Clients regularly ask how the Dubai construction market is doing since the financial crisis hit in late 2008. From our perspective, it appears that the market remains uneasy due to the stream of enquiries and instructions pertaining to disputes in construction projects. Over the last couple of years, we have acted, and continue to act, in numerous construction disputes (both arbitration and litigation), the total amount of money in dispute runs into billions of dirhams.
Given the above, you may be curious to know if there are any
common themes or issues running through the disputes handled. Not
all disputes arise simply because one of the contracting parties is
unable to pay as a result of its cash flow being affected by the
financial crisis. From experience, there are numerous contractual
or legal issues that tend to push parties to a full-blown dispute.
The following sets out five of such issues:
The right to suspend works
Under both the 1987 and 1999 editions of the FIDIC Red Books which
are the prevalent form of contract used in the UAE, there are
provisions that allow the contractor to suspend works and the
employer (through the engineer's instruction) to require works
to be suspended. For example, Sub-Clause 40.1 of the 1987
conditions provides that the engineer designated under the contract
may at any time instruct the contractor to suspend works in full or
in part, and pursuant to Sub-Clause 69.4 of the same conditions,
the contractor is entitled to suspend or slow down the progress of
the works if the employer fails to make payment within a certain
period of time in respect of sums due under any payment certificate
issued by the engineer.
The issue which commonly arises is, based on the particular facts,
was the party who suspended the works, or who initiated the
suspension, right to do so and what are the reciprocal rights and
remedies of the other party? Another common issue is, in the
absence of a contractual right to suspend works or failure to
properly initiate the relevant provisions, is there any provision
under the UAE Laws that could provide some form of relief or
remedy? Contractors often complain that despite being instructed by
the engineer to suspend the progress of the works (due to the poor
property market conditions), the engineer would not grant an
extension of time and costs as a result of the suspension.
The Engineer's instruction to recover lost
time
In construction projects, the engineer or the employer's
representative will usually have the power to instruct the
contractor to increase the rate of the works or to take steps to
recover any delay should the actual progress or physical status of
the works indicate that the works will not be completed within the
contractual deadline. Such powers can be found in Sub-Clauses 46.1
and 8.6 of the 1987 and 1999 FIDIC Red Books respectively. The
issue that often arises is whether in the particular circumstances
the contractor is obliged to give effect to such an instruction
and, if so, would the contractor be entitled to claim the
additional costs or expenses in complying with such an
instruction?
The issue becomes more complicated when the contractor argues that
it was not responsible for the delays that have occurred on the
project and that the engineer has failed to grant it a reasonable
extension of time. The question of whether the contractor was
entitled to an extension of time often involves the need to carry
out detailed investigation of the historical events and a complex
technical and factual analysis by delay analysts to ascertain the
cause(s) and effect(s) of such delays. It is crucial that these
tasks are undertaken with the advice of the parties' respective
lawyers. It is important to advise and work very closely with
clients and their appointed delay analysts on the relevancy of the
delaying events, rights and liabilities of the parties in
connection with the events and the appropriate method of delay
analysis in the given circumstances.
An Employer's rights to employ a third party to
takeover part of the works
Based on the FIDIC 1987 and 1999 Red Books the employer is obliged
to provide access and possession of the site to enable the
contractor to carry out the full scope of the works within the
contractual deadline. Save for certain circumstances, the employer
is prohibited from interfering with the manner and timing in which
the contractor carries out the works. Until a Taking Over
Certificate is issued for the whole or part of the works or the
Contract is terminated the employer is not entitled to take
possession of the site or control of the works. Furthermore, under
the FIDIC Red Books, omission of any part of the works from the
original scope of the contractor is not permitted if such works are
to be carried out by the employer or a third party (see Sub-Clauses
51.1(b) and 13.1(d) of the 1987 and 1999 FIDIC Red Book
respectively).
This begs the question, can the employer engage a third party
contractor to carry out a specific part of the works because the
contractor is badly behind schedule or has suspended its works due
to non-payment? As mentioned above, there are limited situations in
which an employer can engage a third party to intervene without
terminating the contract. One such situation is contemplated under
Sub-Clause 7.6 of the 1999 FIDIC Red Book whereby the employer is
entitled to employ a third party to carry out urgent works for the
safety of the works if the contractor fails to do so immediately
despite having been instructed by the engineer. But what other
situation allows the employer to engage a third party? Can an
employer rely on certain provisions of the Civil Code to circumvent
the restriction upon him in engaging a third party without
terminating the contract?
The "Engineer" under the contract
Under the FIDIC Red Books, a party designated as the
"Engineer" under contract must be identified and named in
the contract (the name of the Engineer is usually stated in the
Appendix to the Tender and/or in the Particulars Conditions). In
reality, the Engineer is a third party to the construction contract
whereby the contracting parties empower him to carry out certain
duties and determinations pursuant to the terms of the contract.
For example, under the FIDIC Red Books, the Engineer is empowered
to issue instructions to the contractor to vary the works, issue
payment certificates upon which the employer must make payment
within a certain time period, grant an extension of time to allow
the contractor a longer period of time to complete the works,
etc.
Typically, the employer's architectural or engineering
consultants would take up the role of the Engineer under the
contract. One of the reasons for this is because, depending on the
scope of their engagements, they have a statutory obligation (see
Articles 880 and 881 of the Civil Code) to ensure that the project
will be designed and constructed free from any defects that may
threaten the structural integrity or safety of the building or
structure. Furthermore, they are also professionals who are
registered with the local municipality and are, therefore,
answerable to local government agencies and authorities in relation
to the design and construction of the project. However, depending
on the nature, size and complexity of the project, a project
management consultant who is usually employed at the inception of
the project, is also commonly engaged by employers to take up the
role of the Engineer.
Therefore, there can be a number of professionals that an employer
may employ on the project, e.g. various specialist designers,
architects and engineers, supervising architects and engineers and
quantity surveyors and cost consultants. The various interactions
and exchanges of communications between these professionals and the
contractor in order to procure information, approvals and
certifications in an ongoing project often causes confusion as to
who is the "Engineer" (and who is the lawful
representative or delegatee of the Engineer) under the contract or
whose instructions and determinations are binding on the
parties?
We have come across cases where the party who regularly issues
instructions and approvals to the contractor is not named as the
Engineer under the contract, and yet the party who is named in the
contract is no longer employed by the employer. One of the major
repercussions of not being able to properly identify the Engineer
is that; either party may not be certain to whom they should refer
their claims or disputes to in order to obtain the Engineer's
valuation, certification or determination. This causes a further
problem when either party wishes to initiate the dispute resolution
mechanism under the standard FIDIC Red Books which will in the end
enable them to bring their claims or dispute to arbitration for
final resolution (see Sub-Clauses 67.1 and 20.4 of the 1987 and
1999 FIDIC Red Book respectively).
"Back to back" or "pay if paid" payment
provisions
These terms are notorious within the construction industry,
especially at the subcontracting level. Their objective is to
provide a contractual arrangement between a main contractor and a
subcontractor such that the latter will not get paid until the
former receives the corresponding payment from its employer. There
are a number of jurisdictions (e.g., UK, Singapore, New Zealand and
certain states in Australia) where a contractual "pay if
paid" type of arrangement is outlawed. In the absence of any
legislation that disapproves such practices and coupled with the
principle of freedom of contract and the concept of good faith in
exercising contractual rights, it is not clear how and to what
extent would the local courts or an arbitral tribunal view or
approach a "back to back" or "pay if paid"
provision.
The uncertainly with these provisions is often exacerbated by badly
drafted provisions, e.g. what is meant by "the subcontract
will be on a back to back basis"? Is this a "pay if
paid" or a "pay when paid" provision (for which a
distinction can be made between them)? Does the "back to
back" arrangement prevent the sub-contractor from getting paid
if the main contractor is involved in arbitration or litigation
with the employer or, for whatever reason, the main contractor
chooses not pursue overdue payments from the employer? And given
the circumstances, can the out of pocket subcontractor pursue
payments directly from the employer?
There are no quick answers to the issues raised above. And there
are many other issues that have given rise to uncertainties and
ambiguities within the construction industry which is partly caused
by the interactions between well accepted contractual provisions
(such as the FIDIC Conditions of Contract) and local laws; in
particular, the Muqawala section of the Civil Code and the
application of the Commercial and Civil Codes generally.
Since the founding of the UAE in 1971 the construction and property
development sectors in the UAE, and Dubai in particular, have
experienced phenomenal growth. During this period industry players
were busy negotiating and building projects rather than getting
embroiled in the "niceties" of the interaction between
contractual provisions and the legal codes. Therefore, it is not
unreasonable to say that many of the issues raised in this article
have not, until recently, been the subject of dispute or issues
that the industry players have had to deal with. Legal
practitioners are now being called upon to step up to the demands
of the industry to deal with these complex issues. In this context,
it will be interesting to see how local legal jurisprudence will
develop to resolve the issues that are now plaguing the
industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.