The civil codes of almost all the Middle East countries are derived from the Egyptian civil code which in turn is based on the French civil laws. It is therefore rather ironic that most of the Middle East countries whose legal setup consists of a mixture of civil and Shar’ah law have based their construction contracts on FIDIC standards. This despite the fact that the FIDIC contracts are largely tailored to common law principles.
The marketability of FIDIC is derived from its global acceptance and the fact that it is used by the World Bank for its project across the globe. However, the global usage and operation in different jurisdictions comes with its own challenges. The situation becomes somewhat tricky when FIDIC contracts operate in a civil law set-up like the UAE.
To ensure that amendments to FIDIC contracts are enforceable in the UAE, it is important to understand the civil code provisions under the UAE Civil Code (Code) which have a potential to override the FIDIC clauses.
Clause 8.7 of the FIDIC Red Book 1999 edition (Red Book) provides for the Contractor to pay delay damages to the Employer if it fails to complete the works, or each section of the works, by the Time for Completion (subject to any extensions of time). The clause also states that such “delay damages shall be the only damages due from the Contractor for such default …” The rate of such delay damages is quantified in the Appendix to Tender.
Under the Code, Article 390(1) allows the parties to agree a fixed amount of damages in advance. Article 390(2) allows the court, upon a written petition from the aggrieved party, to decrease or increase the amount of damages to reflect the actual loss suffered. The power of the courts to increase the amount of damages presents a considerable risk for a Contractor petitioning before the courts.
It should however be noted that the courts in the UAE require cogent evidence that there is a discrepancy between the actual loss suffered and the level of contractual compensation.
In the UAE Federal Supreme Court case 103 of 2004, the court ruled that the contractually agreed rate of liquidated damages was grossly exaggerated compared to the damage suffered by the party imposing liquidated damages and should therefore be reduced.
A party may also rely upon Article 290 of the Code as a defence which provides that the court may reduce the liability or award no damages, if the victim contributed to the events which caused the damage, or increased the damage.
Article 287 of the Code presents another defence and states that if the party can prove that the damage caused is due to a foreign element beyond its control, such as an act of God, an unexpected event, force majeure, an act of third party, or an act of the victim, he shall not be liable for the damage unless the law or the agreement provides to the contrary.
Time Bars on Contractor’s Claims
Clause 20.1 of the Red Book states that the contractor must give notice of any claim, whether for time or money, not later than 28 days after he became aware, or ought to have become aware of the cause giving rise to such a claim. The Contractor runs the risk of losing his entitlement to additional time or money if he fails to notify.
The contractor must then submit a “fully detailed claim which includes full supporting particulars” within 42 days of becoming aware of the event or circumstance (please note that this is not within 42 days of the notice).
Clause 20.1 of the Red Book is often amended to restrict the time periods for notification and attach time bars to particulars as well as the initial notice. Another common practice by employers is to make it clear that the notice must “describe itself” as a notice under Clause 20.1. This prevents the contractor relying upon other records, such as minutes of the meeting, as a notice.
Clause 20.1 is to be read with clause 8.4 of the Red Book. Clause 8.4 defines when, for the purposes of clause 20.1, the Contractor could ‘consider himself entitled to an extension of time’ and, therefore, when the 28 day period for the notice starts running. The key is where completion ‘is or will be delayed’ by one of the listed events in clause 8.4.
However, in the UAE, a failure to adhere to a contract’s notice provision will not necessarily, of itself, restrict claims from being pursued. The principles of good faith under Article 246, causing disproportionate harm under Article 106 and unjust enrichment under Article 318 and 319 act against such time bar clauses and entitle the courts to provide relief to a party who is unable to comply with the time bar provisions. When all these factors combined, a court will likely tread cautiously when asked to deny a claim following an alleged failure to adhere to a contractual notice regime.
Clauses which limit liability may not be enforceable under local laws. Clause 17.6 of the Red Book states that, “The total liability of the Contractor to the Employer, under or in connection with the Contract other than under Sub- Clause 4.19 [Electricity, Water and Gas], Sub-Clause 4.20 [Employer's Equipment and Free-Issue Materials], Sub-Clause 17.1 [Indemnities] and Sub-Clause 17.5 [Intellectual and Industrial Property Rights] shall not exceed the sum stated in the Particular Conditions or (if a sum is not so stated) the Accepted Contract Amount. This Sub-Clause shall not limit liability in any case of fraud, deliberate default or reckless misconduct by the defaulting Party.”
Subject to a small number of exclusions, a contractor might be comforted to enter into a contract thinking that its liability is capped. This may not be true in the UAE.
Article 880 (1) provides that a contractor and a supervising architect (which where the context permits, can mean the supervising engineer) are jointly liable to compensate the employer for a period of ten years from the date of project handover, if the building suffers (a) total, or (b) partial collapse, or (c) there is a defect that threatens the stability and safety of the building. Parties may not agree to a shorter period as this is a mandatory obligation.
Decennial liability (as such liability is known) exists as a strict liability even if there is a defect in the land itself or even if the employer consented to the construction of the defective buildings. A claim for compensation, however, must be brought within three years of the collapse or discovery of the defect.
Any amendment to the FIDIC contract to the effect limiting liability of the contractor with respect to the safety of the building or confining the liability for any loss or damage to the defects liability period (such defects liability period which is less than ten years) shall be void by virtue of Article 880 of the Code.
Clause 16.2 of FIDIC 1999 provides for the termination in an event of default by the employer. It states that if the engineer fails to issue a payment certificate within a specified period, if the contractor does not receive the amount due under a payment certificate within a specified period, or if the employer becomes bankrupt or insolvent, or goes into liquidation, the contractor is entitled to terminate the contract.
Additionally, Clause 16.2 also provides for termination if the employer substantially fails to perform his obligations under the contract, or if the employer fails to comply with the provisions of the contract agreement (clause 1.6) or the assignment provisions (clause 1.7), or if there is prolonged suspension which affects the whole of the works as described in clause 8.11.
However, the most striking feature of clause 16.2, which allows the contractor to terminate the contract, is clause 16.2 (a) which states that “if the contractor does not receive the reasonable evidence within 42 days after giving notice under clause 16.1 [contractor’s entitlement to suspend work] in respect to failure to comply with clause 2.4 [employer’s financial arrangements].”
However, the practical reality is not as simple as the conditions envisaged in a contract. The issue of unilateral termination of a contract is a hotly contested topic in the UAE and subject of a lot of disputes.
The general position under Article 267 of the Code is that a contract may be terminated in three ways: mutual consent; court order; or by force of law. While strong arguments can be made (for example, under Articles 246 and 258) regarding the legality and validity of unilateral termination where the contract provides for such a mechanism, if a challenge is made, it will often be submitted to the courts.
It is permissible to agree that a contract shall be deemed terminated, without the need for a judicial order. To do away with the hassles of obtaining a court order on termination of contract, it is advisable to insert wording to the effect that any termination of the contract is deemed to be exercised within the meaning of mutual consent as contemplated by Articles 218, 267 and 892 of the Code and without the need to obtain a court order under Article 271.
Appropriate amendments and additions are required from a UAE law perspective when executing a FIDIC contract in the UAE. Numerous times contractor and employers, to save time and legal costs, are lured into using a contract (based on the FIDIC form) executed in the UK, US or Australia as the base document for a project in the UAE. Such a contract does not take into account the local law requirements and is a recipe for disaster.
Although FIDIC contracts have been the numero uno choice of parties in the UAE, reconciling provisions suited to common law with the Code is essential for avoiding risks and ensuring smooth execution of the project. Parties to a FIDIC contract should not hesitate in soliciting professional legal advice when executing construction contracts to ensure that the contract is in compliance with the local laws.