FIDIC Americas Contract Users’ Conference
2nd & 3rd October – New York, USA
Created by FIDIC in association with IBC Legal Conferences
10% saving for CMguide readers – quote VIP code: FKW82297CMGP …
By Ruth Wilkinson
Key Points:
• A force majeure clause normally excuses one (or both) parties from performance of the contract in some way on the occurrence of a specified event or events beyond their control
• In English law what constitutes force majeure varies widely between contracts
• Most construction contracts define what is meant by force majeure and prescribe the time and cost consequences, as well as what happens to the contract going forward
• The courts have taken a narrow approach to construction of force majeure clauses, requiring that obligations have actually become impossible to perform, not merely more difficult or less profitable
The origin of the doctrine of force majeure is the French Civil Code. It has been used as a defence to a claim for breach of contract as in effect it relieves a party of performance because of some ‘act of God ’ or unavoidable catastrophe. A force majeure event may be relied upon if it has made performance of the contract impossible, was unforeseeable and was unavoidable in consequence and effect.
But in English law it is not so simple. The term ‘force majeure’ is not a legal term of art. Chitty describes the normal understanding of the purpose of a force majeure clause as follows:
‘
[a force majeure clause is] normally used to describe a contractual term by which one (or both) of the parties is
entitled to cancel the contract or is excused from performance of the contract in whole or in part, or is entitled to suspend performance or to claim an extension of time for performance, upon the happening of a specified event or events beyond his control.’
Typical force majeure events would include war, riot, civil commotion, strike and natural catastrophes (such as earthquakes and hurricanes) but would not include bad weather, football matches, a funeral or an act, negligence or omission by the party seeking to be excused.
The concept of force majeure cannot be relied upon as a defence unless and to the extent that the contract so provides, or if it is implied as a term. Construction contracts will usually define what is meant by force majeure and the consequences. The precise terms and effect of such clauses can vary widely.
As the leading authority on force majeure in English law (the judgment of McCardie J. in Lebeaupin v Crispin [1920] 2 KB 714) states, the precise ambit of the term will depend on the context in which it is used:
‘A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument.’
It is common to see force majeure defined by a list of events followed by a general sweep up provision. In Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40 (Comm) the defendant sought to justify its refusal to accept delivery of an aircraft on the basis that the alleged ‘unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets’ constituted ‘any other cause beyond the Seller ’s reasonable control’ as provided for in the force majeure clause of the contract. This, they said, postponed the time for the defendant to complete the purchase.
The judge rejected the argument. He held that this phrase had to be read in the context of the entire clause. Although the judge noted that the phrase ‘any other cause beyond the Seller’s reasonable control’ did not need to mirror the specific examples set out earlier in the definition, he pointed out that it was nonetheless telling that nothing in any of those specific examples was even remotely connected with economic downturn, market circumstances or the financing of the deal.
A force majeure clause may provide relief from liability when a party is prevented from carrying out his obligations or is unable to do so. However, a party seeking to rely on a clause which states that he is relieved of his obligations if he is prevented from carrying them out must show that performance has become physically or legally impossible, and not merely more difficult or unprofitable.
It is not unusual for contractors to claim that whilst performance of the contract is technically possible, it has become financially unviable, so much so, that it is economically impossible.
Generally, a change in economic or market circumstances affecting the profitability of a contract or the ease with which the parties’ obligations can be performed will not be regarded by the courts as constituting a force majeure event. This was the case in Tandrin above.
Thames Valley Power Ltd v Total Gas & Power Ltd [2006] 1 Lloyd ’s Rep 441 established:
‘… It does not at all follow that the supplier is entitled to rely upon an increase in the market price in comparison to the contract price as a force majeure circumstance … This conclusion is consistent with a line of cases, both on force majeure clauses
… to the effect that the fact that a contract has become expensive to perform, even dramatically more expensive, is not a ground to relieve a party on the grounds of force majeure …’
The burden of proof is on the party seeking to rely upon the force majeure clause. He must prove the occurrence of the event he is relying on and that he has been prevented, hindered or delayed (as the case may be) from performing the contract by reason of the event. Subject to the terms of the contract, he must also prove that the event in question was beyond his control and that there were no further steps he could have taken to avoid or mitigate the consequences: Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd ’s Rep 323. In that case a clause that included ‘strikes beyond [its] control’ did not bite if the party seeking to rely on the clause could have settled the strikes by taking reasonable steps.
The standard form construction contracts deal with force majeure differently as illustrated by comparing NEC3, JCT 2011 and the FIDIC Red Book.
NEC3
The term force majeure is not used in NEC3, however cl 19.1 (Prevention) is the equivalent. Clause 19.1 states:
‘ If an event occurs which
• stops the Contractor completing the works or
• stops the Contractor completing the works by the date shown on the Accepted Programme,
and which
• neither Party could prevent and
• an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that
it would have been unreasonable for him to have allowed for it,
the Project Manager gives an instruction to the Contractor stating how he is to deal with the event’.
Such an event is a compensation event (cl 60.1(19)) and a ground upon which the employer may terminate (cl 91.7). Clause 91.7 requires that the event must stop the works completing by the date shown on the Accepted Programme and ‘is forecast to delay Completion by more than 13 weeks.’
The NEC3 Prevention clause is generally regarded as providing a more generous approach for the contractor than a typical force majeure clause, since it puts the onus on the employer to decide how such events should be dealt with and entitles the contractor to both time and money where such events arise. As many employers are uncomfortable with the prospect of considering whether an event is one which it would have been reasonable for a contractor to allow for, these provisions are often deleted by employers, with the result that the contractor may have no effective remedy in the event of force majeure.
JCT
The JCT form clause references are to JCT 2011 With Quantities which includes express reference to force majeure; but it is not defined, which gives rise to potential uncertainty about its scope. In the absence of such a definition Keating on Construction Contracts (9th edn, para 20-118) suggests that the court would follow Lebeaupin v Crispin when attempting to define what a force majeure event would include.
Force majeure is listed as a relevant event which entitles the contractor to an extension of time (cl 2.29.14). It is not identified as a relevant matter for the purposes of recovering loss and expense. It sits alongside other events which could ordinarily be considered as force majeure such as ‘exceptionally adverse weather conditions’ (cl 2.29.9), ‘civil commotion’ (cl 2.29.11), or ‘strike’ (cl 2.29.12).
It may also be a ground for termination (cl 8.11). Clause 8.11.1 provides that if before practical completion, the whole or substantially the whole of the uncompleted works is suspended for the period specified in the contract particulars by reason of various events including force majeure, then either party may give notice of termination.
FIDIC
Clause 19 of the Red Book states:
‘ In this Clause, “ ‘Force Majeure” means an exceptional event or circumstance:
a) which is beyond the Party’s control,
b) which such Party could not reasonably have provided against before entering into the Contract,
c) which, having arisen, such Party could not reasonably have avoided or overcome, and
d) which is not substantially attributable to the other Party.
Force majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied:
i. war, hostilities (whether war be declared or not), invasion, act of foreign enemies,
ii. rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,
iii. riot, commotion, disorder, strike or lockout by persons other than the Contractor ’s Personnel and other employees
of the Contractor and Sub-Contractors,
iv. munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be
attributable to the Contractor ’s use of such munitions, explosives, radiation or radio-activity, and
v. natural catastrophes such as earthquakes, hurricane, typhoon or volcanic activity.’
Read on their own, sub-clauses (a) to (d) could be seen as providing a broad definition of force majeure, however, in line with Lebeaupin v Crispin , reading these with the subsequent sub-clauses I to V may well limit the definition of force majeure.
Clause 19.4 provides that the Contractor can recover an extension of time and can on the occurrence of events I to IV recover cost subject to (in relation to I to IV) these occurring in the country in which the site is located. Clause 19.6 provides that either party may give notice of termination if the execution of substantially all the works is prevented for a continuous period of 84 days by reason of force majeure or for multiple periods totalling more than 140 days.
Summary
These are just examples of some of the standard forms’ treatment of force majeure. It makes sense to consider carefully at drafting stage what parties wish force majeure to look like – as always, it is about who bears the risk. The devil is, as they say, in the detail.
www.dundas-wilson.com
Contract Requirement
Max Abrahamson in his book Engineering Law and The ICE Contract wrote
” A party to a dispute, particularly if there is an arbitration will learn three lessons (often too late) the importance of records, the importance of records and the importance of records”. This quotation came to mind recently when I read the judgement in the case of Attorney General for the Falkland islands v Gordon Forbes construction (Falklands) Limited. A contract was let for the construction of the infrastructure of the East Stanley Housing Development in the Falkland Islands using the FIDIC 4th Editions conditions.
…
RECORDS, RECORD, RECORDS – Importance for Contract ClaimRead More »
by Dennis Brand
Many of you will deal with industry-standard form contracts, while others will deal with company standard or even bespoke forms; whatever the form of contract, the notices provision contained in the conditions of contract is probably one of the least-read provisions. The notices provision does not attract the same degree of interest as, say, the variation or change order provisions, or provisions which deal with certificates of completion, suspension or even termination, but in each case a notice is required.
Let me be clear: a notice provision in a contract is not the same as where a contract includes the term ‘notify’; a requirement that one party must inform the other of a thing or matter. A notice provision is where the contract includes the term ‘shall give notice’ (or something similar), which usually requires a formal written notice to be issued by one party and delivered to the other.
For example, a ‘Notice to Proceed’ is a formal notice issued under many forms of industry-standard contracts. The issue of a ‘Notice to Proceed’ is the confirmation that the contractor or supplier of a service is to start work. To proceed on the basis of simply being notified, which could be a phonecall or even a text message, without a formal notice in writing, would be risky in the extreme for the contractor or supplier.
From the employer’s side, such a notice is equally important because, by issuing the formal ‘Notice to Proceed’, he knows that, regardless of what discussions or communications he may have had with the contractor or supplier, they will only start work, and thereby incur cost to his account, once the employer has issued the ‘Notice to Proceed’, and not before.
When one is involved in the preparation of a contract and the subject of the notices provision is to be addressed, there are really six points or matters to be considered:
1. How many days?
The first thing is that the period of notice should be expressed in days rather than weeks. Notice periods will differ depending upon the reason for the notice. When determining the number of days, the period should be reasonable, not too long and not too short, and must be workable. Many contracts contain provisions that, where a contractor seeks additional money or a variation, the contractor must give notice within a limited number of days following the event which resulted in the request. Some contracts go further and provide that, if the notice is not given within the specified time, the contractor loses his right to claim a variation. You may think this pretty harsh, and indeed it is not one that courts or arbitrators like to enforce, but if the period for the notice is reasonable, the contractor should not have any difficulty in complying with it.
2. In what form?
There is no standard form for a notice. The important thing to bear in mind is that it is a standalone document which advises the other party of something or requires the other party to do something. It should contain all the relevant information, including reference to the provision of the contract and relevant clause, so the recipient can be under no misapprehension as to the purpose of the notice and what is required. For example, FIDIC requires that, in the event of a dispute which is referred to the engineer for a decision, the notice must provide a description of the dispute and confirmation that a decision of the engineer under the relevant clause is required. Failure to give that information will likely mean that the notice is considered invalid.
3. Who should sign them?
Due to the importance of a contractual notice, it should only be signed by someone in authority. Rarely will the contract state who should sign the notice. Therefore it should be signed by the same person who signs all other contract correspondence, such as the contractor’s or employer’s nominated representative.
4. To whom should they be sent?
Due to the importance of such a notice, it is important it is brought to the attention of the senior management of the contractor or employer. However, for those large organisations where the head office might be in another country, a notice sent to the head office will not be acted upon at site level until it has been received and site management informed. In order to avoid attendant problems, it is not unusual to see a notice provision which requires the notice to be addressed to a named individual in the head office, with a copy sent to the project manager on-site. I have seen this put to good effect where the employer, who was not getting the required action from the site, issuing a notice, which required the original to be sent to the head office.
5. How should they be delivered?
Usually a notice provision provides for notices to be delivered by one of three methods: by hand, by mail or by fax. To deliver a notice by hand means exactly what is says; it also includes delivery by courier. To include a provision allowing the delivery of a notice by mail, consideration must be given to the delivery point, which could be another country. Often a number of days are added in case of delay, with an overall number of days agreed upon when delivery will be considered as having taken place. For delivery by fax, the sender’s fax report confirms the delivery.
6. Is an acknowledgement needed?
In my view never … that simply invites problems!
CW
By Edward Sunna
What You Need To Know and Why?
The private sector in the UAE and more recently the public sector in Abu Dhabi, have adopted FIDIC or at least a hybrid version of FIDIC for government use. This was done in part to reduce the risk of international contracting, but more importantly, to standardise terms of engagement to reduce uncertainty caused by the application and interplay of Federal Laws and the various Laws of the Emirates, in so far as they are applicable to construction contracts.
…
By Christopher R. Seppala
I propose briefly to discuss five topics in the three new Books for major works (the new Construction Contract, the Plant Contract and the EPC Contract), as follows:
(1) Contractor’s risk and “Employer’s Risks”,
(2) Indemnities,
(3) Limitation of Liability,
(4) The New Force Majeure Clause, and
(5) Grounds and Procedure for Termination of the Contract by the Employer and the Contractor. …
FIDIC’S FOUR NEW STANDARD FORMS OF CONTRACT: Risks, Force Majeure and TerminationRead More »
by Sarah Thomas
I thought that I would hail in the new year with an update on some interesting construction developments. Put it down to a period of reflection over the Christmas break! As I want to cover a number of areas, I have split this update into 2 postings.
In this first update, I am going to cover the latest FIDIC news and the new Bribery Bill currently going through the UK parliament. In my next posting I will look at two recent construction cases in English law, the first covering recoverability of damages and the English “remoteness” rule, the second covering treatment of contractual notice bars for claims.
Firstly, on FIDIC. I presented at the annual FIDIC conference in London in December of last year and can report some interesting developments:
FIDIC have just published a new Subcontract form (termed the Conditions of Sub-Contract for Construction). This is specifically designed as a construction only subcontract – to be used by main contractors operating under either the 1999 FIDIC Conditions of Contract for Construction for Building and Engineering Works designed by the Employer (known as the “Red Book”) or the Multilateral Development Bank’s Harmonised Edition of these FIDIC Conditions of Contract. The subcontract is drafted very much on the basis of a “total pass down of risk”, although there are some interesting features (particularly from an English law perspective).
For example, the payment provisions are effectively tied to payment under the “Main Contract” and include “pay when paid” clauses (Sub-Clause 14.6 (c)) in that the Contractor can withhold monies where “the Employer has failed to make payment in full to the Contractor in respect of those amounts…”. Of course, this protection will not apply where the reason for non-certification under the Main Contract is because of Contractor default or the Employer’s insolvency. Whilst common in subcontracts in Europe, any construction contract signed in England and Wales is subject to the UK Housing Grants, Construction and Regeneration Act and this prohibits pay when paid provisions. It will be interesting to see how this plays out in the market – readers will no doubt be conscious of the current harsher market conditions for contractors generally – so this may be more palatable to subcontractors in these straitened times. What it means in practice is that subcontractors will have to take a good deal more notice of what the main contract says about payment, and certification of payments, to ensure they are comfortable with these risks flowing down into their subcontracts.
As for other key features,
• Whilst the underlying principle is direct risk pass down, there is no general provision (as appears in many “pass-down” subcontracts) saying, for example, that the Sub-Contractor shall carry out the Sub-Contract Works such that he does not put the Contractor in breach of the Main Contract.
• The Sub-Contract assumes that the Main Contract will be the FIDIC Red Book and directly refers to Main Contract Clauses. Of course, the numbering will not necessarily work if the Main Contract is either not FIDIC or is an amended form of FIDIC.
• Not surprisingly, there are provisions allowing for immediate termination where the Main Contract terminates (Clause 15). Where the Main Contract is terminated for default the Sub-Contractor only gets the value of work and documents produced up to the date of termination (less amounts recovered by the Employer and any other losses and damages incurred by the Contractor and, notably in my view, its other sub-contractors). If not in breach, the Sub-Contractor gets paid the value of works/documents to date, demobilisation and reasonable repatriation costs, any other costs “reasonably incurred” in expectation of completing the Sub-Contract Works plus loss of profit. This is all fairly standard, although I suspect a number of main contractors may wish to curb the ‘loss of profit’ claim. However, the biggest potential issue is I think Sub-Clause 15.6. This allows the Sub-Contractor to terminate where there would be a right to do so under the Main Contract. The clause simply refers to the termination events in the Main Contract equally applying to the Sub-Contract. I query whether this actually works or makes the Contractor’s other termination rights sufficiently clear. It would be preferable to spell them out for such an important clause.
FIDIC is also proposing to issue a new user guide to accompany the Design Build and Operate form (Gold Book). Just to remind readers, the current form (first published in September 2008) covers design, build and long term operation of facilities on green field sites. The new guide will include provisions allowing this to be used for brown field sites. No doubt FIDIC hope that this will lead to a much greater use of the Book as most DBO projects involve some element of upgrade of existing facilities alongside new build. However, as this form is still in its infancy I am yet to hear from anyone who has actually used this form (- readers please get in touch if you have), it remains to be seen whether this will lead to wholesale take up of this new form. I think one reason for the lack of use so far may be that the form has no provision for funding by the Contractor and so is not suitable for PPP projects.
At the same time, FIDIC are proposing a review of all the contract forms in their current “1999 Rainbow Suite” (i.e. principally the Red, Yellow and Silver Books) and plan to amend these in line with current business practices and in response to request for amendments over the last decade. For example, one likely amendment is to include the amendment FIDIC has already made to Sub-Clause 20.1 in the DBO form dealing with the procedure for Contractor’s claims. Just to recap, Sub-Clause 20.1 has always been a sticking point for contractors as it essentially precludes any entitlement to claim for time/money if the conditions of this clause are not strictly complied with. What the Gold Book has introduced is a slight relaxation of this absolute notice bar, allowing the Contractor to apply to the Dispute Adjudication Board for a ruling if he considers there are circumstances which justify the late submission of a notice. If the DAB agrees that in all the circumstances “it is fair and reasonable that the late submission be accepted”, it can overrule the 28 day notice limit.
FIDIC canvassed views at our London conference as to what other clauses should be amended. There were a number of requests for a review of the variations clause (Sub-Clause 13) and in particular to the right of the Contractor to payment for value engineering changes. Currently under all the forms, the Contractor bears the cost of any proposal and only if it is accepted by the Employer, does he then get remunerated. This has always been something of a disincentive to propose value added changes.
Before signing off on this first update, I would like to touch upon the Bribery Bill 2009 which is currently going through the UK Parliament. The reason this has been introduced is because the UK has come under foreign criticism from the Organisation of Economic Co-Operation and Development (OECD), amongst others, because of its perceived failure to carry out its obligations under the OECD Convention, which the UK ratified in 1998. The new Act, if it becomes law, will impact upon all commercial organisations seeking contracts with the public sector both in the UK and abroad.
Key features to watch out for if you are a UK contractor are the proposed new offences of bribing a foreign public official and the corporate offence of failure to prevent bribery by persons working on behalf of the business, including employees, agents and subsidiaries (whether domestic or foreign). The corporate offence applies to companies or partnerships which are either formed under UK law or which carry on business in any part of the UK – in other words, it could also impact on foreign companies doing business in the UK. The offence is punishable by an unlimited fine for the company whilst company individuals with responsibility for anti-corruption measures face personal criminal liability and up to 10 years’ imprisonment.
It will be a defence to the corporate charge for a company to show that “adequate procedures” to prevent corruption were in place at the time. The Bill does not detail what “adequate procedures” means but this month the Government agreed to add an amendment that will require the Secretary of State to provide guidance on this. All UK companies and overseas companies doing business in the UK should probably review their internal procedures carefully and update training, policies and contracts of employment to reflect the new law.
Some of you may ask whether there is sufficient parliamentary time to push this through before the UK election (which most commentators are forecasting in early May this year). The current view is that while the Bill is generally understood to have cross-party support, timing is very tight as there are a number of further stages that the Bill must complete in the House of Commons before it can be passed into law. If the Bill is not passed in time, it will need to be re-introduced in the next Parliament.
Any thoughts on the latest FIDIC development or indeed on the UK’s proposed anti corruption measures are of course always welcome!
Kluwer Construction Blog
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.’ …
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
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
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 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
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. …
