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

Contract Administration

Private works contract and the owner’s legal guarantee obligation

by Maxime Simonnet

Commentary on the decision rendered by the third civil chamber of the Cour de Cassation (French Supreme Court) on September 9, 2009

To protect the contractor from the risk of the owner’s insolvency, the law No. 94-475 of June 10, 1994 on the prevention and treatment of the difficulties encountered by contractors instituted the obligation for the owner to guarantee the contractor that the price of the ordered works would be paid.

This obligation, set out in Article 1799-1 of the Civil Code, concerns exclusively private works contracts, whose amount exceeds the minimum threshold fixed by the decree of July 30, 1999 at EUR 12,000.

It is mandatory, as Article 1799-1 of the Civil Code is public policy, and is materialized by a control mechanism of the payment of the loan financing the contractor’s contract, or, in the absence of a loan, by an obligation for the owner to provide to the contractor a specific guarantee.

In a decision rendered on September 9, 2009, the third civil chamber of the Cour de Cassation confirmed once again these various principles by recalling that the owner which enters into a private works contract must guarantee the contractor that the sums owed will be paid, no derogation being allowed.

Moreover and above all else, the Court recalled that the owner is liable for this payment guarantee obligation as from the execution of the works contract, the owner being unable to postpone it or make it conditional.

In this case, an owner had engaged a private contractor to renovate hotel rooms.

The owner had placed three service orders with its contractor, subject however to the latter providing to the owner a bank guarantee for the total amount of the works (considering its wish to subcontract the contract).

The contractor’s bank, for its part, agreed to provide it with this guarantee, but subject to the contractor obtaining from the owner a joint suretyship guaranteeing the payment of the contracts, in accordance with Article 1799-1 of the Civil Code.

Confronted with this request from the bank, the owner notified its contractor that the service orders were null and void on the grounds of the failure to meet the condition precedent to obtain the bank guarantee.

Having had its claims for the payment of various down payments and damages dismissed in first instance and in appeal, the contractor lodged an appeal before the Cour de Cassation.

Referring to paragraphs 1 and 3 of Article 1799-1 of the Civil Code, the Cour de Cassation quashed the decision of the Court of Appeal and granted the contractor’s claim.

Because, as from the execution of the contract, the owner was indeed liable, under Article 1799-1 of the Civil Code, for its legal guarantee obligation, without being able to condition it on the provision of a guarantee by the contractor.

By Maxime Simonnet and Chloé Niedermaier

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.

…

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Project Management

Tender Process

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The tender process will be dictated by the choice of the procurement route. This will include short listing contractors including compliance with the European Union directives, issuing tender documentation, receiving tenders, tender interviews and selection. As an alternative to this competitive tendering process, tenders may be negotiated where this proves to be a better option for obtaining value for money. …

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Project Management

Project Kickoff

Projects don’t always go through an organized sequence of planning, approval and execution. Sometimes a project is in various stages at once. Before you know it, you can be executing the project and find that team members and stakeholders have varying levels of understanding about the purpose and status of the project. Just as a project should have a formal end-of-project meeting to signify that it is complete, it also makes sense to hold a formal kickoff meeting to start a project. …

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Contract Administration

GCC in catch-22 over FIDIC forms

The Fidic form of contracts has been in the Middle East since the 1970s, yet it is far from popular. Adam Webster looks at legal issues that should be borne in mind when negotiating Fidic-based contracts.
THE legal systems of the Middle East are founded upon civil law principles (most heavily influenced by Egyptian law, which is itself based on the Napoleonic Code) and Islamic Shariah law – the latter constituting the guiding principle and source of law.

The impact of Shariah law depends on the jurisdiction. For example, charging interest is prohibited under Saudi law, whereas only prohibitive interest will be unenforceable in the UAE. In the UAE and other civil law jurisdictions in the Middle East (including Bahrain, Saudi Arabia, Kuwait and Oman), legislation tends to be formulated into a number of major codes providing for general principles of law with a significant amount of subsidiary legislation. Unlike common law jurisdictions, there is little, if any, precedent and we can only surmise what decision a court may arrive at on any given point.
The Fidic forms of contract have been in use in the Middle East since the 1970s. Indeed, the abbreviation “Fidic” (Fédération Internationale des Ingénieurs-Conseils) has become synonymous with the Middle East. It is somewhat paradoxical that the majority of Middle East countries, which source their law from a mixture of civil and Shariah law, have based their conditions of contract on the Fidic form despite the fact that the Fidic conditions of contract are based largely on English common law principles.
Historically, the public sector (in Gulf countries especially) has promoted Fidic as the accepted standard and the private sector has followed suit. There is no apparent rhyme or reason for this, and although Fidic is the established form of construction contract in the region, it is far from popular. It is interesting to note that whilst Abu Dhabi has officially adopted the Fidic form for its standard government contracts, it remains to be seen whether Dubai will follow suit.
According to a recent survey conducted by Norton Rose’s Middle East offices, most developers and contractors responded that they choose to use Fidic forms largely through habit (indeed 94 per cent of respondents said that they primarily use Fidic or modified Fidic contracts, largely because it is well-established and recognised within the region). That said, many respondents also complained that Fidic is too rigid and breeds an adversarial relationship. The current downturn may give contractors and developers time to reassess their contractual models and consider other forms of contract, including Institution of Civil Engineers (ICE), New Engineering Contract (NEC) and partnering contracts. However, few respondents expected that there will be a change in approach towards contracts in the short term.
Unlike in the UK and other common law jurisdictions, countries in the Middle East do not have a specific body of construction or engineering-related laws and precedents, despite the fact that particular problems recur. Although civil codes can give some comfort and confidence to foreign developers and contractors, the uncertainty that often surrounds the interpretation of such laws should not be dismissed out of hand. While it is true that there are principles common to most legal systems, there are some quite significant differences, and often, in the context of construction and engineering projects, these have the capacity to be problematical if not addressed from the outset. As such, it is necessary to have an appreciation of and be aware of the relevant civil code articles and local law nuances which may impact on certain Fidic conditions.
Obviously, the issues vary from country to country as the local laws are not identical. That said, they are often quite similar and, as such, it is possible to highlight some of the key legal issues that should be borne in mind when negotiating Fidic-based contracts.
• In most (if not all) Gulf jurisdictions, it is not possible for contractors to contract out of liability for major structural defects, which threaten the total or partial collapse of a building for a period of not less than 10 years from the date of practical completion.
• Further, whilst it is possible for parties to ascertain and limit damages from the outset of a contract, if the actual damage sustained as a result of a breach is proven to be well in excess of any agreed cap, a court/arbitral tribunal may look beyond the cap and award damages that are quantifiably closer to the actual losses incurred.
• Contractors may also be precluded from claiming payment if payment certificates have not been issued in respect of work performed. Careful consideration should, therefore, be given to the wording of Fidic (or any other standard form or bespoke contract) to ensure that the time for late payment runs from the date on which the interim and/or final payment certificate, as opposed to the date on which the contractor’s application for payment, is made.
• The local laws of most Gulf nations permit parties to a contract to agree on the circumstances in which a contract can be terminated, including provisions that determine the contractor’s employment, but not all of the contractor’s obligations under the contract. In Bahrain, as in Qatar and Egypt, an employer may terminate a contract and stop work at any time before the completion of the works, provided he compensates the contractor for all the expenses he has incurred for the work completed and the profit he would have made if he had completed the works. The court may, however, on application of the employer reduce the compensation for loss of profit, if it sees fit. There is no such provision under the UAE law, however, and in certain circumstances, a court order may be required to terminate a contract. Drafting could be included in contracts governed by the UAE law to provide that the parties agree that they may be terminated without a court order if such termination is in accordance with the termination provisions, but it is not certain that this will be effective if challenged.The Fidic form of contracts has been in the Middle East since the 1970s, yet it is far from popular. Adam Webster looks at legal issues that should be borne in mind when negotiating Fidic-based contracts.

THE legal systems of the Middle East are founded upon civil law principles (most heavily influenced by Egyptian law, which is itself based on the Napoleonic Code) and Islamic Shariah law – the latter constituting the guiding principle and source of law.

The impact of Shariah law depends on the jurisdiction. For example, charging interest is prohibited under Saudi law, whereas only prohibitive interest will be unenforceable in the UAE. In the UAE and other civil law jurisdictions in the Middle East (including Bahrain, Saudi Arabia, Kuwait and Oman), legislation tends to be formulated into a number of major codes providing for general principles of law with a significant amount of subsidiary legislation. Unlike common law jurisdictions, there is little, if any, precedent and we can only surmise what decision a court may arrive at on any given point.

The Fidic forms of contract have been in use in the Middle East since the 1970s. Indeed, the abbreviation “Fidic” (Fédération Internationale des Ingénieurs-Conseils) has become synonymous with the Middle East. It is somewhat paradoxical that the majority of Middle East countries, which source their law from a mixture of civil and Shariah law, have based their conditions of contract on the Fidic form despite the fact that the Fidic conditions of contract are based largely on English common law principles.


Historically, the public sector (in Gulf countries especially) has promoted Fidic as the accepted standard and the private sector has followed suit. There is no apparent rhyme or reason for this, and although Fidic is the established form of construction contract in the region, it is far from popular. It is interesting to note that whilst Abu Dhabi has officially adopted the Fidic form for its standard government contracts, it remains to be seen whether Dubai will follow suit.


According to a recent survey conducted by Norton Rose’s Middle East offices, most developers and contractors responded that they choose to use Fidic forms largely through habit (indeed 94 per cent of respondents said that they primarily use Fidic or modified Fidic contracts, largely because it is well-established and recognised within the region). That said, many respondents also complained that Fidic is too rigid and breeds an adversarial relationship. The current downturn may give contractors and developers time to reassess their contractual models and consider other forms of contract, including Institution of Civil Engineers (ICE), New Engineering Contract (NEC) and partnering contracts. However, few respondents expected that there will be a change in approach towards contracts in the short term.


Unlike in the UK and other common law jurisdictions, countries in the Middle East do not have a specific body of construction or engineering-related laws and precedents, despite the fact that particular problems recur. Although civil codes can give some comfort and confidence to foreign developers and contractors, the uncertainty that often surrounds the interpretation of such laws should not be dismissed out of hand. While it is true that there are principles common to most legal systems, there are some quite significant differences, and often, in the context of construction and engineering projects, these have the capacity to be problematical if not addressed from the outset. As such, it is necessary to have an appreciation of and be aware of the relevant civil code articles and local law nuances which may impact on certain Fidic conditions.


Obviously, the issues vary from country to country as the local laws are not identical. That said, they are often quite similar and, as such, it is possible to highlight some of the key legal issues that should be borne in mind when negotiating Fidic-based contracts.


• In most (if not all) Gulf jurisdictions, it is not possible for contractors to contract out of liability for major structural defects, which threaten the total or partial collapse of a building for a period of not less than 10 years from the date of practical completion.


• Further, whilst it is possible for parties to ascertain and limit damages from the outset of a contract, if the actual damage sustained as a result of a breach is proven to be well in excess of any agreed cap, a court/arbitral tribunal may look beyond the cap and award damages that are quantifiably closer to the actual losses incurred.


• Contractors may also be precluded from claiming payment if payment certificates have not been issued in respect of work performed. Careful consideration should, therefore, be given to the wording of Fidic (or any other standard form or bespoke contract) to ensure that the time for late payment runs from the date on which the interim and/or final payment certificate, as opposed to the date on which the contractor’s application for payment, is made.


• The local laws of most Gulf nations permit parties to a contract to agree on the circumstances in which a contract can be terminated, including provisions that determine the contractor’s employment, but not all of the contractor’s obligations under the contract. In Bahrain, as in Qatar and Egypt, an employer may terminate a contract and stop work at any time before the completion of the works, provided he compensates the contractor for all the expenses he has incurred for the work completed and the profit he would have made if he had completed the works. The court may, however, on application of the employer reduce the compensation for loss of profit, if it sees fit. There is no such provision under the UAE law, however, and in certain circumstances, a court order may be required to terminate a contract. Drafting could be included in contracts governed by the UAE law to provide that the parties agree that they may be terminated without a court order if such termination is in accordance with the termination provisions, but it is not certain that this will be effective if challenged.

Gulf Construction

Contract Administration

Contractor risk in the Gulf’s ‘new wave’ of EPC contracting

1 Comment

by Sachin Kerur

With global business headlines currently dominated by debt restructuring issues facing Dubai World, the Gulf region is again subject to the negative gaze of the West. Despite this, the UAE and the broader Gulf region is likely to be a fertile region for major international contractors over the coming years.
Imminent infrastructure projects in the Gulf, as well as the current one, will provide major contractors with opportunities when global pickings are slim. However, contractors are already facing, and will continue to face, an increased transfer of risk combined with compressed margins in respect of new infrastructure projects and EPC contracts. …

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Construction Law

Christmas cheer for frustrated tenderers in public procurement contracts

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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

Contract Administration

The Foreign Project Consultant as Jian Li

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by Hew Kian Heong

Many years ago, I saw a Chinese construction contract for the first time, and there was mention of a person called a “Jian Li” in the contract. I asked myself – what strange creature is this Jian Li?

The literal meaning of Jian Li in Chinese is “project supervisor” and it refers to someone engaged by the owner to supervise the contractor on matters like construction quality, progress of works and cost control. The Jian Li’s main role is really to ensure that a project is constructed safely and to the quality standards as required under law. The appointment of a Jian Li is mandatory for certain types of construction projects in China, for example projects funded by international development agencies, infrastructure projects and public utilities projects.

The concept of a Jian Li in China originated in the 1980s, early years in China’s transition to market economy. In those days, it was common practice for employers to manage construction projects on their own without any external professional support. The obvious problem was that inexperienced employers often ended up with projects with quality problems because the contractors were not properly supervised or managed in their work. Poor quality buildings and works were a major headache for the industry. The introduction of a Jian Li was part of an effort by the government to resolve this problem. Although appointed by the employer, the Jian Li is primarily intended to play a statutory role similar to that of an independent checker of works which we see in many countries.

In the last three decades, we have seen a massive influx of foreign investors relocating their manufacturing operations to China. Factories were and continue to be put up all over the country at an amazing speed. Most of these factories were built and will continue to be built by local Chinese contractors. Foreign contractors have not been able to get a foothold in the Chinese construction market due to a variety of reasons including restrictions on market entry, the tough requirements to obtain and maintain a contractor’s license and most importantly the inability to compete with the local Chinese contractors on pricing.

However, many foreign investors who are new to China are not used to working with the local Chinese contractors. They do not know for sure if the local Chinese contractors will build their factories in China to the same standards as their factories elsewhere. They therefore often look to the foreign contractors or construction professionals that they have used elsewhere to build their factories for help in managing or supervising the construction of their projects in China.

Many foreign contractors and construction professionals have come to China with the objective of servicing the foreign investors. Many of them have in fact followed their clients to China. Most of these foreign contractors and construction professionals have chosen to set up “project consultancy” companies employing both foreign and Chinese construction professionals. The business that a project consultancy company is licensed to undertake is however fairly limited, but it is relatively easy and cheap to set up. Although not ideal, with the right contract structures, these project consultancy companies have been able to service their clients’ needs adequately. Many become involved from the very start of a project, helping their clients with site selection and due diligence, right up to the ultimate delivery of the completed project to the clients.

On many projects, one would often find the foreign owner appointing a Jian Li as well as a project consultant. The project consultant’s role is usually wider than that of the Jian Li but it would invariably also involve ensuring that the project is built to the correct standards and quality. The Jian Li is however primarily concerned with ensuring that statutory standards and quality are met andthe project consultant is concerned with ensuring that contractual standards and quality are met. Although statutory and contractual requirements often overlap, the former are often less stringent than the latter. This gives rise to a risk that the Jianli and the project consultant in performing their respective supervision duties on a project may give inconsistent messages to the contractor if they are not properly coordinated.

One would have thought that it would be more efficient for one party to perform the duties of both the Jian Li and the project consultant. Most owners would certainly prefer a single point of responsibility. It would at least avoid any inconsistency in performance of their respective duties. For a long time, this was not possible. To set up a Jian Li company, one has to be licensed by the construction authorities. Before 2007, foreigners were not allowed to set up or acquire interest in a Jian Li company.

On 26 March 2007, the Regulations on the Administration of Foreign-invested Construction Service Enterprises was introduced which allows foreigners to set up or acquire interest in Jian Li companies. This was part of China’s effort to fulfill its World Trade Organization commitment to open up the construction engineering services sector. However, despite the Regulations, the market has not seen the setting up of many foreign invested Jian Li companies. Why is this?

I can think of a few reasons. I suspect the main reason is the regulatory limitations. Similar to construction and design companies, Jian Li companies must obtain Skill Qualifications Certificates (SQCs) from the construction authority before they can carry out business. The SQCs are classified into several grades which determine the size and scope of the projects that the holder is permitted to work on. A newly set up Jian Li company is only allowed to apply for the lowest grade of SQC and has to wait for at least two years to apply for a higher grade. This is obviously not appealing to foreign investors as it will take too long before they are able to upgrade to a SQC that will allow them to undertake the bigger projects that they desire.

Local protectionism may also be a factor hindering the growth in numbers of foreign-invested Jian Li companies. One of my clients recently complained to me that his proposal to acquire a Chinese Jian Li company was rejected by the local construction authority. I asked him about the reasons for the rejection. My client said that he believed the real reason was that the authority is keen to protect the local Jian Li companies from foreign competition. The official response from the local construction authority was that the review of our client’s application could not take place because the central construction authority has not issued any detailed implementation rules for the Regulations yet. And so we wait…

 

Kluwer Construction Blog

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