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. [Read more…]
