The changed economic climate precipitated by the drop in oil and gas prices has resulted in spending cuts manifesting themselves in project descoping
Employers seeking to save money can benefit from contractual rates which overstate the value of items under the contract
Freedom of contract is the cornerstone of Qatari contract law and there is limited scope to step outside contractual obligations
Performance bonds and restricted rights of termination oblige contractors to fulfil contracts which are no longer economically viable
Qatar has significant oil and gas reserves, the exploitation of which has propelled the state to become the richest country in the world and the second largest gas exporter in the world. At the current level of extraction, Qatar's proven gas reserves will last another 135 years.
Qatar has ambitions to capitalise on the income it derives from its natural resources by investing in the state's future. Qatar's National Vision 2030 sets out a strategy to develop the country and targets reducing the state's economic reliance on hydrocarbons. To this end, the revenue from the state's hydrocarbon resources is being channelled into major infrastructure projects, in order to diversify the Qatari economy.
Qatar is set to host the FIFA 2022 World Cup competition. In its bid to FIFA, Qatar undertook to complete a number of infrastructure projects. A number of the landmark projects presently underway in Qatar are key to delivery of the World Cup. Qatar's integrated railway, including the Doha Metro and Lusail Tram, should be completed by the tournament, offering 600,000 passenger trips a day to fans. In February this year, Qatar's Finance Minister announced that Qatar is spending US$500m a week on preparations for the FIFA 2022 World Cup and that total expenditure is likely to exceed US$200bn.
Many international construction companies have entered the construction market in Qatar to capitalise on the rich seam of infrastructure projects being undertaken in Qatar. Due to significant competition to win work, many contractors have signed up to onerous contract terms, which have become the market standard in Qatar.
Lump sum, fixed price - but not as you know it
It has become increasingly common for construction contracts in Qatar to be procured on a design and build basis, for a fixed price lump sum. Under a lump sum contract, the contractor accepts the financial risk of fulfilling the contract requirements for the fixed price agreed. While international contractors may be familiar with lump sum contracts, in Qatar the operation of these contracts can differ from standard practice in other markets.
For example, in Qatar, it is common practice for contractors to be required to submit detailed bills of quantities and schedules of prices even when tendering for lump sum contracts. Often the contract rates submitted in the tender and included as an appendix to the contract do not bear any relevance on the true cost of the items listed; the tender price will often be a negotiated price, not based on these rates. (28 5 Cons.Law 27 at 28)
Changing face of the construction market in Qatar
The reduced income resulting from the lower price of oil and gas has had a considerable impact on governments across the Middle East and Qatar is no exception. This has led to cuts in public spending on some of the major projects.
Some projects anticipated to be completed for the 2022 tournament have been placed on hold, with no indication as to when they will be completed. In April 2017, it was reported that the planned expansion of Hamad International Airport is to be placed on hold. The planned expansion would have increased the airport capacity to receive up to 60 million passengers a year and would have linked the airport to Qatar's integrated railway, once constructed. In 2013 it was announced that a 12 kilometre crossing would be built to link Hamad International Airport to Doha city centre, at a cost of US$12bn. No announcement has been made that the project is no longer proceeding, however, since January 2015 there has been no mention of it in Qatar's infrastructure budget.
Disputes trends in Qatar
The construction sector continues to be the largest employer in Qatar; capital spending on construction projects has continued, albeit at a reduced rate. Many projects are being scaled back, placed on hold, or cancelled altogether. In order to scale back continuing projects, variations are being instructed to reduce the scope of works. Some employers are strategically varying contracts to omit remunerative parcels of work and, reportedly, these omitted works are subsequently awarded to replacement suppliers at a cut price.
A failure to properly administer the contract is still the leading cause for disputes in the Middle East. The average value of a construction dispute in the region is US$82m and will take an average of 15.2 months to reach resolution (whether through formal proceedings or by agreement between the parties). As further spending cuts emerge within Qatar's construction market, there is a growing trend of disputes arising out of the valuation of omissions. In particular, there are increasing concerns regarding how employers are valuing omissions in lump sum contracts which contain artificial schedules of rates, as outlined above.
By valuing variations using the rates provided in the contract, employers can deduct an artificially inflated sum from the contract price. In some cases the deduction can be 2-3 times higher than the real cost of the omission, securing a significant saving for the employer. Subject to the contract terms, employers find that they can secure these savings and instruct other parties to complete the omitted works.
Common contract terms
The FIDIC suite of contracts, particularly the Red Book, are commonly used in Qatar. The Red Book provides that valuations should be valued in line with the contract rates or at the engineer's discretion. In making its determination, the engineer should take account of all the circumstances, while ensuring the valuation is in accordance with the contract. However most large employers use their own standard form contracts. It is common for these contracts to exclude any recovery of overheads, loss of profit, loss of prospective profit or financially reduced compensation. Moreover, a number of these contracts provided limited guidance as to the engineer's role in valuing variations. Instead the contracts provide that the parties should mutually agree the valuation. In the absence of a defined role for the engineer, if the parties cannot agree the valuation of variations, the contractor is left with no choice but to pursue protracted, often costly, formal dispute resolution process.
Clear contract terms v ambiguous contractual language
Contracts in Qatar are governed by Law No 22 of 2004 (the Civil Code). Parties' freedom to contract as they wish, lies at the heart of the relevant Civil Code provisions and parties are bound by the terms they have agreed (art 171).
Where the language of the contract is clear, the parties are restricted in their ability to request a court to step in to interpret the terms parties have agreed. The starting point is that courts will not deviate from what has been agreed, even when one party has signed up to very onerous contractual terms (169(1)). The courts are empowered to step in only when (i) a 'public exceptional incident' has occurred, that could not have been anticipated when the contract was executed; (ii) the court is satisfied that the obligation has become excessively onerous; and (iii) will result in a party suffering an exorbitant loss (171(2)). (28 5 Cons.Law 27 at 29)
In practice, a court might step in if a party could demonstrate that honouring its contractual obligations would result in insolvency. Simply incurring unforeseen financial losses would not be adequate to justify intervention. Having said that, there is no concept of binding precedent in Qatar and court judgments are not consistently published. Therefore, it is not possible to predict with any degree of certainty what the courts will decide in any given set of circumstances.
When the contractual language is ambiguous, the Qatari courts will seek to establish the common will of the parties. In determining the parties' intentions the court consider the nature of the dealings between the parties; the trust and integrity that exists between the contracting parties and the customs applicable to type of dealing (169(2)).
The parties' conduct and course of dealing will be considered by the court in establishing their intentions. Arguably, therefore, the valuation method adopted by the parties in practice may be taken into consideration, to establish clarity on the agreement which exists between the parties. For example, if the contractor can evidence that previously instructed variations were not valued using rates in the contract, it may support the argument that the parties did not agree to use the rates in the contract to value variations. By the same token, it would be untenable for a contractor to contest the use of the contractual rates, having benefited from other variations valued using such rates.
Further legal considerations
1. Good faith
Performing contractual obligations in accordance with the principles of good faith is an overarching obligation under Qatar law (art 172). This is not a 'get out of jail free' card when the operation of a contract becomes disadvantageous to one party. The general duty to operate in good faith is a prohibition to operate in bad faith, and the burden of proof rests with the party asserting bad faith has occurred. In practice, this is a high test to satisfy.
2. Public contracts
Contracts for the public works in Qatar are governed by specific legislation, Law No 22 of 2015 on Regulation of Tender and Auctions and Law No 26 of 2005 Promulgating the Tenders and Bids Regulatory Law, which restricts variations to a maximum addition or reduction of 20 per cent. Where the contract is for public works, a contractor has grounds to resist any omissions in excess of 20 per cent of the contract value.
3. Performance security
If de-scoping leads to a disproportionate reduction of the contract price, contractors may find that it is no longer profitable to continue with the contract. However, despite the unprofitable result of fulfilling the contract, it may not being economically viable to walk away from the project. In the Qatar market it is typical for contractors to provide significant, unconditional performance securities. Typically a performance bond of ten per cent of the total contract value is commonly provided. Avoiding the forfeiture of these sums may compel contractors to continue with a contract which will inevitable result in significant losses.
4. Termination rights
Without a contractual right to terminate, parties may apply to the court, at any time, seeking permission to dissolve a contract on the grounds of breach of contract (art 283). However, the nature of the breach of contract is not defined. In practice, a compelling reason will be required to persuade the court to take the extreme step of agreeing to terminate a contractual relationship. It is unlikely that the court would be minded to release a party from its obligations merely to avoid suffering a financial loss. Further, the court may be inclined to consider a party seeking to escape obligations that have become unfavourable, to be acting in bad faith.
As economic conditions in Qatar have changed, employers are seeking to trim the cost of realising their infrastructure projects. Contractual schedules of rates which overstate the prices of items of work may allow employers to strategically de-scope the works and secure a disproportionality reduced contract price. The freedom of contract principles enshrined in Qatar law limit contractors' chance of escaping their contractual obligations. To avoid facing significant losses on construction projects in Qatar, both parties need to carefully examine their contract terms and take care when preparing the detail of contract schedules.