FIDIC

Contract Administration

The curse of the bespoke amendment

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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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Construction Law

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

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by Melanie Grimmitt

If you are a construction contractor accustomed to operating in common law jurisdictions where the doctrine of “freedom of contract” is generally upheld, you should be aware that the position under UAE law is different. We explore how it is different below …

Common Law Approach

In most common law and European jurisdictions, party autonomy and freedom of contract (whilst being gently eroded since the 19th century) are concepts that are recognised and respected. English law, for example, allows commercial parties to contract freely, provided that the agreement does not contravene any laws or public policy, and the courts will generally try to support the agreement between the parties. Although we can’t deny that notions of equality of bargaining power and fairness are increasingly being used to justify an interventionist stance, the courts of common law jurisdictions are – by and large – slow to use the doctrines of misrepresentation, mistake and economic duress to vary the terms of a commercial agreement.

The UAE position

The UAE, on the other hand, is a civil law jurisdiction, with its codified laws based on the Egyptian code, which in turn is derived from the French code. In addition, the laws of the UAE are influenced by Shari’a law. Nevertheless, as a general rule, under UAE law, the parties are entitled to agree on any contractual terms that they deem fit, provided that such terms are not inconsistent with the provisions of law or contrary to public order or public morals (pursuant to Article 2 of the UAE Commercial Code). Thus the common law concept of freedom of contract exists in the UAE but is subject to certain further limitations, based on ‘moral’ considerations.

Whilst in general the position in the UAE appears broadly similar to the English law position, there are some important differences, including the fact that in the UAE the scope of public policy exceptions and a court’s power to strike down or vary a contract are broader. This can cause challenges for parties who have become accustomed to operating in a secular legal and political environment, who may now be faced with having their contract varied or struck down on the basis of principles which may find their genesis in the Shari’a, for example.

In a construction context, the more limited application of freedom of contract in the UAE has important consequences for concepts that international contractors and developers may be familiar with, or take for granted, such as the interpretation of limitation of liability and liquidated damages clauses.

Examples of the differences in approach

Like English law, UAE law includes statutory implied terms that fetter the doctrine of freedom of contract. For instance, pursuant to the Civil Code parties are required to perform their contract in a manner consistent with good faith, (Article 246(1)). These statutory implied terms are different to those one might expect under English law, which are generally more tangible and objective.

A further example is the different approach taken to limitation of liability provisions as explained in my last blog.

Another interesting example is the different approach that the UAE takes to termination provisions, such as a termination for convenience clause. Again under English law, the Courts will generally uphold an agreed termination provision, including the right for one party to terminate its contract for convenience. The validity of such provisions in the UAE, however, is highly questionable. This is because UAE law prescribes the circumstances in which a contract may be terminated (which are limited and do not include a right to terminate a contract without cause) and because such provisions are considered to be contrary to Shari’a law. This is a topic to which we will return!

Therefore, whilst the concept of ‘freedom of contract’ can be said to exist in some form in the UAE, it is not the same as in English law. In the UAE there is a greater risk of the terms of a contract being altered and reinterpreted. In these circumstances it is vitally important to ensure contracts have been reviewed by lawyers familiar with UAE law so at least the areas of potential uncertainty are understood and action can be taken to mitigate consequential risks.

But which approach is better?

Well that, of course, depends.

The flexibility provided by the UAE law in some circumstances may be very helpful. For example a contractor faced with paying liquidated damages in circumstances where the employer has not suffered loss to an equivalent extent is likely to welcome the opportunity to argue that the liquidated damages provisions he agreed to should be varied by operation of the UAE law.

On the other hand greater certainty of contract may be argued to be a pre-requisite to construction risk management, which will surely be the focus of attention of the international contracting industry as it picks itself up from the worldwide economic downturn.

Perhaps the more interesting question is whether as a matter of principle the UAE should reach the same position in relation to freedom of contract as that found under the common law? Should freedom of contract supersede moral or religious considerations when determining the terms of an agreement between two commercial entities, or are the latter considerations more important?

 

Kluwer Construction Blog

Contract Administration

You’re Creeping Me Out – Design Creep under the FIDIC Silver Book

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by Sarah Thomas

In the wake of the current downturn, employers will increasingly look for greater budget certainty under EPC or Turnkey contracts. This is where the contractor undertakes all tasks – design, construction, management etc – so that, upon completion, the employer merely needs to ‘turn the key’ and operation of the plant or building can begin immediately. The whole point is that the contractor assumes price risk in return for relative autonomy over how he delivers the project – provided of course he meets the employer’s output requirements. But often employers want not just price certainty but also to retain control over design approval and how the project is actually delivered. This can lead to claims of ‘design creep’ by the contractor when he perceives that the employer is trying to introduce design improvements under the guise of reviewing the contractor’s documents.

But what is ‘design creep’? Why are contractors upset at its use and are their concerns justified?

I will be concentrating on the provisions of the FIDIC Silver Book, although design creep is not something particular to the Silver Book, or indeed any construction standard form.

Sub-clause 5.2 of the Silver Book allows the Employer to review the Contractor’s Documents. Nothing controversial about that. But what happens if the Employer undertakes a design review and makes ‘comments’ on those documents? Will those comments amount to a “Variation” (entitling the Contractor to time and money)? Or will they be taken as something less than a Variation, so that any additional work will have to be absorbed into the Contractor’s schedule and budget? This is the classic example of “design creep”.

What can the Contractor do when he considers that a comment constitutes a variation?

The first question to ask is: Does the “comment” amount to a “variation” under the terms of the contract? A Variation is defined in the Silver Book as “any change to the Employer’s Requirements or the Works which is instructed or approved as a variation under Clause 13″. Clause 13 [Variations] may be initiated at any time, “either by an instruction or by a request for the Contractor to submit a proposal”. The Contractor is often put in a difficult position because he must execute each variation unless he promptly gives notice that he cannot implement it (because of lack of goods, increased risk to safety or suitability of the Works or to his ability to meet Performance Guarantees). Obviously the broader the Employer’s Requirements and the Works are described in the contract, the less likely it is that the comment will be seen as a change to the Employer’s Requirements or to the Works.

However, if the comment does require a clear change, the Contractor’s first step should be to write to the Employer asking him to confirm whether the comment amounts to an instruction to change the Works under clause 13.1.

The second step is to follow the requirements of sub-clause 20.1 [Contractor’s Claims] and request the Employer to agree or determine adjustments to the Contract Price and the Schedule of Payments, proceeding in accordance with sub-clause 3.5 [Determinations].

But what if the comment does not amount to a ‘change’ as such. Is the Contractor still bound to follow it? This is the more difficult area. The Contractor could argue that the provision of comments that do not specify “non conformity with the Contract” is not a proper use of the review procedure under sub-clause 5.2. That clause only allows the Employer to give notice to the Contractor if a Contractor’s Document fails to comply with the Contract. There is a difference here between the FIDIC Silver and Yellow Books. The key difference is that the documents are submitted “for review and/or for approval” (if so specified) under Yellow but under Silver, they are submitted for review only. Thus under Silver, the argument can be made far more strongly that the Employer can only issue a notice if the documents don’t comply with the Contract. Under Yellow on the other hand, where a document is specified “for approval”, the Engineer can give notice of approval with or without comments. This is an important difference and is the reason why “design creep” may well be a bigger problem under the Yellow Book than under Silver. But under both contracts, it is important to remember that the Employer’s scope to review the Contractor’s documents is confined to issuing a notice that the document does not comply with the Contract. A Contractor would also be well advised to check the formalities for issuing instructions and variations under his contract – to see whether he does in fact have to implement the change. For example under the FIDIC contracts, an instruction must (1) be given in writing and (2) state the obligations to which it relates as well as the sub-clause in which the obligations are specified [Sub-clause 3.4].

No matter what approach the Contractor adopts, to the extent that the Contractor is making a claim under a FIDIC contract, he will have to comply with the provisions of sub-clause 20.1.

So, what has been your experience of design creep? Is it occurring more or less often? What do you see as the threshold that needs to be reached in order for a comment to turn into a Variation? I would be interested to hear your war stories.

Kluwer Construction Blog

Contract Administration

GCC in catch-22 over FIDIC forms

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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

FIDIC Red Book comes to contractors’ rescue

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FIDIC Red Book comes to contractors’ rescueIn the current climate, many contractors are concerned that they may not get paid on time or at all, for work carried out on construction projects in the region. MARTIN PRESTON* looks at what remedies may be available to a contractor in such a situation.
CONSIDERATIONS of the rights of a party for non-payment require an analysis of both the contract that that party has entered into and the underlying law governing the contract.
For the purpose of this article, the governing law is assumed to be that of the UAE and, therefore, reference is made to the UAE Civil Code. Other GCC countries have provisions broadly similar to the UAE Civil Code but there will be differences between the various jurisdictions that the parties will need to be aware of.The most commonly used construction contract in the region remains the Fidic Red Book (1999 edition) – known as the Red Book.In its unamended form, this contract contains a number of key provisions relating to payment, supervision and termination. This article will look at the interaction between these provisions and the UAE Civil Code.Under the Red Book, payment is due within 56 days of the issue of a payment certificate. Late payment attracts “financing charges” (interest) at an annual rate equivalent to three per cent above the discount rate of the central bank of the country of the currency of payment (clause 14.8).Some GCC countries, notably Saudi Arabia, do not permit the payment of interest, and hence this clause will not be enforceable in those jurisdictions.
However, there is no blanket prohibition on the payment of interest under UAE law, although there are certain restrictions that the parties should be aware of. For example, regardless of the rate of interest charged, the amount of interest cannot exceed the principal amount due.If payment is not made within the 56-day payment period, the contractor has two options: give 21 days notice of its intention to suspend the works (clause 16.1); or after 42 days, give notice of its intention to terminate the contract (clause 16.2).During any period of suspension, financing charges continue to accrue on the unpaid amount. The contractor is also entitled to an extension of time and additional cost to cover any delays and/or additional costs occasioned by such suspension.Should the standard Red Book provision covering suspension for non-payment have been deleted, then the contractor may be able to look to Article 247 of the UAE Civil Code, which allows a party to refuse to perform its obligations under a contract if the other contracting party does not perform its obligations under the contract.This does not give a specific right to suspend for non-payment (as the Red Book does) and exercising this right may put the contractor in breach (if, for example, the employer has good grounds for not making payment). This right should, therefore, be exercised with caution. Injudicious reliance on this article could lead to the contractor being liable for delays and additional costs and, ultimately, lead to termination of the contract for contractor default.Clause 16.2 permits the contractor to terminate the contract if payment is outstanding 42 days after the date for payment. At the expiry of this 42-day period, the contractor must serve a further notice on the employer and the contract will terminate 14 days after the date of that notice.Interestingly, clause 16.2 makes specific reference to the employer being able to make deductions under clause 2.5 if the employer considers that it has a claim against the contractor.
But this is not referred to in either clause 14.8 (financing charges) or 16.1 (suspension).This raises the prospect that any counterclaim or set-off advanced by the employer in relation to an unpaid invoice can be ignored for the purposes of charging interest and/or suspending the works. However, it is unlikely that this would survive the requirement that a party must perform its contractual obligations in a manner consistent with the requirements of good faith under Article 246 of the UAE Civil Code.Another provision that may be of particular interest to contractors is clause 2.4. This entitles the contractor to require reasonable evidence that financial arrangements are in place to enable the employer to pay the contract price.If the employer fails to provide this information within 28 days of a request from the contractor, the contractor can suspend work after having given the employer 21 days notice of its intention to do so (clause 16.1).If within 42 days after giving notice that it intends to suspend work under clause 16.1, the contractor has still not been provided with this information, the contractor may terminate the contract on giving the employer a further 14 days notice of its intention to do so.Therefore, if a contractor is concerned that a developer may not have sufficient funds to complete a project, the contractor can request that the developer provide evidence that funding is in place to pay the contractor.The advantage to the contractor of this provision over the standard remedies for non-payment is twofold. Firstly, it allows the contractor to take action before incurring costs it is concerned it may not be paid for. Secondly, termination can take place 84 days after the contractor requests the financial information from the employer whereas termination for non-payment can occur only after 112 days have elapsed from the date of the invoice.Unfortunately for contractors, this is also one of the most frequently deleted clauses in the Red Book and so this avenue of redress may not be available in the majority of instances.
The Red Book provisions concerning termination are subject to the UAE Civil Code. This states, in Article 892, that a construction contract may only be terminated on completion of the works, by mutual consent or by an order of the court. This cuts across the termination provisions in the Red Book and could operate to prevent or delay a contractor from exercising what it thought was an enforceable contractual right to terminate for non-payment.A common amendment to overcome this is the insertion of a clause stating that if one of the parties to a contract has a contractual right to terminate that contract, the parties agree that that right can be exercised without the need to obtain a court order.Such provisions have not been tested in the UAE courts and it is questionable whether such a clause would be sufficient to constitute mutual consent at the time of termination or obviate the need for a court order, but it is currently considered best practice to include such wording to give the parties the best chance of enforcing their contractual rights to terminate.If a contractor is not being paid, then dialogue with the employer should always be the preferred first option. Suspension and termination of the contract are remedies fraught with difficulty and should only be considered after taking legal advice as to the rights and restrictions on exercising those remedies and considering the commercial consequences of taking such action.Gulf Construction
In the current climate, many contractors are concerned that they may not get paid on time or at all, for work carried out on construction projects in the region. MARTIN PRESTON* looks at what remedies may be available to a contractor in such a situation.
CONSIDERATIONS of the rights of a party for non-payment require an analysis of both the contract that that party has entered into and the underlying law governing the contract.
For the purpose of this article, the governing law is assumed to be that of the UAE and, therefore, reference is made to the UAE Civil Code. Other GCC countries have provisions broadly similar to the UAE Civil Code but there will be differences between the various jurisdictions that the parties will need to be aware of.
The most commonly used construction contract in the region remains the Fidic Red Book (1999 edition) – known as the Red Book.
In its unamended form, this contract contains a number of key provisions relating to payment, supervision and termination. This article will look at the interaction between these provisions and the UAE Civil Code.
Under the Red Book, payment is due within 56 days of the issue of a payment certificate. Late payment attracts “financing charges” (interest) at an annual rate equivalent to three per cent above the discount rate of the central bank of the country of the currency of payment (clause 14.8).
Some GCC countries, notably Saudi Arabia, do not permit the payment of interest, and hence this clause will not be enforceable in those jurisdictions. However, there is no blanket prohibition on the payment of interest under UAE law, although there are certain restrictions that the parties should be aware of. For example, regardless of the rate of interest charged, the amount of interest cannot exceed the principal amount due.
If payment is not made within the 56-day payment period, the contractor has two options: give 21 days notice of its intention to suspend the works (clause 16.1); or after 42 days, give notice of its intention to terminate the contract (clause 16.2).
During any period of suspension, financing charges continue to accrue on the unpaid amount. The contractor is also entitled to an extension of time and additional cost to cover any delays and/or additional costs occasioned by such suspension.
Should the standard Red Book provision covering suspension for non-payment have been deleted, then the contractor may be able to look to Article 247 of the UAE Civil Code, which allows a party to refuse to perform its obligations under a contract if the other contracting party does not perform its obligations under the contract.
This does not give a specific right to suspend for non-payment (as the Red Book does) and exercising this right may put the contractor in breach (if, for example, the employer has good grounds for not making payment). This right should, therefore, be exercised with caution. Injudicious reliance on this article could lead to the contractor being liable for delays and additional costs and, ultimately, lead to termination of the contract for contractor default.
Clause 16.2 permits the contractor to terminate the contract if payment is outstanding 42 days after the date for payment. At the expiry of this 42-day period, the contractor must serve a further notice on the employer and the contract will terminate 14 days after the date of that notice.
Interestingly, clause 16.2 makes specific reference to the employer being able to make deductions under clause 2.5 if the employer considers that it has a claim against the contractor. But this is not referred to in either clause 14.8 (financing charges) or 16.1 (suspension).
This raises the prospect that any counterclaim or set-off advanced by the employer in relation to an unpaid invoice can be ignored for the purposes of charging interest and/or suspending the works. However, it is unlikely that this would survive the requirement that a party must perform its contractual obligations in a manner consistent with the requirements of good faith under Article 246 of the UAE Civil Code.
Another provision that may be of particular interest to contractors is clause 2.4. This entitles the contractor to require reasonable evidence that financial arrangements are in place to enable the employer to pay the contract price.
If the employer fails to provide this information within 28 days of a request from the contractor, the contractor can suspend work after having given the employer 21 days notice of its intention to do so (clause 16.1).
If within 42 days after giving notice that it intends to suspend work under clause 16.1, the contractor has still not been provided with this information, the contractor may terminate the contract on giving the employer a further 14 days notice of its intention to do so.
Therefore, if a contractor is concerned that a developer may not have sufficient funds to complete a project, the contractor can request that the developer provide evidence that funding is in place to pay the contractor.
The advantage to the contractor of this provision over the standard remedies for non-payment is twofold. Firstly, it allows the contractor to take action before incurring costs it is concerned it may not be paid for. Secondly, termination can take place 84 days after the contractor requests the financial information from the employer whereas termination for non-payment can occur only after 112 days have elapsed from the date of the invoice.
Unfortunately for contractors, this is also one of the most frequently deleted clauses in the Red Book and so this avenue of redress may not be available in the majority of instances.
The Red Book provisions concerning termination are subject to the UAE Civil Code. This states, in Article 892, that a construction contract may only be terminated on completion of the works, by mutual consent or by an order of the court. This cuts across the termination provisions in the Red Book and could operate to prevent or delay a contractor from exercising what it thought was an enforceable contractual right to terminate for non-payment.
A common amendment to overcome this is the insertion of a clause stating that if one of the parties to a contract has a contractual right to terminate that contract, the parties agree that that right can be exercised without the need to obtain a court order.
Such provisions have not been tested in the UAE courts and it is questionable whether such a clause would be sufficient to constitute mutual consent at the time of termination or obviate the need for a court order, but it is currently considered best practice to include such wording to give the parties the best chance of enforcing their contractual rights to terminate.
If a contractor is not being paid, then dialogue with the employer should always be the preferred first option. Suspension and termination of the contract are remedies fraught with difficulty and should only be considered after taking legal advice as to the rights and restrictions on exercising those remedies and considering the commercial consequences of taking such action.
Gulf Construction

In the current climate, many contractors are concerned that they may not get paid on time or at all, for work carried out on construction projects in the region. MARTIN PRESTON* looks at what remedies may be available to a contractor in such a situation. …

FIDIC Red Book comes to contractors’ rescueRead More »

Contract Administration

Insurance and indemnities

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by Dennis Brand

The insurance clauses or provisions in a contract will often state the employer’s requirements as to the types of insurance and the required minimum amounts. Sometimes the amount of insurance is linked to the limit of liability under the contract – and, while there is no objection to this in principal, the required amount of insurance should not be more. Moreover, one must take care to ensure that the insurance provisions do not allow for liability which is separate or in excess of the overall limited liability under the contract. …

Insurance and indemnitiesRead More »

Contract Administration

Factors to consider when preparing a disruption claim

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by David Merritt

Disruption claims are routinely made during the course of a construction project yet they remain notoriously difficult to prove. One of the main reasons for this is that productivity losses are often extremely difficult to distinguish, as opposed to other money claims which are more directly concerned with the occurrence of a distinct and compensable event, such as an instruction for a variation during the progress of work or a properly notified compensation event.
Most claims for disruption are dealt with retrospectively and the claimant is forced to rely on contemporary records to try and establish a causal nexus for identified losses (cause & effect), which are inadequate for evidencing a loss of productivity claim.
When this happens the claimant is often forced into the situation where it advances a weak global or total cost claim to try and recover its losses. The claimant must first establish that the factor causing the disruption is compensable risk under the contract.
To do this, the contract needs to be reviewed to understand the basis of the agreement as certain productivity issues may have been foreseeable and therefore accounted for within the claimant’s productivity allowances. The contract may also identify if a party expressly accepted certain productivity risks. Common causes of disruption on projects that may lead to a loss of production include site access restrictions, unforeseen site conditions, late or incorrect design, changes in the work, labour availability, remedial/corrective work, testing/inspections, client and third party interference, changes in construction methods and adverse weather.
The primary challenges the claiming party faces in preparing a disruption claim are to identify the root cause of the loss of productivity and quantifying the associated labour and equipment productivity losses. Many methods exist to quantify a disruption claim such as the measured mile; the modified total cost approach; a time and motion study or a comparative work study.
Alternatively research data published by the Mechanical Contractor Association or the National Electrical Contractors Association on the effects of disrupted working may be utilised but care must be exercised because no one size fits all.
Productivity is normally measured as production per unit of effect or output divided by input (ie units/hr) or it may be expressed as input divided by output (ie hrs/unit). A loss of productivity occurs when it takes more labour and equipment to do the same amount of work, thereby increasing project costs. A common error made by a claiming party when preparing a disruption claim is to confuse productivity with efficiency.
Efficiency is a measure of productivity as a ratio or percentage during the affected periods. If target production is 50 units per day and actual production is 25 units per day then given the same input the efficiency of the operation would be 50%. If actual production was equal to the target production efficiency would be 100%. The efficiency formula must take into account the variable input (resources) as well as variable output (production).
For instance it is possible to increase productivity but reduce efficiency. A decrease in efficiency is often associated with one or more secondary factors unrelated to the original excusable event but which are implemented to negate or mitigate the effects of the root cause. These secondary factors include out of sequence working, multiple work fronts, new learning and unlearning curves, fatigue (overtime/shift working), dilution of supervision and stacking of trades in confined spaces.
So when preparing a disruption claim for a loss of productivity it is very important to consider not just immediate effects on the rate of production but also the inefficiencies of some of the secondary factors.

Disruption claims are routinely made during the course of a construction project yet they remain notoriously difficult to prove. One of the main reasons for this is that productivity losses are often extremely difficult to distinguish, as opposed to other money claims which are more directly concerned with the occurrence of a distinct and compensable event, such as an instruction for a variation during the progress of work or a properly notified compensation event.

Most claims for disruption are dealt with retrospectively and the claimant is forced to rely on contemporary records to try and establish a causal nexus for identified losses (cause & effect), which are inadequate for evidencing a loss of productivity claim.

When this happens the claimant is often forced into the situation where it advances a weak global or total cost claim to try and recover its losses. The claimant must first establish that the factor causing the disruption is compensable risk under the contract. …

Factors to consider when preparing a disruption claimRead More »

Construction Law

The TIA route to resolving disputes

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The TIA route to resolving disputes
Time impact analysis is becoming an increasingly popular method of resolving construction disputes without litigation. MICHAEL HARDY* details the steps to be considered and the benefits of using the method
FUNDS for a large number of construction projects in the region are drying up. This, coupled with a substantial reduction in the cost of labour and materials, has meant that some developers are reconsidering their current projects with a view to renegotiating more favourable terms or seeking to alter the original scope.
Should a developer fail to persuade its contractor to agree to a re-scoping exercise, the developer may then be faced with a claim for delay caused by what, in effect, amounts to a contract variation.
Given the financial pressure developers are currently facing, there may also be increasingly valid grounds for contractors to make extension-of-time claims in respect of delays caused by, for example, non-payment or the late provision of information.
Whatever the cause, the contract administrator (often an engineer) must apply a methodology to determine whether and to what extent an extension of time should be awarded.
There are a number of different ways to determine an extension of time and it is not uncommon for parties to disagree upon the methodology used. If the contract follows a particular industry form, there may already be a specific methodology applicable. However, most standard form contracts fail to address the issue adequately.
For example, the Fidic Conditions of Contract are commonly used in the Gulf yet fail to promote a specific approach to extensions of time. Fidic’s Red Book uses the words: “If and to the extent that completion … is or will be delayed” but fails to consider the appropriate methodology to decide such delay.
Time impact analysis (TIA) is a method typically used to resolve complex disputes. In order to undertake a time impact analysis, the six sequential steps below must be considered:
1. Has a cause entitling the contractor to an extension of time arisen (an “Event of Delay”)?
2. Identify the programme against which any delay is to be assessed. By way of example, in the case of the Fidic Red Book, the contractor is obliged to submit a programme and to revise it “whenever the previous programme is inconsistent with actual progress or with the contractor’s obligations”. Consequently, the last such accepted (or deemed accepted) programme which most recently pre-dates the ‘event of delay’ identified should be used.
3. Without taking into account the event of delay itself, revise the programme identified in Step Two, so that it reflects:
(i) The reality that pertains at the time immediately before the occurrence of the ‘event of delay’; and;
(ii) A plan for the remaining works which complies with the contractor’s duties as to programming and progressing of the works.
4. Identify planned time for completion on the revised programme developed in Step Three.
5. Identify the activities on the revised programme that will be affected by the ‘event of delay’, and then assess the effect of it on each of those activities. Finally, impact the ‘event of delay’ on those activities, in order that the revised programme takes account of the ‘event of delay’.
6. Finally, consider whether the planned time for completion has changed following the impact of the ‘event of delay’ determined at Step Five.
As to Step Three, contractors are often tempted to use an unamended version of the accepted programme to assess events of delay, irrespective of how out of date it may be. Whilst there is no reported case law in England on this point, for the contractor not to revise the programme to reflect the position immediately prior to the event of delay, is often self-serving.
Consider a project where the programme is severely out of date and the contractor is in culpable delay. If the contractor were to be entitled to assess an extension of time against the out-of-date programme, the culpable delay in the period after that programme but before the event of delay occurred would be completely ignored, thereby reflecting reality from a frozen point in time in the past and failing to accurately demonstrate the cause and effect of the delay.
This would permit the contractor to evade liability for culpable delay and effectively provide him an incentive to stop issuing programmes for acceptance in the future, in order to avoid future liability for culpable delay. The contractor could take advantage of its own wrongdoing by benefiting from a breach of contract (be it the culpable delay or the failure to submit revised programmes).
That being said, Article 246(1) of the UAE Civil Code introduces an implied term to carry out obligations in good faith, which would seem contrary to this approach.
Conversely, employers are sometimes tempted to take hindsight into account and to use a programme that post-dates the event of delay. This is similarly not permitted. Time impact analysis does not permit events to be taken into account if they post-date the event of delay in question. In other words, a retrospective approach, which allows the benefit of hindsight, is not permitted.
In relation to Step Five above, another argument known to surface is whether the assessment or “snapshot” date should be the date at which the assessment is made (or ought to have been made) or the date of the occurrence of the event of delay itself. This is probably an arguable point and depends on contractual drafting.
However, reliance on the date of assessment (as opposed to the date of the event of delay itself) would result in differing degrees of hindsight, depending on when the assessment occurred.
For example, the Fidic Red Book allows the engineer to make its determination within either 42 days after receiving the contractor’s particulars of claim, an alternative period mutually agreed or, alternatively, seek further particulars. This leaves the position open to manipulation. Aside from anything else, carrying out the assessment as at the date of the event of delay would ensure consistency irrespective of how quickly the assessment is made afterwards and would also be truer to the concept of a time impact study (as supported by the Society of Construction Law Protocol on Delay and Disruption).
The downside of the time impact methodology is that it places considerable importance on the programme and on the contractor continually updating the programme so as to reflect reality.
However, the benefits of time impact analysis in terms of prudent project management and progress tracking are to a large degree self-evident.
The parties know where they stand as the works progress as regards contractual entitlements flowing from events at the employer’s risk. This works to all parties’ mutual benefit and should help to avoid large scale after-the-event disputes on projects that encounter difficulties.
However, if the actual process of time impact assessment does not take place within a short period after the event occurring, it can be very burdensome and expensive to revisit. Clearly, it is in both parties’ best interests not to adopt a “wait-and-see” approach, but immediate action is something which is sadly more honoured in the breach than the observance.
Developers, contractors and engineers need to be prepared for these issues and to deal with them effectively, so as to protect their contractual rights (both in existing and future contracts) in what are trying economic conditions

Time impact analysis is becoming an increasingly popular method of resolving construction disputes without litigation. MICHAEL HARDY* details the steps to be considered and the benefits of using the method

FUNDS for a large number of construction projects in the region are drying up. This, coupled with a substantial reduction in the cost of labour and materials, has meant that some developers are reconsidering their current projects with a view to renegotiating more favourable terms or seeking to alter the original scope. …

The TIA route to resolving disputesRead More »

Contract Administration

Does every silver lining have a cloud?

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by Chris Larkin

The construction market in the UAE poses many challenges: the number and scale of projects have generated a tremendous demand for construction services; the weakening of the US dollar against other major currencies coupled with other inflationary factors has further increased the cost of construction; and the potential impact on the global economy caused by difficulties in the US sub-prime market has created uncertainty amongst investors. These issues give rise to particular risks for developers and contractors alike. …

Does every silver lining have a cloud?Read More »

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