Construction Law

By KATIE LISZKA and NAZLI OKUSLUK

ABU DHABI Law No 6 of 2008 (procurement law), which governs the procurement of materials, service contracts and works contracts in the Emirate of Abu Dhabi, aims to decentralise, modernise, simplify and facilitate procurement by government departments. It grants the Department of Finance the authority to issue a manual to execute the provisions of the law, pursuant to which the department issued the Purchases, Tenders and Bids Manual in 2008 (manual). This manual sets out provisions, policies and procedures in respect of tenders for purchasing materials, services contracts and executing works and bids, in addition to the terms and policies related to electronic tenders and purchases.ScopeWithout prejudice to the provisions of Law No 21 of 2006 regarding construction contracts and agreements in the field of civil works, the procurement law and the manual are in principle applicable to all government departments and agencies funded under the general budget of Abu Dhabi and apply to all contracts, except for the following:

(a) Direct employment contracts entered into between a government department and employees;

(b) Purchases by and contracts of the Abu Dhabi Police;

(c) Buildings leases provided to the employees of a government department; and

(d) Contracts entered into with other government entities.

In addition, the Executive Council of the Emirate of Abu Dhabi may, at its discretion, determine that the provisions of procurement law and the manual will not apply to a specific tender.

Types of tenders

The two main types of tender process are the general, which is a public tender, and the limited, which is a restricted tender.

• General tender: Designed for contracts exceeding Dh50,000 ($13,611), general tenders are based on three principles, namely, openness, equal opportunity and freedom of competition, and involve four main steps: announcement of tenders; evaluation of proposals; awarding contracts; and supplying goods or performing work.

General tenders can be either global or local. A global general tender is where invitations to tender are open to suppliers and contractors from within the country and abroad and advertised in the local as well as international media. A local general tender is where invitations are restricted to suppliers and contractors within the country and advertised in the local media only.

• Limited tender: Here, the invitation is given to a restricted number of registered suppliers and contractors selected by the relevant department. The minimum number of tenders for this process is three.

Such a tender may be international or local and is sometimes called the “selective tender” or the “tender from the list” as it is based on selecting certain suppliers or contractors from a register (see below) and inviting them participate. This process may be appropriate in circumstances where there are, for example, only a certain number of specialist suppliers.

Except for general advertising, all the rules and procedures for public tenders apply to limited tenders.

Pre-qualification

Registration is a pre-condition of doing business with government entities in Abu Dhabi and the procurement department of each government entity keeps a register of suppliers and contractors qualified to provide services and products to that government entity. If a bidder in a public tender is not on the register, it must fulfil the qualification conditions before the bids are opened.

Qualification standards

Qualification standards and conditions cover the following aspects:

(a) Legal, including the requirement for licences to practice the activity (from Planning and Economic Department, Chamber of Commerce and Industry, or any other entity);

(b) Commercial, including the relationship with licence agencies and previous transactions with the relevant government and other entities;

(c) Financial, including the financial position of the tenderer and arrangements and relationships with its banks and other financing sources;

(d) Technical, including that the tenderer has professional technicians and appropriate and sufficient equipment, workshops and warehouses; and

(e) Expertise, which can be evidenced by the successful completion of previous transactions.

Procedure

• Invitation to tender: The tendering government entity publishes an invitation to tender in newspapers, magazines and its official website (in case of public tenders) or sends the invitation directly to a specific number of suppliers or contractors (in case of restricted tenders) in order to get offers.

• Tender documents: These documents can be collected from the procurement department immediately after the invitation to tender is announced for a cash fee. They must be stamped and signed by the procurement department of the relevant government entity.

• Clarification meetings: In order to assist the bidders in preparing their bids, meetings may be held prior to submitting bids for the purpose of replying to any enquiries or questions. To ensure equal opportunity, the same information will be provided to all bidders. The manual strictly prohibits any information being provided to bidders by other means.

• Bid submission: Bids must be submitted in the required form to the envelopes opening committee, which comprises of at least three members with experience and competence in legal and financial aspects of the procurement.

A participant is permitted to submit more than one bid, provided that he shall provide for each bid a separate set of original tender documents. Submissions received after the deadline shall not be accepted.

• Bid security: For bids exceeding a value of Dh1 million ($272,238), the procurement department may decide that bid security is required.

• Reviewing bids: Once the bids are opened by the envelopes opening committee, they are delivered to the concerned technical division of the tendering government department to conduct a technical assessment. Bids accepted from a technical perspective shall be forwarded to the procurement department for financial evaluation in the case of procurement of materials, and in the case of procurement of services and works, to the relevant division.

• Notifying the successful bidder: The successful bidder will be notified of the acceptance of its bid by letter no later than a week from the date at which the procurement department approves the recommendations of the tenders and auctions committee. For unsuccessful bidders, envelopes will be returned along with a letter clarifying the reason for rejection.

• Performance bond: The successful bidder is required to submit a performance bond within 15 days from the date it is notified of the acceptance of its bid. The performance bond, to be provided before execution of the contract, is for between five and 10 per cent of the bid’s value. No interest will accrue on this bond.

If the successful bidder fails to provide the performance bond within the prescribed time period, the procurement department may call on the bid security and perform the subject of the tender in whole or in part on its behalf without taking any legal action and without prejudice to any of its legal rights.

• Contract execution: The successful bidder must sign the contract after being notified of the award and submitting the performance bond. If the successful bidder fails to sign the contract, without reasonable justification, within 15 days of being notified of the award, it shall be deemed to have withdrawn and the bid security can be called on.

Other provisions

Apart from tender procedure, the manual also contains information on internal procedures and regulates contract periods, penalty payments and dispute resolution, among other things.

• Internal procedures: The manual specifies in detail the relevant committees (such as the tenders and bids committee, and the envelopes opening committee) and officials (such as the officer in charge of contract management) who will be running the procurement process as well as their tasks and duties.

• Delay penalty: If there is a delay in completing the works within the specified time, a delay penalty will be imposed on the contractor, in accordance with the conditions of its contract. That penalty should not exceed 10 per cent of the total value of the contract.

• Claims and disputes: The relevant department must solve the contractual problems amicably by consent as far as possible. If these cannot be so resolved, the dispute shall be settled in accordance with the terms of the contract. If a dispute cannot be settled amicably, the parties have the right to go to the courts and may appeal to arbitration either under the terms of the original contract or by a separate agreement.

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KATIE LISZKA* looks at the circumstances in which the beneficiary of an on-demand performance bond may be prevented from calling on the bond for reasons outside the terms and conditions of the bond itself.

THE recent global financial crisis has brought the performance security documentation provided on construction projects into sharper focus. Employers are looking to protect themselves should current and future projects get into trouble and are considering more carefully the security provided.
Unfortunately, some parties are in the position of having to consider what terms they signed up to in better times and whether or not they can enforce the security. An employer commonly requires a performance bond and, where there is a parent company, a parent company guarantee, as security for the performance of the contractor’s obligations. These requirements are usually contractual obligations in the underlying construction and engineering contract. Of the different types of bond available, the on-demand performance bond offers the employer the most robust form of protection.

It is worth considering the purpose of an on-demand bond and the advantage it offers to an employer. The key advantage is that the bond can be called even if there is an underlying dispute under the contract, allowing the employer ready access to cash. An on-demand bond operating in this way is also advantageous for the bondsman as it does not want to be concerned with merits of the underlying claim in respect of which the call is made. But does on-demand always mean on-demand?

If it doesn’t mean “when requested” and requires something more, the commonly perceived benefits are potentially seriously undermined. This article considers two cases, one in the Special Tribunal related to Dubai World and the other an English case in the Technology and Construction Court. Both case concern interim applications to restrain the employer from calling on an on-demand performance bond. In both cases, the applications were successful and the employers prevented from making the calls.

Recent cases

Simon Carves Limited v Ensus UK Limited [2011] EWHC 657 (TCC) relates to a process plant to produce bioethanol at a site in Teesside, in the north-east of England. The contract was an IChemE Red Book, as amended by special conditions agreed between the parties. The special conditions of the contract obliged Simon Carves to provide a performance bond “as security for all and any of the contractor’s obligations and liabilities under the contract…” The bond would become null and void, save for any pending or previously notified claims, on issue of the acceptance certificate. The contract also provided for the return of the bond once it had become null and void, save where there were pending claims. The word “claim” was not defined in the contract. However, there was a clause which stated that any claim “shall be supported by a written statement of the grounds and summary of material facts upon which it is based”.

The acceptance certificate was issued, “subject to outstanding defects being rectified as per the attached schedule and subject to resolution of liability of certain of the rectification works…” As the acceptance certificate had been issued, Simon Carves claimed that the performance bond was null and void and should be returned. Ensus UK’s position was that arguably there was a “claim” in the form of the list of defects and the bond, therefore, should not be returned.

The decision in this case confirmed, amongst other things, the following:

• Fraud is not the only ground on which a call on an on-demand bond can be restrained;

• If the underlying contract clearly and expressly prevents the beneficiary of the bond from making a demand, the beneficiary can be restrained from making a call on the bond; and

• At the interim injunction stage, the court has to be satisfied that the party seeking the injunction against the beneficiary of the bond has a strong case.

The judge granted the injunction on the grounds that Simon Carves had a strong case that the bond should be treated as null and void under the terms of the underlying contract. This was regardless of the fact that a call on the bond, as between the beneficiary and the bondsman, remained valid. This decision does not undo the principle that the bondsman need not be concerned with the provisions of the underlying contract. It does, however, mean that close attention should be paid by the employer to any terms in the underlying contract regarding the provision of and ability to call on the bond itself, as an employer may be prevented from calling on an on-demand performance bond if such a call is in breach of those terms. The Simon Carves case is clear that express provisions restricting a call are required.

The case of Bin Belaila Baytur General Contracting LLC v Nakheel PJSC and Standard Chartered Bank (DWT/APP25/ 003/2010) concerned two construction contracts relating to villa developments at Jumeirah village in Dubai, UAE. The contracts were governed by the laws of Dubai and the UAE, even though the documentation was drafted in English. Nakheel, the employer, was concerned about the slow progress of the works and issued formal notices under the contracts to that effect. It was also concerned that the contractor was short of money and Nakheel had directly paid a subcontractor. Nakheel at first delayed and then eventually ceased payment to Bin Belaila Baytur of amounts certified as payable under the contracts. Both parties purported to terminate the contract and what then developed was a dispute over who terminated the contracts and on what grounds. Nakheel then made a call on the performance bonds, for the full amount. However, before payment was made, Bin Belaila Baytur applied for an order restraining Nakheel from doing so before the final accounts had been finally determined.

In the proceedings, the judge framed the question as to whether Nakheel had bona fide legal grounds to justify its demand for payment of the full amount under the performance bonds. In answering this question, the court looked at the terms of the contracts, which limited the right to call on the bonds. The clause required the employer to give the contractor notice of “the nature of the default in respect of which the claim is to be made”. This clause was interpreted as restricting the right of the employer to call on the bond in situations where there is a bona fide claim for payment in respect of which the bond provides security, and to restrict the amount of the call to the amount of that bona fide claim for payment.

The court, in this case, was not satisfied that there were bona fide legal claims to justify the demand for payment. The judge went on to acknowledge that Nakheel had not served the appropriate notice and that the court thought that Nakheel should not have been in a better position than if it had served such notice. Again, the court was concerned with the provisions of the underlying contract which limited the right to make a demand on a bond.

Implications

What conclusions can be drawn from these decisions? Both decisions give effect to the parties’ underlying contract. The cases focus on preventing the employer from calling on the bonds in breach of contract rather than whether the employer is entitled to claim in accordance with the terms and conditions of the performance bond between it and the bondsman. So, the position of the bondsman in not having to interrogate the merits of the underlying claim in respect of which the call is made is preserved.

Even if the bond is on-demand and the demand is in accordance with the terms and conditions of the bond, the beneficiary may be restrained from making the demand if the underlying contract restricts it from doing so. During negotiation of the contract documents and prior to making a call on an existing on-demand performance bond, careful attention should be paid not only to the wording of the on-demand performance bond itself, which has been the primary focus in the past, but also to the terms of the underlying contract relating to the agreement of the contractor to provide such a bond and the circumstance in which it can be called. The best position for an employer is to have no restrictions on its ability to call on a bond. If it is unable to achieve this position, the restrictions should be carefully and unambiguously drafted to avoid the call being prevented in circumstances that the employer did not intend.

An employer needs to be aware of any restrictions in the underlying contract on the ability to call on the bond and how these may be interpreted or the employer may find that it does not have the security it thinks it has and on-demand does not in practice mean on-demand.

Gulf construction Online