Contract Administration

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

by Sarah Thomas

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

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

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

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

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

As for other key features,

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

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

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

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

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

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

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

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

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

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

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

Kluwer Construction Blog

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

1 Comment

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

Contract Administration

Construction Claims

2 Comments

by Sarah Thomas

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

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

Kluwer Construction Blog

Contract Administration

A fixed price may not always be fixed in China

1 Comment

by Hew Kian Heong

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

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

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

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

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

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

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

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

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

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

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

Kluwer Construction Blog

Contract Administration

Going Green Gets Greatly Muddled

by Andrew Ness

The spreading trend toward “green” building has resulted in a number of competing and overlapping certification systems, with only faint hope in sight of better standardization. United States builders are most familiar with the LEED system sponsored by the United States Green Building Council (USGBC). Through USGBC’s association with the World Green Building Council, LEED is now available in almost 60 countries, spanning the globe from Malaysia to Morocco.
Starting in 1996, Canada’s Building Research Establishment developed its Environmental Assessment Method. This then evolved into an online assessment and rating tool owned by BOMA Canada, known as Green Globes. BOMA Canada then licensed Green Globes to the Green Building Initiative (GBI) in the United States to compete with LEED. To raise its “market share” GBI has applied to have Green Globes accredited by the American National Standards Institute.
Outside of the Americas, the BREEAM standard promulgated by BRE in the United Kingdom has become widely used and adopted for use in Europe and the Gulf Region, with approximately 110,000 buildings BREEAM certified. There are also a number of national and local standards. France has the HQE system, and about 70% of the commercial buildings built in Australia since 2002 have been rated under the “Green Star” system. In Italy, a regional standard known as Protocollo Itaca was developed for specific regions, but has now been divided into two separate and more streamlined standards.

Most of these standards are privately owned and promoted, but on December 11, 2009 at the Climate Change Summit in Copenhagen, the United Nations Environmental Programme (UNEP) unveiled the “Common Carbon Metric” for measuring energy use and reporting greenhouse gas emissions from building operations. UNEP proposes establishment of the Common Carbon Metric to measure the weight of carbon dioxide equivalent (kgCO2e) emitted per square meter per year by different building types and climate regions. While the Common Carbon Metric has yet to be adopted by any governing body, entities such as BRE and the USGBC may well incorporate the metric in their rating systems.

The diversity in rating systems means that parties wishing to build green projects in diverse locations need to be familiar with different standards for use in different countries, or even regions within a country. The different rating system requirements also need to be compared to local building codes and regulations, to ensure that there are no conflicts between them.

This diversity also undermines one of the principal business reasons for green building. A recent study sponsored by the World Green Building Council determined that the top business reason for green building is because it is the “right thing to do.” Positive publicity is the most obvious commercial benefit from “doing the right thing,” and a common standard for assessing a project’s “greenness” makes garnering that positive publicity much easier. The Sustainable Building Alliance (SBA) is working to solve this problem by developing common minimum standards for adoption by the different rating systems. SBA’s goal is to ensure consistency among the systems and to promote “dual certification.” But because each rating organizations has its own commercial interest in promoting its system, SBA has a difficult task ahead of it. Uniformity is certainly in the interest of engineers, architects, builders, and owner/developers, and there are early signs of progress, as SBA has reportedly fostered an agreement between BRE and HQE to create together a common standard for the European Union.

Kluwer Construction Blog

Construction Law, Contract Administration

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

Contract Administration

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

by Andrew Ness

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

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

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

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

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

Kluwer Construction Blog

Contract Administration

A chicken talking to a duck !

by John Bishop

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

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

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

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

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

Kluwer Construction Blog

Contract Administration

Practical Aspects of Greenfield Projects in St. Petersburg

by Karina Chichkanova

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

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

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

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

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

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

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

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

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

Kluwer Construction Blog

Contract Administration

The curse of the bespoke amendment

by Philip Adams

I am increasingly fascinated by the extent to which clients and to a certain extent their lawyers, feel compelled to amend standard forms of contract, especially, bearing in mind the involvement of such organisations in the initial drafting. Next time you look at the Fidic Red Book for example, take a look at the ‘acknowledgements’ as these make for very interesting reading.

The ‘acknowledgements’ state that the drafts were reviewed by many persons and organisations, and that their comments were ‘duly studied by the Update Task Group and, where considered appropriate, have influenced the wording of the clauses.’ …

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Contract Administration

Building material firms adjust to price fluctuations

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

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

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

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