Contract Administration

Construction Law, Contract Administration, Project Management, Statutory Adjudication

Importance of contractor progress payment terms

It has been said that an army marches on its stomach. Contractors and subcontractors in the construction industry run on cash. Lord Denning many years ago made the oft repeated phrase that cash flow is the lifeblood of the construction industry and this sentiment is still relevant today. Estimators when preparing tenders usually concentrate on building profits into the price. Of equal importance is the amount of working capital required to fund the contract and the need to keep the amount to a minimum. The payment terms are therefore crucial to every contractor and subcontractor. Certification and payment should be the subject of careful strategy and planning. …

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Construction Industry, Contract Administration

CMGUIDE is the MEDIA PARTNER of the second FIDIC Contract Users’ conference

Get to grips with the ins and outs of using FIDIC contracts at an event designed by FIDIC and featuring FIDIC speakers.

The 2nd annual FIDIC Middle East Contract Users’ conference is taking place on Wednesday 23rd & Thursday 24th February 2011 in at the InterContinental Abu Dhabi.

Cmguide readers get a 10% discount to attend! Quote VIP Code: KW8116CMGP or visit:
http://www.informaglobalevents.com/KW8116CMGP …

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Construction Law, Contract Administration

Security of payment

By Dr Jay Palmos

To date, both the public and private sector’s attempts to resolve this problem have failed. Security of Payment (SOP) style legislation has successfully solved this issue in other jurisdictions, and should be considered in Dubai before we lose the best sub-contractors and suppliers to other more reliably paying regions. Just last month, Laing O’Rourke closed its Middle East division of 20 000. The loss of this and other superior-grade contractors signifies that the presently available source of high-quality contractors has diminished. …

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Construction Law, Contract Administration

What is Conciliation?

By Dennis Brand

Conciliation is a form of alternative dispute resolution (ADR) process whereby the parties to a dispute agree to utilize the services of a conciliator, who then meets with each of the parties separately in an attempt to resolve their differences. Conciliation differs from arbitration in that the conciliation process, of itself, has no legal standing, and differs from mediation in that the parties seldom, if ever, actually face each other across the table in the presence of a conciliator.

A conciliator usually has no authority to require the presentation of evidence or call witnesses; indeed, the conciliator usually writes no decision and makes no award. However, if the conciliator is successful in negotiating an understanding between the parties, then that understanding is almost always recorded in writing, often with the assistance of the respective parties’ legal advisors, and signed by the parties, at which time it becomes legally binding.

Conciliation can be carried out by a conciliator appointed by the parties, being someone that both parties respect and consider able to bring about a resolution of the dispute. Often the parties will prefer to use a professional conciliator, being someone trained in the conciliation process, and best able to assist the parties towards a resolution. A common method is ‘shuttle diplomacy’ or ‘caucusing’, whereby the parties to the dispute are placed in separate rooms and the conciliator goes from one room to the other trying to find common ground in order to bring about a resolution of the dispute.

A variation of that method is where the conciliator asks the parties to independently list their objectives and the outcomes they desire from the conciliation. The conciliator then discusses with the parties their respective lists, requiring them to priorities the items. Thereafter he encourages them to ‘give’ on the objectives one at a time from the least important upwards, thus reducing the number of issues in dispute.

Although conciliation can be carried out by a conciliator appointed by the parties, being someone that both parties respect and consider able to bring about a resolution of the dispute, often the parties will prefer to use a professional conciliator, that is someone who has been trained in the conciliation process and is best able to assist the parties towards a resolution.

There are several organisations that provide dispute resolution services. The International Chamber of Commerce (ICC) launched its ADR Rules in 2001 to replace the former 1988 Rules of Conciliation. Under the ICC ADR Rules, the parties can choose the settlement technique they consider most appropriate.

Conciliation in the UAE

The Rules of Commercial Conciliation and Arbitration of the Dubai Chamber of Commerce and Industry provide for conciliation on the basis of the secretariat to the committee of the DCCI appointing a conciliation panel. The form of the conciliation proceeding is contained in Chapter 5: Articles 21 and 22:

Article 21

1. A party desiring Conciliation shall submit a written application to the Secretariat.

2. The application shall include a presentation of the facts of the dispute and the views of the applicant together with supporting documents.

3. The Secretariat shall notify the other party with the application of Conciliation within a period not exceeding seven days from the date of the receipt thereof. The other party shall present his views with respect to the dispute within 15 days of the date he was informed of the application for Conciliation.

4. The Conciliation Panel shall be appointed by the Committee in accordance with the provisions of Article 17 of these Rules. The parties may object to the conciliator/s within two weeks of receiving notification of his/their name/s. The Conciliation proceeding shall commence immediately after expiration of this period.

5. The Committee may request an advance payment against the costs of the Conciliation in accordance with the provisions of Part Seven of these Rules.

6. The Conciliation Panel shall study the dispute and summon the parties before it to hear their statements and each party shall attend personally or through a representative.

7. The Conciliation Panel shall bring together the views of the parties, and upon their agreement on a final formula for the settlement it shall be recorded and authenticated by the Panel.

8. The Conciliation Panel must accomplish its duties within two months of the commencement of the Conciliation proceedings, but by a decision of the Committee this period may be extended for another similar period.’’

Article 22

If the attempt of Conciliation fails, the dispute shall be considered not more pending before the Chamber and the rights of the parties shall not be affected in any manner by what was presented or written during the course of the Conciliation proceedings.

At the request of any of the parties, the Chamber shall issue a certificate stating that the dispute had been referred to it but that attempts for Conciliation failed without giving any comment or opinion regarding the subject of the dispute.

It is worth noting that, while it is said by some, that conciliation is of little benefit because of its limitations, FIDIC, when it published its 1999 ‘Rainbow Suite’ of contracts, maintained the same provision for amicable settlement in Clause 20.5 as was included in Clause 67.2 of the 1987 4th Edition Conditions of Contract for Works of Civil Engineering Construction.

Conciliation remains one of the several available forms of alternative dispute resolution; and, if the parties involved in a dispute process consider conciliation to be the most effective way of resolving that dispute, then it is a method that should be retained.

CW

Contract Administration, Project Management

Project finance: how to secure it

By Martin Preston
THE majority of the features of a project finance loan agreement are the same as a corporate loan agreement. However, because the basis on which the lenders are advancing the loan is the forecast revenues of the project, rather than the assets or creditworthiness of the sponsors, the risks taken by the lenders and, therefore, the controls that they require under the loan agreement, are greater than would be required under a corporate loan agreement. Inevitably, some of these additional controls impact on the construction contract.

Conditions precedent

Conditions precedent are those that must be met by the project company for financial close to occur, which is when the loan becomes effective. Additional conditions precedent may also need to be satisfied before first drawdown under the loan can occur.

Typical conditions precedent to financial close that affect the construction contractor are that the construction contract and all ancillary documents (including the direct agreement to the lenders) have been executed and become effective. Since the construction contract will often itself contain a condition precedent stating that it does not become effective until financial close (to prevent the project company being committed to construction of the project before it has funds available to pay for it), it is important to avoid circularity between these two requirements. The usual way that this is dealt with is for the condition precedent in the construction contract to state that all conditions precedent to financial close under the loan agreement have been satisfied other than the effectiveness of the construction contract.

Representations & warranties

The representations and warranties made by the project company are the facts upon which the risk is allocated between the parties and form the basis of the lenders’ decision to commit funds to the project. These will normally be made at the date of the loan agreement and deemed to be repeated at financial close. Alternatively, one of the conditions precedent to financial close will be that no changes have occurred that render any of the representations and warranties previously made inaccurate.

Where the project company is required to make representations and warranties relating to the construction of the project, these will be passed down to the construction contractor, who will be required to make the same representations and warranties to the project company.

The representations and warranties commonly required to be given by the construction contractor in a project-financed construction contract include the following:

• The construction contract is legally binding;

• No defaults have occurred under the construction contract;

• No force majeure event has occurred under the construction contract;

• All necessary licences and consents required for the construction of the works have been obtained;

• Completion will occur by an agreed date;

• No variations will be made to the works; and

• No amendments will be made to the terms of the contract.

Undertakings & discretions

Undertakings and/or reserved discretions are the means by which the lenders control the project company and its implementation of the project. They may be positive or negative and prevent the project company from exercising any discretion it has under the construction contract without the lender’s consent. Thus, the project company will not be able to vary the terms of the contract or the scope of the works, issue certificates or terminate the construction contract without obtaining the lender’s consent.

Payment

Payment will be due to the construction contractor when it has met the payment conditions under the construction contract (which will usually be based on the achievement of milestones). However, the project company will only have funds to make payment to the construction contractor if it is able to draw down funds under the loan agreement. This will usually require demonstration by the project company that not only are the amounts due to the construction contractor under the construction contract, but also that:

• When aggregated with all amounts paid to date, the amount sought is within the agreed construction budget;

• The sum of the amounts paid to date and the remainder of the loan allocated to the construction costs is sufficient to complete the works;

• The representations and warranties remain accurate in all respects;

• No event of default has occurred under the loan agreement; and

• There has been no material adverse change affecting the project.

Insurance

Where the works suffer a total loss (or a loss in excess of a pre-agreed amount) and this is covered by insurance, the usual position would be that the insurance proceeds would be paid to the contractor who would then undertake the rebuilding of the works.

However, in a project finance transaction, the insurance proceeds will be paid into an account controlled by the lenders who will decide how they are to be used. If they decide that the insurance proceeds and the outstanding amount of the loan are insufficient to complete the works, then rather than the works being rebuilt, the insurance proceeds will be used to repay the debt. This is known as a “head for the hills” clause and will need to be replicated in the construction contract.

Gulf Construction

Construction Law, Contract Administration

Front end advice

Despite the harsh lessons learnt over the latter part of 2009 and first quarter of 2010 it is still patently obvious that parties to contracts are falling into a number of age old pitfalls, many of whom are convinced that they have no other viable choice but to accept top-down back-to-back arrangements and in some cases a scramble of documents that barely resemble a contract at all.

There is still an overwhelming market tendency to order mobilisation and commence work on the back of a very brief Letter of Intent (LOI), particularly if the commissioned works are minor works or low value. This is a particularly high risk practice. …

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Construction Law, Contract Administration

Dispute boards: the missing link?

   Leonora Riesenburg.

After the Dispute Review Board (DRB) Foundation and Society of Construction Law (Gulf) met to discuss dispute boards and their function in the local market, many praised the ‘checks and balances’ proffered by the mechanism.

The rationale behind the dispute board is simple. The DRB provides a non-binding recommendation to contracting parties that have appointed a board of three independent experts, intended to comb out difficulties either prior to the offset of, or in answer to, a problem.

A similar principle applies to the Dispute Adjudication Board (DAB), save that the DAB’s decision has interim-binding force.
Dispute boards have been given tour de force by the active support of the Dispute Board Federation, the Dispute Resolution Board Foundation, ICC, and standard-form contract authorities including the International Federation of Consulting Engineers (FIDIC).

This form of independent regulation has had a warm welcome in the West. Interestingly though, collaboration contracts such as NEC have been tested in territory, most notably by Abu Dhabi’s Aldar Properties in the early phases of Al Raha Beach Development, and failed to take flight.

Creating valuable opportunities for periodic review is fine in theory. In practice, however, it is rare that two parties’ agendas will be aligned in such a way as to capitalise on the opportunity.

Competing interests are a particular concern when more than two parties are involved. Returning control to the employer and the contractor is only worth the paper it is written on to the extent that the employer and contractor play ball.

In the case of long-term appointments, a day rate, allowances and disbursements customarily need to be shouldered for all three board members, over the course of the life of the project, however lengthy. The cost implications can be staggering.

The fact of the matter is that employers will never want to pay above a budgeted figure for the contracted services, and service providers will be bent to do their utmost to secure their minimum margin.

The equation only ever balances if the margin for error is not eroded. Commercial reality dictates that errors are made and a price tag is attached to each of them. It is the allocation of these risk events, and in turn its cost, that is the bone of contention among contracting parties.

The effectiveness of an independent administration, in the form of dispute boards, in the context of this tension, is questioned.

The UAE has been slow to apply FIDIC 1999, calling for the appointment of a DAB as part of its dispute process. If and when adopted, the standard conditions are often heavily modified and reinstate the engineer’s traditional role as a de facto ‘dispute manager’.

Further the language of contracts in territory is slow to entertain the admissibility of recommendations or resolutions in any subsequent arbitration or legal suit.

When legal fees are calculated on a percentage fee basis, irrespective of complexity, the mathematical exercise rapidly dwarfs the financial benefits attributed to the DB.

The Abu Dhabi Municipality has moved the markers further afield with its Municipality Construction Contract, essentially a heavily modified form of the 1999 FIDIC Contract for Construction, by making it mandatory for a ‘standing’ DAB to be appointed once a dispute has arisen.

A ‘standing’ DAB is in effect a half-way house. Where the Municipality Contract gives on one hand, it takes on the other: the engineer’s role in dispute resolution is re-assigned to the employer.

One would not need to go into any further detail to entertain that dispute boards, particularly given their limited application in territory, are not a means to an end.

There is no real replacement for proper internal administration coupled with continuous sound legal counsel and guidance to complement to the day-to-day workings of commerce.

CW

Contract Administration

Design-build contracts

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By Dennis Brand

Perhaps the best way of describing ‘design-build’ is to describe what it is not.
The traditional ‘design-bid-build’ method of construction is a sequential process in which the owner or developer first contracts with a design professional to prepare a concept or basic design, then a detailed design for construction. This includes specifications to solicit competitive bids for construction, and finally the award of a construction contract to the lowest bidder. …

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Contract Administration

Delay claims

by Dr Jay Palmos
Last month, Deutsche Bank estimated that as many as 30 000 new units will enter the Dubai residential market this year, decreasing demand for new and existing units. A Union Bank of Switzerland study predicts rental prices could decline by as much as 30% during the course of financial year 2010 due to overcapacity in the sector. These reports paint a bleak picture for current developments. …

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Construction Law, Contract Administration

Tales of the Unexpected: Where Liability Lurks Unseen

by Melanie Grimmitt

Uncertainty in the Application of UAE Laws

The UAE legal system is a civil code system based on both Islamic and civil code principles. Any contract subject to UAE law must comply with the UAE Constitution, Federal and local Emirate laws, Islamic Shari’a and custom and practice.

There are challenges in deciding how the law of the UAE will be applied in any particular case. This is due to a number of factors. The UAE legal system is still very much in its infancy, the collision of French – via Egypt and other Middle Eastern countries – civil code principles and Islamic Shari’a principles, the lack of judicial precedent – previous decisions may be useful but do not create any binding or persuasive precedent to the court, and the difficulty of predicting which legal principles and/or custom and practice a judge will apply when reaching a decision. …

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Construction Law, Contract Administration

Letters of Intent: Still Crazy After All These Years?

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by Melanie Grimmitt

Reviewing the wealth of commentary on the use of letters of intent in construction contracts, one might speculate that at the time the pyramids were being built some well-intentioned Egyptian lawyer was earnestly hammering out hieroglyphics warning his contemporaries of the potentially dire consequences of commencing construction works without a concluded contract in place. Nevertheless, despite the plentiful guidance cautioning contractors against relying on letters of intent which has been produced by legal professionals in more modern times, a significant proportion of construction projects do, in fact, proceed on the basis of a letter of intent. This practice is particularly common within the UAE and the wider Gulf Region. …

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