Zero value payment certificates, zero payment, zero liquidated damages… These are some scenarios in which "zero" causes problems to the construction and engineering industry.
"Zero" valued payment certificates
Contracts in Qatar routinely provide a number of bases for which the engineer is required to certify "zero" payment due on payment certificates.
- A minimum sum is to be due before payment is required. i.e. if the value of work done during the period is less than the minimum sum specified the Engineer is required to certify that zero payment is due.
- The ability to set-off accrued liquidated damages against payments falling due resulting in the payment being completely extinguished. The payment due is zero.
- The ability to correct an earlier over-certification by the Engineer, reducing the current payment to zero.
Such mechanisms exist to protect the employer from overpaying. Keeping the employer in a cash rich position designed to maintain control over the project. Providing incentive to the contractor to complete, complete in a given time, or reduce the cost risk to the employer should a third party need to be engaged to complete works. However, the exercise of these mechanisms should be balanced against the cashflow impact on the contractor and how this might actually inhibit the ability for it to complete or complete in a given time.
Compounding the problem created by zero valued payment certificates are occasions where the employer opts not to make payment against a positive valued payment certificate. This action is rarely supported by the contract. However, in practice circumstances do arise where the employer refuses payment, even if the Engineer has certified payment due. For example, there are reports of employers refusing payment simply where the completion date has passed (and without legitimate application of delay damages).
The combination of zero valued certificates and zero payments can give rise to unsustainable positions for contractors resulting in little option but to terminate performance, again an action rarely supported by the contracts used in Qatar.
Unhappily, it follows that many of these projects end up in court or arbitration.
"Zero" Liquidated Damages
Most commonly we associate liquidated damages with delay. In this context the parties usually agree in the contract that in the event the contractor is late in reaching completion of the works for handover then the contractor shall pay to the client the sum of [x] per day or per week that the works are delayed. The parties pre-determine the loss to the employer arising from the delay.
Unliquidated damages by contrast are the damages the employer can claim where the loss has not been pre-determined between it and the contractor, where delay damages do not apply. The employer can claim its actual, proven losses.
What happens if there is a delay damages provision, as in the example above, but [x] (in the example above) is not a positive sum of money, such as QAR 300,000 (three hundred thousand Qatari Riyals). What if [x] is expressed to be QAR 0 ("zero" Qatari Riyals)?
Should the contract be interpreted to mean that there is no pre-determined amount? Therefore if the contactor is in delay then the contractor pay the employer’s actual loss arising from that delay. I.e. the employer’s unliquidated damages.
Alternatively, should it be interpreted to mean that the parties had pre-determined the loss associated with delay would be zero, no loss?
It should be pointed out that liquidated damages, whilst representing a pre-agreed sum of money to compensate for a particular loss, are not solely reflective of what the parties genuinely believe the loss might be. Commercial factors play a part, and the agreement of a liquidated damages sum may well be the product of negotiation or be reflective of the parties’ agreement as to risk allocation. An easy example is the tendency to agree a cap on liquidated damages.
It is possible then that the parties might have deliberately arrived at the commercial decision that a delay should not be compensated in given circumstances. It may even be the case that it is recognised that the delay will not cause a direct loss to the employer (in which case even if a sum is included it could be overturned by the court). It is of benefit to the parties to be clear if it is thought that the employer in the event of delay will claim no damages. The contractor will be able to remove this as an item of risk and that may be reflected in its price.
So how then do we deal with the scenario where "0" is included against liquidated damages in the contract?
There is a strong argument that "0" will be considered to reflect the situation whereby the parties have pre-determined that the loss will be zero. The employer will recover no damages. Therefore, if it is intended that the employer will recover its actual losses, its unliquidated damages, then parties should express clearly that "liquidated damages will not apply and the employer shall be entitled to recover its proven losses".