leave merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take.” [at p.761]

Kerr J was also the judge at first instance in the Edward Owen Engineering case . In the Edward Owen case the Court of Appeal approved Kerr J’s decision in Harbottle and held that a performance bond stood on a similar footing to a letter of credit and that a bank giving such a guarantee must honour it according to its terms unless it had notice of clear fraud. (see Denning MR at p.169 and 171)

In Edward Owen, Denning LJ referred to the authorities concerning letters of credit and cited the American case of Sztein v J. Henry Schroder Banking Corporation (1941) 31 NYS 2d 631 heard in the New York Court of Appeals. In that case the Court had upheld a challenge on the basis that the bank had knowledge of the fraud prior to the presentation of the documents for payment. Shientag J said:

“…where the seller’s fraud has been called to the bank’s attention before the drafts and documents have been presented for payment, the principle of the independence of the bank’s obligation under the letter of credit should not be extended to protect the unscrupulous seller.”

In his judgment in Edward Owen Lord Denning described a performance bond as a “new creature” (ibid at p.169A), and he concluded that:

“the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms… The only exception is when there is a clear fraud of which the bank has notice.” (ibid at p. 171)

As far as fraud was concerned, Lord Denning confirmed that it was not enough simply to allege fraud, it had to be established. In fact it had to be, “very clearly established.”

These cases, decided thirty years ago, established the “fraud exception” as a principle in English law. Lord Denning’s statement that any fraud must be “very clearly established” for the exception to operate has been recognised and applied consistently since that time as recognised in the case of Enka Insaat ve Sanayi AS v Banco Popolaire Dell’Alto Adige SPA; Enka Insaat ve Sanayi AS v Cassa Di Risparmio Di Bolzano SPA [2009] EWHC. Teare J noted the consistency of tribunals post “Edward Owen” when faced with this issue:

In Turkiye Is Bankasi AS v Bank of China [1996 2LLR 611, Waller J held (and was approved by the Court of Appeal):

“That passage identifies the difficulty that a plaintiff has in succeeding in stopping payment on a performance bond. He may show an arguable case that the demand is not honest, but that it not sufficient. He must also establish that: “the only realistic inference is that the demands were fraudulent.”” (P.616)

Rix J looked at the same issue in another way in the case of Czarnikov-Rionda v Standard Bank [1999] 2LLR 187:

“However the fact that the claimant gets the benefit of a lower standard of proof for the purposes of a pre-trial hearing, places on the Court, as I believe the cases demonstrate, an additional requirement to be careful in its discretion not to upset what is in effect a strong presumption in favour of the fulfilment of the independent banking commitments.” (p.202)

In Solo Industries v Canara Bank [2001] 1WLR 1800, Mance LJ cautioned the court against allowing any dilution of the presumption in favour of upholding independent banking obligations. Equally in Banque Saudi Fransi [2007] 2LLR 47, Pill LJ noted that the task of demonstrating a “real prospect” that at trial it could be proved that the beneficiary calling the bond could not honestly have believed in the validity of the demands was “a high hurdle, as the authorities in my judgment recognise.” (p.55)

In Enka the Court had little difficulty in concluding that the “fraud exception” while alleged, had come nowhere close to being proved sufficiently even to meet the “real prospect” test necessary to obtain leave to defend an application for summary judgment. The case is of course decided on its own facts but it is interesting to note that the Court required only that the beneficiary should have held the belief that there had been breaches of the contractual obligations of the sub-contractor. The Court held that upon the true construction of the APG and PG there was no necessity for there to be any causal connection between the allegation of breach against the sub-contractor and the amount of the sums claimed.

In arriving at his construction of the guarantees Teare J was keen to emphasise that it was necessary to bear in mind the nature of performance guarantees or bonds as explained in the authorities. In particular, in Cargill International v Bangladesh Sugar and Food Industries Corporation [1996] 2 LLR 524, Morison J said, when considering an application for an injunction to restrain a call on a bond;

“However, it seems to me to be implicit in the nature of a bond, and in the approach of the Court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an “accounting” between the parties in the sense that their rights and obligations will be finally determined at some future date. The bond is not intended to represent an estimate of the amount of damages to which the beneficiary may be entitled for the breach alleged to give rise to the right to call.” (p.528)

When read in that context the Court had no hesitation is dismissing the claim of fraud on the basis that when the calls on the guarantees were made there was no obligation on Enka to state that it had an honest belief that it had suffered damage in the amount claimed under the PG, or that it was entitled to payment equal to the sums demanded under the APG. On a true construction of the guarantees, there needed only to be an honest belief in the allegation of a failure on the part of the sub-contractor to fulfil its obligations under the sub-contract. The fact that the loss was not as much as the value of the guarantees, or indeed even if it could be shown there was no loss, was immaterial to the bank’s obligation to pay . In order to avoid the obligation to pay, the banks had to show that the only realistic inference was that when the demands were made, Enka could not honestly have believed in the validity of their demands.

What the authorities here demonstrate is that while the fraud exception is an established part of English jurisprudence, which in principle gives rise to a right to avoid payment of a demand on a performance bond, in practice it seldom operates successfully so to do.

Kluwer Construction Blog

Construction Industry, Construction Law

Do you own the copyright in your employees’ designs?

by Melanie Grimmitt

If you’re based in the UAE, the answer to the above question is probably not.

Why is copyright important?

If a company has invested significant time and money in the creation of designs for a particular project then it will want ownership rights in relation to those designs. Copyright provides some protection against third parties copying your designs.

Copyright becomes particularly important in the event of a dispute where one of the parties to a construction project may try to move on and to take your valuable designs with them. If you do not own the copyright in those designs then you will not be able to prevent others from using them on other projects.

Who owns the copyright in the designs?

Provided that the designs are original, then the owner of copyright in those designs will be the person who created them. This sounds fair enough. But, unlike other jurisdictions such as the UK, UAE law does not provide that the copyright in works created during the course of employment will vest in the employer. This means that the individual employees involved in the creation of the designs will own the copyright in those designs and not the employer.

You may now be thinking that this isn’t a problem for you because your employees’ employment contracts contain the usual standard clause assigning all intellectual property created during the course of employment to you as the employer. Well, unfortunately under UAE law there is a further problem.

The UAE Copyright Law states that a copyright owner cannot assign copyright in more than five future works. The threshold for when copyright attaches to a work is low – a simple email or sketch on a piece of paper will likely be a copyrighted work.

Therefore, even if your employment contracts contain a clause assigning intellectual property, the effect of such an assignment may be minimal. As soon as the employee has created five pieces of work, which he or she may do within hours of beginning work, then the assignment provision is no longer effective and the employee will own the copyright in all further future works.

What can you do?

The first step is check your employees’ employment contracts to ensure there is that provision in there which assigns all intellectual property in work created by them during their employment to you. The “five future works” law is yet to be tested in the courts and there remains a chance an assignment provision will be upheld beyond that limitation.

Secondly, we recommend that all construction companies operating in the UAE regularly require employees involved in the creation of potentially valuable works to which copyright attaches to make a written assignment to them of the copyright in all works that the employee has already created. There are no limitations in the UAE Copyright Law on the assignment of the copyright in works that have already been created.

The position in the UAE is not ideal and reflects the fact that at the moment intellectual property protection here is less well developed than in other jurisdictions . However, if you know about the problem, there are steps you can take to solve it.

Kluwer Construction Blog

Construction Industry, Construction Technology, Sustainability

We’re Turning Green: New Green Contract Addendum is Released

by Andrew Ness

The U.S momentum to build “green” is rapidly gaining popularity, with the office market currently leading the way toward more sustainable structures. The construction industry, including the publishers of form construction contracts, is scrambling to keep up. ConsensusDOCS, a relatively new group of industry organizations that is promoting a family of contract forms that have been released in a steady stream since 2007, has now provided a document for contractually assigning the parties’ respective liabilities when entering into contracts for a green building.

The leading set of green building standards and certification process used in the U.S. to date is the LEED certification process, developed by the U.S. Green Building Council. Achieving a given LEED rating (Silver, Gold or Platinum) depends not only on the structure’s design but on its construction process and how it actually performs once in operation. Many commentators have noted that this creates the potential for significant disputes as to whom, if anyone, may be found liable if the project fails to achieve the targeted LEED rating. There is a consequent perceived need to control contractually the associated liability risks of project participants on green projects.

The new “ConsensusDOCS 310 Green Building Addendum,” released November 11, 2009, is intended to address this concern via a single Addendum for incorporation into each of the major contracts for the project. The basic scheme of the Addendum calls for the Owner to designate a Green Building Facilitator (GBF) to take the lead in identifying the measures needed to achieve a particular green status (such as a particular LEED certification level targeted by the Owner), coordinate their implementation by the project participants, and gather and submit the documentation needed to actually achieve the desired certification. The GBF can be the existing Architect/Engineer, the prime Contractor, or an entirely separate consultant. The project Architect remains responsible for incorporating the chosen “green measures” into the project design, with assistance from the GBF.

Most interesting are the provisions assigning potential liability. First, all project participants other than the GBF are expressly relieved of liability for failure of the selected green measures to achieve the targeted green status. The GBF’s own potential liability is left for determination under the GBF’s separate contract with the Owner. Second, damages from failure to achieve the targeted green status such as expected operating cost savings, tax benefits, and enhanced marketing opportunities, are all deemed “consequential damages,” and made subject to any waiver of consequential damages in the underlying contracts. Third, all project participants (including the GBF) preserve any specific limitations or assumptions of liability in their respective underlying contracts with the Owner.

Doubtless other forms will be unveiled in the coming months and years to deal with the growing popularity of green building, and their provisions will likely evolve over time to account for changes in green building methodologies and certification processes. The ConsensusDocs Green Building Addendum merely starts the conversation, offering one considered approach to dealing with the new legal issues associated with sustainable building projects.

Kluwer Construction Blog

Construction Industry, Contract Administration

A chicken talking to a duck !

by John Bishop

There is a funny commercial that you can see when you take a taxi in Shanghai. You can view it on a video screen on the back of the front passenger seat. It features a foreign businessman getting into a taxi in Shanghai and telling the Chinese taxi driver the address of his destination. The taxi driver does not understand English and starts asking the passenger where he wants to go in Chinese which the passenger obviously does not understand. At this point, the taxi driver and passenger transform into a chicken and a duck and both are clucking and quacking away with neither understanding each other. The commercial is for a road directory service whereby a passenger can punch in an address on the video screen in English and the address in Chinese is announced to the taxi driver. I think the commercial is pretty neat, and is a play on a Chinese description of a situation where both parties lack a common language (literally translated as a chicken trying to talk to a duck).

In every construction project, the engineering or construction standards that the contractor has to apply are specified in the contract. For Chinese contractors and design institutes going international, this is a particularly vexing issue. Chinese contractors and design institutes are generally much more familiar with Chinese standards than the standards of other countries and are therefore obviously more comfortable designing and constructing to Chinese standards. It is also sensible to use Chinese standards if one is procuring equipment or plant manufactured in China.

Most employers outside of China will however insist on using their national or other international standards. Their insistence is often borne out of ignorance or lack of understanding of Chinese standards. Chinese contractors often find themselves in a position where they have to persuade employers to accept Chinese standards. This will normally involve demonstrating to the employers that Chinese standards are not lower or even sometimes higher than the employers’ national standards or other applicable international standards. One of the practical difficulties is that Chinese standards are written obviously in Chinese and translation of these standards to the employer’s language of choice is usually a must. Unfortunately accurate translation of technical standards is not the easiest of task and can often be very time consuming and costly.

Hopefully by the end of 2010, issues arising from the lack of accurate and official translations of Chinese technical standards in other languages will be partly resolved. On 7 December 2009, the Ministry of Transport, China Eximbank, and China Communications Construction Company Limited commenced the translation of Chinese standards and specifications for transport construction from Chinese into English and French. This massive exercise, entailing a 16 million RMB investment in resources, is planned for completion at the end of 2010.

This will set the groundwork for Chinese technical standards gaining more international recognition and acceptance, at least in countries where Chinese contractors are active in transport construction, such as Asia, South America and Africa. Hopefully this means that less time is spent arguing on whether Chinese or other standards should apply because all parties involved can start off singing or at least reading from the same hymn sheet, and works toward bridging the avian dichotomy.

Kluwer Construction Blog

Construction Industry, Contract Administration

Practical Aspects of Greenfield Projects in St. Petersburg

by Karina Chichkanova

In recent years St. Petersburg has earned a reputation as an investment center with numerous greenfield projects. Greenfield projects involving the construction of industrial and sports facilities, transportation infrastructure, and residential developments, are underway. In the auto industry alone, four assembly plants have been built recently or are under construction (Toyota, Hyundai, General Motors, Nissan), and component and parts suppliers have a number of greenfield projects in progress. St. Petersburg has also established a technical-innovational type special economic zone, where a number of greenfield projects relating to the creation of innovative products are underway.

Underlying this success is the program of regulatory legal acts developed and implemented in St. Petersburg, which provide a clear and detailed framework for investment projects (many St. Petersburg laws have been taken as models by other regions). In particular, special (beneficial) procedures and conditions apply to projects of particular social, economic, cultural or other significance, known as “strategic investment projects”. (There are currently 21 strategic projects at various stages in St. Petersburg, including the automotive projects mentioned above). City officials have also acquired significant experience in commercial negotiations and show a willingness for open dialog with developers.

Practically all the investment projects in question are taking place on state land, as historically land has been and continues to largely be in state ownership. The most commonly used procedure for non-residential greenfield investment projects on state land is targeted allocation with prior site approval (Residential greenfield projects follow a different scheme – with allocation of the land plot under lease or into ownership by auction). This procedure has two main stages: (i) the developer conducts a survey of the site (in practice, the survey involves the collection of documents determining the ownership/legal status of the land plot, and engineering surveys), and (ii) the actual design and construction process. Legally, these two stages are covered by separate land plot leases concluded on the basis of a St. Petersburg Government Resolution allocating the land plots for the above purposes and on the terms in the Resolutions (usually up to one year for surveying, and up to three years for design and construction). Upon completing construction and obtaining a commissioning permit, the developer registers its title to the new building and has the right to buy out the underlying land plot from the city at a regulated price (the price is determined by a special formula based on the cadastral value), or to conclude a long-term lease agreement (up to 49 years).

Nevertheless, despite the well developed and smooth-running greenfield project system in St. Petersburg, there are a number of issues investors should take into consideration when deciding whether to proceed with a greenfield project in St. Petersburg. Among these questions are the following:

Limited choice of sites. The large number of investment projects has inevitably led to a shortage of suitable sites for greenfield projects. This is related both to the limited territory of St. Petersburg itself, and the specific site requirements for certain projects. The City Government is therefore lobbying for a merger with the neighboring region – Leningradskaya Oblast – and reclamation of additional territory from the Gulf of Finland (at least two major projects are underway on reclaimed territory).

Payments to the St. Petersburg budget for the right to implement an investment project. These payments can be significant (except strategic projects, which have large discounts and exemptions) and are calculated on the basis of the market value of the planned building. The market value is determined by an independent expert chosen by the developer, but must be approved by a special city institution.

Insufficient external infrastructure. Although St. Petersburg spends significant funds each year on developing and enlarging its utilities infrastructure, developers are often faced with non-existent or insufficient utilities capacity for their projects, particularly with regard to power. This issue is also complicated by the connection fee, which can be considerable. Where infrastructure is insufficient developers may be required to build the required capacity and hand it over to the operating companies as the connection fee.

Actual impediments. Often, greenfield project investors encounter the situation where the chosen site has vegetation, bodies of water or other features of indeterminate status (such as trees not in city woodland records, unregistered bodies of water). The indeterminate legal status of these features can significantly delay the process of determining the risks for the project, and steps to be taken to mitigate the risks.

These problems are, of course, not the only ones. At the same time, after more than 15 years of experience on the St. Petersburg real estate market, we can see that St. Petersburg is ready to go to developers and discuss how to reduce and/or redistribute the risks involved in projects. This does not, however, make it any less necessary for developers to ensure they have sound legal, technical and financial advisors for each greenfield project in St. Petersburg.

Kluwer Construction Blog

Construction Industry, Construction Law

Decennial Liability and Latent Defects Contractors’ and Developers’ Liability in Dubai

By Lisa Dale & Steven Hunt
Since the advent of Dubai’s construction boom circa 2002, fuelled by the relaxation of restrictions on property ownership by foreign nationals, thousands of new residential property units have been completed by developers and handed over to their new owners for occupation. This relatively recent phenomenon of home ownership on any significant scale has heightened the need for both contractors and developers to understand their potential legal exposure to home owners when defects begin to appear in the properties that they have either constructed or sold to them. …

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Construction Industry, Project Management

Pre Construction Stage in Projects

At this stage the project brief should be finalised, a preferred option agreed and the detailed design should be delivered within the identified parameters of cost, time and quality. Clear definition of the project is necessary in order to attain a successful outcome.

Previous Actions

Preconstruction encompasses the development of the detailed design, formulation of the tender documentation, undertaking the tender process and concluding the contract documentation. The choice of procurement route will determine how much of these stages overlap but by the start of this stage, a number of issues will have been addressed and actions taken, including the following:

Feasibility completed

LSC support for preferred option attained

Alternative site secured, disposals agreed

Surveys and statutory requirements concluded

Statutory authorities, utilities information concluded including consultation with the planning offices

Development cost plan prepared

Project team appointed. This should include main contractor representation as soon as is practical.

Project execution plan and programme established

Statutory Obligations

It is the duty of the design team to effect compliance with a statutory control and attain the appropriate consents e.g. consents for planning, Building Regulations, means of escape. Planning approvals can be a complex process and may require the appointment of specialist consultant to assist in attaining a successful approval.

Value Engineering

This is a process of examining the function of a building to ensure that it is delivered in the most cost effective way. It involves reviewing the design proposals at each stage of the design process to analyse whether client objectives have been achieved without over design or specification and at minimum cost. In major and complex projects this process may be best facilitated by a specialist in this field. In less complex projects this can be lead by the project manager.

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Construction Industry

Building material firms adjust to price fluctuations

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Construction sector in the UAE witnessed a massive drop in costs during the past 12 months. Prices of most materials dropped by more than half compared to 2008.

Producers and distributors said they experienced a difficult year as reduced cost coupled with falling demand led to severe drop in revenues.

Most affected were ready-mix companies. Many of them had to cut their production by more than 50 per cent and send several staff on leave in order to reduce operational cost. …

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Construction Industry, Construction Law

To What Extent Does Freedom of Contract Exist for You in the UAE?

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by Melanie Grimmitt

If you are a construction contractor accustomed to operating in common law jurisdictions where the doctrine of “freedom of contract” is generally upheld, you should be aware that the position under UAE law is different. We explore how it is different below …

Common Law Approach

In most common law and European jurisdictions, party autonomy and freedom of contract (whilst being gently eroded since the 19th century) are concepts that are recognised and respected. English law, for example, allows commercial parties to contract freely, provided that the agreement does not contravene any laws or public policy, and the courts will generally try to support the agreement between the parties. Although we can’t deny that notions of equality of bargaining power and fairness are increasingly being used to justify an interventionist stance, the courts of common law jurisdictions are – by and large – slow to use the doctrines of misrepresentation, mistake and economic duress to vary the terms of a commercial agreement.

The UAE position

The UAE, on the other hand, is a civil law jurisdiction, with its codified laws based on the Egyptian code, which in turn is derived from the French code. In addition, the laws of the UAE are influenced by Shari’a law. Nevertheless, as a general rule, under UAE law, the parties are entitled to agree on any contractual terms that they deem fit, provided that such terms are not inconsistent with the provisions of law or contrary to public order or public morals (pursuant to Article 2 of the UAE Commercial Code). Thus the common law concept of freedom of contract exists in the UAE but is subject to certain further limitations, based on ‘moral’ considerations.

Whilst in general the position in the UAE appears broadly similar to the English law position, there are some important differences, including the fact that in the UAE the scope of public policy exceptions and a court’s power to strike down or vary a contract are broader. This can cause challenges for parties who have become accustomed to operating in a secular legal and political environment, who may now be faced with having their contract varied or struck down on the basis of principles which may find their genesis in the Shari’a, for example.

In a construction context, the more limited application of freedom of contract in the UAE has important consequences for concepts that international contractors and developers may be familiar with, or take for granted, such as the interpretation of limitation of liability and liquidated damages clauses.

Examples of the differences in approach

Like English law, UAE law includes statutory implied terms that fetter the doctrine of freedom of contract. For instance, pursuant to the Civil Code parties are required to perform their contract in a manner consistent with good faith, (Article 246(1)). These statutory implied terms are different to those one might expect under English law, which are generally more tangible and objective.

A further example is the different approach taken to limitation of liability provisions as explained in my last blog.

Another interesting example is the different approach that the UAE takes to termination provisions, such as a termination for convenience clause. Again under English law, the Courts will generally uphold an agreed termination provision, including the right for one party to terminate its contract for convenience. The validity of such provisions in the UAE, however, is highly questionable. This is because UAE law prescribes the circumstances in which a contract may be terminated (which are limited and do not include a right to terminate a contract without cause) and because such provisions are considered to be contrary to Shari’a law. This is a topic to which we will return!

Therefore, whilst the concept of ‘freedom of contract’ can be said to exist in some form in the UAE, it is not the same as in English law. In the UAE there is a greater risk of the terms of a contract being altered and reinterpreted. In these circumstances it is vitally important to ensure contracts have been reviewed by lawyers familiar with UAE law so at least the areas of potential uncertainty are understood and action can be taken to mitigate consequential risks.

But which approach is better?

Well that, of course, depends.

The flexibility provided by the UAE law in some circumstances may be very helpful. For example a contractor faced with paying liquidated damages in circumstances where the employer has not suffered loss to an equivalent extent is likely to welcome the opportunity to argue that the liquidated damages provisions he agreed to should be varied by operation of the UAE law.

On the other hand greater certainty of contract may be argued to be a pre-requisite to construction risk management, which will surely be the focus of attention of the international contracting industry as it picks itself up from the worldwide economic downturn.

Perhaps the more interesting question is whether as a matter of principle the UAE should reach the same position in relation to freedom of contract as that found under the common law? Should freedom of contract supersede moral or religious considerations when determining the terms of an agreement between two commercial entities, or are the latter considerations more important?

Kluwer Construction Blog

Construction Industry, Construction Law

Arbitrator Disclosures – Now Everyone Gets to Play

by Andrew Ness

U.S. courts in recent years have imposed stricter obligations on individuals sitting as arbitrators to disclose to the parties fully any facts or circumstances that may give rise to doubts about their impartiality or independence. As a result, the arbitrators’ mantra has become “disclose, disclose, disclose.” Indeed, it has become fairly common in arbitrations under U.S. law to see arbitrators making continual disclosures throughout the arbitral process as to every minor event that could possibly be seen as questionable – such as receiving a phone call from an old college friend who happens to be a partner at the same large firm as is representing one of the parties, even though the old friend is in a different city and different practice area entirely, and has no connection whatever to the pending arbitration. Under a recent change in American Arbitration Association (AAA) Construction Industry Rules, the parties and their counsel now get to play the disclosure game as well.

The AAA Construction Industry Rules (formally the “Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes)”) are the rules most often selected for domestic U.S. construction arbitrations, and are used in many trans-national cases as well. The AAA Construction Industry Rules as most recently revised (effective October 1, 2009) now provide (in Rule 19(a)) as follows with respect to the applicable disclosure requirements (new language in italics):

“Any person appointed or to be appointed as an arbitrator as well as the parties and their representatives shall disclose to the AAA, as promptly as practicable, any circumstance likely to give rise to justifiable doubt as to the arbitrator’s impartiality or independence, including any bias or any financial or personal interest in the result of the arbitration or any past or present relationship with the parties or their representatives. Such obligation shall remain in effect throughout the arbitration.”

So in an AAA construction arbitration, the parties and their counsel now have just as extensive disclosure obligations as do the arbitrators themselves. That means if counsel for one of the parties learns that her partner in a far-away city is buddies with one of the arbitrators, and this connection has not previously been disclosed, presumably she will now be the one to disclose it. It seems eminently predictable that disclosures by parties and counsel of facts giving rise to justifiable doubts about the impartiality of an arbitrator is rife with immense potential simply to embarrass everyone involved. And not just the embarrassment associated with having to call to everyone’s attention some relationship that, at least arguably, the arbitrator should have disclosed earlier himself. What if, instead of an old college friend, she learns instead that one of her partners is having an affair with the married arbitrator? In a hurry, this seemingly innocuous new rule could get very interesting indeed. Stay tuned. The American preoccupation with disclosing everything may lead down an interesting path.

Kluwer Construction Blog

Construction Industry, Construction Technology, Contract Administration

You’re Creeping Me Out – Design Creep under the FIDIC Silver Book

by Sarah Thomas

In the wake of the current downturn, employers will increasingly look for greater budget certainty under EPC or Turnkey contracts. This is where the contractor undertakes all tasks – design, construction, management etc – so that, upon completion, the employer merely needs to ‘turn the key’ and operation of the plant or building can begin immediately. The whole point is that the contractor assumes price risk in return for relative autonomy over how he delivers the project – provided of course he meets the employer’s output requirements. But often employers want not just price certainty but also to retain control over design approval and how the project is actually delivered. This can lead to claims of ‘design creep’ by the contractor when he perceives that the employer is trying to introduce design improvements under the guise of reviewing the contractor’s documents.

But what is ‘design creep’? Why are contractors upset at its use and are their concerns justified?

I will be concentrating on the provisions of the FIDIC Silver Book, although design creep is not something particular to the Silver Book, or indeed any construction standard form.

Sub-clause 5.2 of the Silver Book allows the Employer to review the Contractor’s Documents. Nothing controversial about that. But what happens if the Employer undertakes a design review and makes ‘comments’ on those documents? Will those comments amount to a “Variation” (entitling the Contractor to time and money)? Or will they be taken as something less than a Variation, so that any additional work will have to be absorbed into the Contractor’s schedule and budget? This is the classic example of “design creep”.

What can the Contractor do when he considers that a comment constitutes a variation?

The first question to ask is: Does the “comment” amount to a “variation” under the terms of the contract? A Variation is defined in the Silver Book as “any change to the Employer’s Requirements or the Works which is instructed or approved as a variation under Clause 13″. Clause 13 [Variations] may be initiated at any time, “either by an instruction or by a request for the Contractor to submit a proposal”. The Contractor is often put in a difficult position because he must execute each variation unless he promptly gives notice that he cannot implement it (because of lack of goods, increased risk to safety or suitability of the Works or to his ability to meet Performance Guarantees). Obviously the broader the Employer’s Requirements and the Works are described in the contract, the less likely it is that the comment will be seen as a change to the Employer’s Requirements or to the Works.

However, if the comment does require a clear change, the Contractor’s first step should be to write to the Employer asking him to confirm whether the comment amounts to an instruction to change the Works under clause 13.1.

The second step is to follow the requirements of sub-clause 20.1 [Contractor’s Claims] and request the Employer to agree or determine adjustments to the Contract Price and the Schedule of Payments, proceeding in accordance with sub-clause 3.5 [Determinations].

But what if the comment does not amount to a ‘change’ as such. Is the Contractor still bound to follow it? This is the more difficult area. The Contractor could argue that the provision of comments that do not specify “non conformity with the Contract” is not a proper use of the review procedure under sub-clause 5.2. That clause only allows the Employer to give notice to the Contractor if a Contractor’s Document fails to comply with the Contract. There is a difference here between the FIDIC Silver and Yellow Books. The key difference is that the documents are submitted “for review and/or for approval” (if so specified) under Yellow but under Silver, they are submitted for review only. Thus under Silver, the argument can be made far more strongly that the Employer can only issue a notice if the documents don’t comply with the Contract. Under Yellow on the other hand, where a document is specified “for approval”, the Engineer can give notice of approval with or without comments. This is an important difference and is the reason why “design creep” may well be a bigger problem under the Yellow Book than under Silver. But under both contracts, it is important to remember that the Employer’s scope to review the Contractor’s documents is confined to issuing a notice that the document does not comply with the Contract. A Contractor would also be well advised to check the formalities for issuing instructions and variations under his contract – to see whether he does in fact have to implement the change. For example under the FIDIC contracts, an instruction must (1) be given in writing and (2) state the obligations to which it relates as well as the sub-clause in which the obligations are specified [Sub-clause 3.4].

No matter what approach the Contractor adopts, to the extent that the Contractor is making a claim under a FIDIC contract, he will have to comply with the provisions of sub-clause 20.1.

So, what has been your experience of design creep? Is it occurring more or less often? What do you see as the threshold that needs to be reached in order for a comment to turn into a Variation? I would be interested to hear your war stories.

Kluwer Construction Blog