Construction Law

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

by Gauthier Van Nieuwenhuyse

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

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

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

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

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

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

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

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

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

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

Kluwer Construction Blog

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

2 Comments

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 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 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. …

Decennial Liability and Latent Defects Contractors’ and Developers’ Liability in DubaiRead More »

Construction Law

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

1 Comment

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 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 Law

Flexible Arbitration Filing Fees Introduced by AAA

by Andrew Ness

While arbitration is often touted as being a less expensive alternative to litigation, the initial cost of initiating arbitration has always been considerably more expensive than filing in court. Typical filing fee in a U.S. court is a few hundred dollars, while administering authorities typically have filing fees in the thousands of dollars. The American Arbitration Association (AAA), self-described as “world’s leading provider of conflict management and dispute resolution services,” is known for its high filing fees that get progressively greater as the amount in dispute rises. But the AAA will now be providing claimants some relief on that front.

The AAA has initiated a new Flexible Fee Payment Schedule intended to provide cost-savings to claimants. The new option is a pilot program available on all cases filed under the AAA’s construction and international rules (as well as the commercial and employment rules) through May 30, 2010.

Here is how it works. Instead of paying a single initial filing fee, the claimant pays a smaller initial filing fee and then a “Proceed Fee” within 90 days. For example, for a construction claim of $1 million, the initial filing fee is $1,000 and the subsequent Proceed Fee is $5,600. The initial filing fee under the AAA’s standard fee schedule would be a single payment of $6,000. The Flexible Fee option is supposed to provide a cost savings, but the combination of the initial fee and the full Proceed Fee is higher than the single initial fee under the standard schedule. So, where is the cost savings? The answer is: the savings come only if the parties appoint their arbitrators without assistance from AAA. If the parties are able to agree on their arbitrators, there is a 50% discount on the Proceed Fee. So, in the example above, the combination of the initial fee and discounted Proceed Fee becomes $3,800 – a savings of $2,200 compared to the standard fee.

Procedurally, if the claimant elects to proceed under the Flexible Fee option, the AAA will notify the respondent of the demand and set the date for filing the answering statement and any counterclaim, but then does nothing more until the Proceed Fee is paid. The Proceed Fee must be paid within 90-days or the AAA will administratively close the file. This 90-day window is for the parties to agree on the appointment of the arbitrators. If they succeed, the claimant pays the discounted Proceed Fee, and the AAA proceeds with the arbitration. If not, the AAA will conduct its standard arbitrator appointment process once the full Proceed Fee is paid.

So the new option provides greater flexibility and offers the potential for cost-savings if the parties can appoint their own arbitrators. Where there is a high likelihood that the parties will not be able to mutually agree on the arbitrators and no immediate settlement is in prospect, the AAA’s standard fee schedule remains preferable. Complete details and a schedule of the fees under the standard and Flexible Fee options can be found at the end of the AAA’s construction industry arbitration rules on the AAA’s website (www.adr.org).

Todd Wagnon
Andrew Ness

Kluwer Construction Blog

Construction Law, Contract Administration

Tales Of The Unexpected: Where Liability Lurks Unseen #3

by Melanie Grimmitt

Recap

After a diversion a fortnight ago to address the newsworthy events in Dubai, normal service resumes with this blog. The previous two blogs in this series considered decennial liability and liability for harmful acts under UAE law.

This blog will briefly consider whether it is possible to limit liability under your contract eg by including liquidated damages provisions, and whether the courts will give effect to such a provision.

Limiting liability

On the face of it there seems clear evidence that it is possible to limit liability under a contract – take a look at Article 390(1) of the Civil Code.

However, it is not so certain that such a limitation will be upheld. In fact, the very next provision of the Civil Code (Article 390(2)) suggests that a judge may vary a clause seeking to fix compensation in advance so as to make the compensation fit the amount of loss suffered in the particular circumstances. Not exactly what contract drafters from common law jurisdictions will have expected!

But our contract is commercial not “civil”!

Some commentators have argued that the Civil Code does not apply to commercial contracts, and that therefore parties to commercial contracts can afford to ignore this possibility. This view is based on previous court decisions where the court has declined to apply the Civil Code to commercial contracts. Such a position would accord with English law where additional protection is given to consumer contracts, but where commercial parties who have equal bargaining power have far greater freedom to determine the apportionment of risk and liability between them.

However there is also plenty of case law where the courts have applied the Civil Code to commercial contracts. So better to err on the safe side and assume that this provision is relevant to commercial contracts.

No excuse for fraud or gross negligence anyway

In addition, even were it to be found that the Civil Code did not apply to commercial contracts, the courts would still be likely to interfere with any purported limitation of liability for fraud or gross negligence on public policy grounds.

When will a judge interfere and how?

There is no express guidance in the Civil Code as to the circumstances in which the court will exercise its power under Article 390(2) to adjust the measure of damages to reflect the actual loss. So far as I am aware, even Egyptian law, on which UAE law is in large measure based, only provides guidance on when a fixed amount of compensation may be reduced, rather than when it may be exceeded. Interestingly a similar provision under Bahraini law (also based on Egyptian law in large measure) expressly only refers to a reduction in the amount of fixed compensation where it can be established that no loss has been suffered or the amount fixed was grossly exaggerated (not far from “genuine pre-estimate of loss” perhaps, albeit that the test for genuine pre-estimate of loss is applied at the time the damages are fixed rather than when the loss is suffered).

However, it is possible to draw conclusions as to the application of Article 390(2) from general principles inherent in UAE law that relate to the conduct of parties to a contract. On this basis the courts would be more likely to adjust (or ignore) a limit on liability if the harm results from, for example, conduct by a party which is contrary to good faith, or an act which is wrongful or deliberate.

What to do?

Perhaps the best advice is to adopt the usual methodology to liquidated damages clauses and other “fixing” of liability clauses which would be adopted in common law jurisdictions: make sure the fixed compensation is actually likely to reflect the loss which will be suffered, rather than a windfall gain. And if you receive a claim for what you perceive as a windfall gain, don’t assume you must pay it even though the sum is clearly due under the terms of a contract – there might be grounds for challenge.

Kluwer Construction Blog

Construction Law, Contract Administration

Issues involved in Taxation of Construction contracts

by Sujjain Talwar

There is a lot of mystery regarding taxation of Construction activities in India. The mystery starts from the fact that a Construction contract involves both labour and material and hence, both Service tax and Value Added tax is levied on one transaction.

The process becomes more complex depending upon a number of factors such as the Scope of work, the nature of the contract, whether the contract includes any further sub-contracting, whether individual prices have been specified for each part of the scope of work and whether the contract involves off-shore and on-shore activities etc.
Let us first consider the Indirect taxes applicable on a Construction contract. As already stated above, a Construction contract involves both labour and materials. Hence, a Construction contract is liable to both Service tax and Value Added tax.

…

Issues involved in Taxation of Construction contractsRead More »

Construction Law

Christmas cheer for frustrated tenderers in public procurement contracts

1 Comment

by Adrian Hughes

The capacity of an unsuccessful tenderer to challenge a contract award which breaches public procurement rules will be strengthened on 20th December with the coming into force of new Regulations implementing an EU Directive on Remedies. The new Regulations introduce a declaration of “Ineffectiveness” as a remedy for certain breaches of procurement rules and provide for a harmonised standstill period between the decision on a contract award and the contract award itself to allow the decision to be challenged. This Note summarises the effect of the new Regulations and refers to a recent case in the Technology and Construction Court relating to court challenges.

Unsuccessful tenderers have had a raw deal in terms of remedies where they have been unsuccessful in winning a contract in circumstances where there has been a breach of the public procurement rules. Once the contract has been placed with a successful bidder, the only remedy available to the tenderer in the English courts (save in relation to framework contracts) has until now been damages.

On 20 December 2009 this position will be changed with the introduction of the Public Contracts (Amendment) Regulations 2009 (SI 2009 No 2992, “the 2009 Regulations”) which amend the Public Contracts Regulations 2006 (“the 2006 Regulations”) to give effect to amendments made by the new European Remedies Directive 2007/66/EC (“the Remedies Directive”).

The principal new remedy is that of a “declaration of ineffectiveness”. In broad terms, where a contract has been entered into (a) without being properly advertised, or (b) without respecting the standstill provisions (thereby depriving a person the opportunity of challenge) or (c) without respecting the rules on mini-competition under framework agreements or dynamic purchasing agreements, a court must make such a declaration. In addition a court will be required to fine the contracting authority in such circumstances and may award damages to an economic operator who has suffered consequential loss. Where a contract has not yet been entered into, existing remedies (such as setting aside, ordering amendment or the award of damages) are preserved.

The declaration operates prospectively but not retrospectively to invalidate the contract award. In deciding what orders to make, the court must not exercise its powers in any way which is inconsistent with provisions which the parties have agreed in advance for the purpose of regulating their mutual rights and obligations in the event of a declaration being made, unless and to the extent that the court considers that those provisions are an attempt to avoid ineffectiveness “by the back-door”.

A court will have a discretion not to make such a declaration where ‘overriding reasons relating to a general interest require that the effects of the contract should be maintained’. Economic interests in the effectiveness of the contract may be considered as overriding reasons ‘if in exceptional circumstances ineffectiveness would lead to disproportionate consequences’.

There are non-extendable time limits for applying for a declaration of ineffectiveness: 30 days where a contract award has been published which justifies the decision not to hold a tender or where the tenderers have been informed of the conclusion of the contract; otherwise 6 months. The commencement of proceedings to challenge a decision to award a contract will automatically require the contracting authority not to enter into the contract.

The second main change introduced by the Remedies Directive and implemented by the new Regulations is the harmonisation of “standstill” periods. The 2006 Regulations already provided for a 10 day standstill period between the date of dispatch of the contract award notice and entry into the contract following the ECJ’s decision in Alcatel. The 2009 Regulations make further provision for standstill periods: 10 days if the decision on contract award is sent by fax or e-mail; 15 days if sent by other means. An unsuccessful tenderer is entitled to be informed of the reasons for the decision.
Procedural issues relating to challenges to contract awards were considered during two interlocutory hearings in the important case of Amaryllis Ltd V HM Treasury earlier this year; [2009] EWHC 962 (May 2009) and [2009] EWHC 1666 (July 2009). In that case, breaches were alleged to have occurred in connection with the evaluation of tenders from framework contractors for the supply, delivery and installation of all types of furniture for use by the UK Public Sector Bodies. Damages of £11 million were claimed.
The first hearing involved an application to strike out the challenge for alleged non-compliance with notification and time limit provisions in the 2006 Regulations. Although the Authority had decided in March 2008 that the claimant had failed in the pre-qualification stage for an important lot within the range of potential contracts, the Judge decided that it had failed to provide a clear explanation of the reasons sufficient to enable the claimant to consider a challenge. It was not until July that the Authority had explained the reason why the claimant had been unsuccessful (in particular because of alleged failings in its environmental management). In these circumstances, Mr Justice Coulson decided that:
1. The notice of intention to challenge was compliant; it was sufficient in the light of the limited explanation of the reasons given at that time by the Authority (despite repeated requests);
2. The grounds for bringing the proceedings first arose when the specific breach of the Regulations actually occurred. The relevant period therefore commenced in this case when the decision to exclude the tenderer was made; it was not a case where the breach complained of defective tender documents where time might have run from the date of issue of such documents.
He therefore held that proceedings were commenced both promptly (given the Authority’s failure to give timely reasons) and in any event within the statutory time limit.
The second hearing concerned the issue of how to protect commercial confidentiality whilst ensuring fair process in the respective challenges. In Amaryllis, the essential complaint was that the Authority had an unstated and unfair preference for manufacturers rather than suppliers. A fair trial required a comparison of the Claimant’s Pre Qualification Questionnaire (PQQ) with the Defendant’s evaluation of the PQQs of other tenderers and those PQQs themselves. The Judge had to consider the applicable principles of Public Interest Immunity (PII) which raised the need to balance the public interest in non-disclosure with the public interest in the proper administration of justice. He decided on the facts that PII was not justified for the public authority’s documents. In relation to the commercial interests of the other tenderers he considered that this could be resolved by a mixture of redactions and substitutions. This was the same solution as that adopted by Mr Justice McCombe, in the earlier case of Lettings [2008] EWHC 1009 (at paragraph 18), who had added a step requiring the lawyers for each party to assess materiality on a confidential basis before any issue over disclosure would be addressed.

It seems safe to conclude that the various considerations set out in the 2009 Regulations bearing on the exercise of the new remedy and the complexity of the detailed provisions relating to time limits for commencing proceedings raise the prospect of interesting court challenges in the future.

Kluwer Construction Blog

Construction Law, Contract Administration

Freedom of contract meets its match: Pay If Paid Clauses

by Andrew Ness

Cash-flow from lender to owner to construction manager to subcontractors is the lifeblood of any construction project. And maintaining a sufficient flow of funds is essential to every construction manager’s ability to manage the job. Contract provisions requiring a contractor or subcontractor to continue to work, even if the right to payment is disputed, mean little to the fate of the project if subcontractors cannot meet payroll.

As a consequence, who will bear the risk of non-payment has becomes a frequent negotiation point, particularly so during periods of economic uncertainty. Imagine that two sophisticated corporations spend thousands of dollars and hundreds of hours of the best legal talent available to negotiate a contract for the construction of a large project to be located in the United States. The negotiations are lengthy and contentious; they are the very definition of ‘arms-length’.

As with all negotiations, the give and take often involves an adjustment to the contract price in exchange for amendment of a certain risk allocation or other material term. At the end of the long process a final deal is struck and the contract is executed. Imagine further that as part of the negotiations, the contract price was increased in exchange for a “pay-if-paid” clause, i.e., a clause that says the construction manager has no obligation to pay the subcontractor for work, unless the owner first pays the construction manager for that work. Under these circumstances, where there is no reason to question the validity of the contract, it would be natural under general principles of U.S. contract law, where “freedom of contract” supposedly reigns, to expect that all of these contract provisions would be enforced as written.

But the aforementioned negotiations involved a third-party. A party that was silent during all of the negotiations, but who gets the final say regarding every provision she wants to influence: public policy. And in some states, public policy will invalidate a provision to share the risk of non-payment through a ‘pay-if-paid’ clause.

In New York, for example, the Court of Appeals (New York’s highest court) has held that a “provision which forces the subcontractor to assume the risk that the owner will fail to pay the general contractor is void and unenforceable as contrary to public policy.” West-Fair Electric Contr. v. AETNA, 87 N.Y.2d 148 (1995). The basis of the Court of Appeals decision was New York State’s mechanics’ lien law, which provides that subcontractors have the right to file a lien against real property to which they have contributed manpower or material to improve. Because a pay-if-paid clause threatened that right, such clauses were found to be contrary to public policy. So much for freedom of contract!

Kluwer Construction Blog

Construction Law, Contract Administration

The Cash Cow

2 Comments

On demand’ guarantee bonds are a typical form of contractual security in the UAE construction industry, particularly on large projects. Their use in theory, is to afford the employer with secured funds from a surety, in the event the defaulting party does not perform under a contract or becomes insolvent.

Prior to the onset of the liquidity crisis last year, the general attitude of an employer (as a beneficiary) would have been to threaten the encashment of a bond to impose commercial pressure on a contractor to perform. A call upon an on-demand bond would have been made if strictly necessary e.g. in the event of material or persistent default. …

The Cash CowRead More »