Construction Law

Construction Law

Opening the Door to U.S. Federal Court a Wee Bit Wider

by Andrew Ness

When forced to litigate in the U.S., many businesses – especially multinational ones – prefer to be in federal rather than state court. The U.S. Supreme Court just made it a bit easier to fulfill that desire.

Most construction disputes are contract cases not involving federal law, so a federal court will only have jurisdiction if the suit involves more than $75,000 and is between citizens of different U.S. states. The key question is usually: where is a corporation a “citizen” for the purpose of determining whether such “diversity of citizenship” exists?

By statute, a corporation is a citizen of both the state (1) where it is incorporated, and (2) where it maintains its “principal place of business.” While the state of incorporation is obvious, for nearly 60 years, federal courts have struggled to define a corporation’s principal place of business. Last month, the United States Supreme Court reconciled divergent tests and clarified this at last. In Hertz Corp. v. Friend, No. 08-1107, slip op. (Feb. 23, 2010), the Court held that a corporation’s principal place of business is just one place, its headquarters. By limiting corporations to one static principal place of business, Hertz increases the number of states where a corporation is not a citizen, meaning it increases the likelihood of getting access to the federal courts in a particular case.

For 60 years, the Circuit Courts of Appeal have been split over where a corporation had its principal place of business. Some circuits held it was the state containing the corporation’s “nerve center.” Others held it was any state where the corporation conducted significant activities. Thus, in the Ninth Circuit a corporation had a principal place of business wherever the corporation conducted “significantly larger” or “substantially predominant” operations. Under such fluid standards, corporations with a presence in all 50 states might be considered a citizen of most or even all 50 states, effectively precluding access to federal courts. What’s worse, the fluidity of the tests made it impossible to predict the outcome from one case to the next.

In Hertz v. Friend, Hertz was sued by California residents in state court. Hertz removed to federal court, asserting it was not a California citizen. The lower court concluded Hertz’s principal place of business was California under the Ninth Circuit test, Hertz was a California citizen, and thus there was no jurisdiction in federal court. The Ninth Circuit agreed.

The Supreme Court reversed, concluding that a corporation’s principal place of business is best interpreted as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.” The Court noted in most cases, this should be the state containing the corporate headquarters, “provided that the headquarters is the actual center of direction, control, and coordination.” Id. Hertz’s headquarters is in New Jersey, so it was not a citizen of California and the federal court thus had jurisdiction.

With this relatively simple test for determining principal place of business, Hertz reduces the likelihood that a corporation will be deemed a citizen of more than two states, and makes predictable what those states are. So corporations should have relatively predictable access to federal courts in the remaining 48 states.

 

Kluwer Construction Blog

Construction Law

Changes Afoot – the Proposed Arbitration Fairness Act

by Andrew Ness

The U.S. has been a staunch supporter of arbitration since 1925, when the U.S. Arbitration Act became law. The Arbitration Act makes arbitration agreements binding and simple to enforce, without significant exception. Rather suddenly, a substantial backlash against mandatory arbitration has appeared on the scene. One of the clearest indicators is the proposed Arbitration Fairness Act (H.R. 1020) that was introduced in the House of Representatives in February of 2009, and is still very much in play. While the anger is not directed at construction dispute arbitration, the concern is that commercial arbitration will end up being limited in important ways, as well as mandatory arbitration schemes where the use of arbitration is seen as one-sided and unfair.

The proposed AFA would limit the scope of the Arbitration Act to exclude from its coverage: a) disputes between an employer and employee arising out of their employment relationship; b) consumer disputes between an individual and the seller or provider of real or personal property, services, money, or credit for personal, family, or household purposes; and c) disputes between a franchisor and a franchisee.
More significantly, the AFA would take away in all arbitrations the arbitrators’ authority to determine the validity and enforceability of arbitration agreements. This is a hallmark of U.S. arbitration law that has been generally successful in keeping courts from interfering in the interpretation and enforcement of arbitration agreements. It would be a major departure from current federal policy and several decisions of the United States Supreme Court.

Supporters of the proposed change believe that mandatory arbitration is being used in ways unfair to parties of unequal bargaining power who routinely fail to read the “fine print” mandating arbitration in many consumer transactions, such as when opening a bank account or obtaining a credit card. Among other objections, opponents fear that adding such restrictions would have the unintended consequence of reducing the effectiveness of arbitration as a cost effective remedy for commercial disputes. In reality, the pending legislation is likely to undergo significant revisions in both House and Senate committees before any final votes are taken.

While the construction industry is not specifically targeted by the AFA, concerns have arisen that subcontractors and suppliers, for example, may attempt to claim unequal bargaining power when confronted with standard arbitration clauses contained in many form subcontracts. As a result, those concerned about cost effective and efficient dispute resolution in the construction industry, both within the U.S. and internationally, are following the AFA’s progress through Congress closely.

Kluwer Construction Blog

Construction Law, Contract Administration

Consultancy agreements and allegations of illegality

by Matthias Scherer

Contractors and suppliers operating abroad often conclude contracts with agents, consultants and other intermediaries who assist them in tender processes as well as in negotiating and performing contracts. Typically, these consultancy agreements provide that disputes are to be submitted to arbitration. Most disputes concern the consultants’ entitlement to a fee. In these disputes, the principal often argues that the contract was illegal under the applicable law. This notably occurred in two cases which led to two recent decisions of the Swiss Federal Supreme Court on applications to set aside or revise arbitral awards.

In the first case, a Swiss and a Taiwanese party had entered into a consultancy agreement in respect of a contract which the Swiss party wished to obtain for managing and maintaining an electricity plant in Taiwan. On the basis of the agreement, the Taiwanese consultant later initiated arbitration under the Swiss Rules of International Arbitration to obtain payment of his fees. The arbitral tribunal found in a partial award that the consultancy agreement was valid.

The Swiss principal applied to the Swiss Federal Supreme Court for revision of the partial award, the time limit for the setting aside of the award, which would have been the ordinary remedy in such a case, having already expired. The principal contended before the Supreme Court that the agreement had an illegal content as it contemplated bribery, and produced new evidence to support its claim. The Court denied the request, as the prerequisites under Swiss law for a review of the award were not met. Indeed, according to the Court, the evidence could have been produced in the arbitration and was therefore not new. The arbitration resumed and the arbitrators eventually rendered a final award in favour of the consultant.

The principal sought to have the final award set aside on the grounds that it breached public policy, relying on the same evidence on which it had previously sought to rely in its request for review of the partial award. The principal further argued that the Supreme Court must examine the alleged nullity of a contract on its own motion. The Court however dismissed the application. It found that the principal could and should have produced the evidence purportedly showing bribery during the arbitration. The Court also ruled that it would not review on its own motion the validity of private law contracts.

The principal again raised its public policy defence in the subsequent enforcement proceedings in Switzerland. The competent cantonal court however ruled that arguments which could have been raised in setting aside proceedings could no longer be raised at the enforcement stage.

In another dispute between a consultant and a principal, the Swiss Federal Supreme Court admitted the principal’s request to set aside an arbitral award due to procedural fraud. In the highly publicized Thales v Frontier AG matter, the award was annulled and the matter remanded to the arbitrators. The facts of the case are summarised below.

In 1989, France authorised the export of new F-3000 frigates to Taiwan. Mainland China objected to the export and a few months later, upon request of a French minister, France withdrew the export authorisation. In 1990, Thomson CSF (which later became Thales), the manufacturer of the frigates, entered into an agreement with Frontier, a Swiss company, to act as its agent. According to the agreement, Frontier was to receive remuneration amounting to 1% of the value of Thomson CSF’s contract with Taiwan for its assistance in relation to the sale of the warships. Behind Frontier was Alfred Sirven, a high ranking manager with the French oil company Elf Aquitaine. Subsequently, in 1991, the French government reversed its previous position and gave its final approval for the sale of the ships. The contract between Thomson and Taiwan was concluded on 31 August 1991 for a purchase price of approximately USD 2.5 billion.

Thomson however refused to pay Frontier, which initiated ICC arbitration as a result. In the arbitration, Thomson contended that the objective of the contract was in fact for Frontier to solicit the services of Edmond Kwan, a consultant of Elf Aquitaine in China, in order that he use his political connections to persuade the Chinese to cease their opposition to the sale of the warships to Taiwan. Thomson argued that the contract was void as its object was influence peddling. Messrs Sirven and Kwan, as well as other witnesses, were heard by the arbitral tribunal.

In 1996, the tribunal rendered its award, ordering Thomson to pay the contractual fee to Frontier. The tribunal found that Frontier had provided the services which were due under the contract by assisting Thomson, through Edmond Kwan, to appease Chinese opposition to the sale. The tribunal admitted that influence peddling was unlawful but found that it had not been proven that influence peddling had occurred. Thomson subsequently initiated criminal proceedings in France against Mr. Kwan and others for giving false testimony before the arbitral tribunal. On 1 October 2008, the French authorities ceased their investigation as a result of Mr. Sirven’s death and because there was insufficient evidence against the other actors. The French authorities however concluded that Sirven had indeed given false testimony during the arbitration.

On 17 December 2008, Thales (formerly Thomson) brought a request for review of the 1996 arbitral award before the Swiss Federal Supreme Court on the basis of the findings of the French authorities. The French investigation had shown that the real objective of the contract between Thomson and Frontier was not to lobby for the sale of the warships in China, but rather to persuade a French minister, who wanted to avoid retaliation measures by Mainland China, to reconsider his objections to the sale. Commissions had therefore been paid by Frontier to Mr. Sirven and a woman who had privileged relations with the minister. Mr. Sirven had represented to the arbitral tribunal that Mr. Kwan had been the only beneficiary of a commission, however it was uncovered that he had implicated Mr. Kwan merely for the purposes of the arbitration. The Swiss Supreme Court ruled that it had been established that Mr. Sirven had orchestrated an influence peddling scheme to the detriment of the French authorities. He had misled the arbitral tribunal and was therefore guilty of procedural fraud. In the opinion of the Supreme Court, Mr. Sirven’s untruthful testimony had had a direct influence on the tribunal’s award. Consequently, the Supreme Court annulled the award and remanded the matter to the original arbitral tribunal or a new tribunal to be constituted in accordance with the ICC Rules.

Conclusions

Several conclusions can be drawn from these two cases. The first is that arbitral tribunals and the Swiss Supreme Court will not uphold contracts that are flawed by illegality. However, it is for the party which alleges an illegality to prove it. Another conclusion to be drawn is that if evidence of illegality exists at the time of the arbitration, it must imperatively be produced in the arbitral proceedings. A party therefore cannot hold back evidence, even if it is self-incriminating, and rely on it in subsequent annulment or enforcement proceedings in the event of an unfavourable outcome of the arbitral proceedings. On the other hand, if a party misleads the arbitral tribunal, as could be uncovered in subsequent criminal proceedings, an arbitral award may not stand.

By Matthias Scherer and Sam Moss

 

 

Kluwer Construction Blog

Construction Law

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

Construction Law

“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 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 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 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 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 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 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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