Contracts and insurance

Construction contracts

What standard contract forms are used for construction and design? Must the language of the contract be the local language? Are there restrictions on choice of law and the venue for dispute resolution?

Under Iraqi laws, there are no specific standard contract forms to be used for construction and design. Hence, the parties may execute any form of contract, including that of the International Federation of Consulting Engineers or any desired form to the extent not restricted by a compulsory legal provision, which is not a significant concern in practice. As a general principle, it is not a condition to use the national language in contracts, as the contracting parties are allowed to use the language they wish in drawing up the contract (whether governmental contracts or contracts between private sector persons).

 

Governing law of the contracts

Generally, there are no restrictions upon the contracting parties under Iraqi law to choose a specific governing law or the mechanism and place of the dispute resolution. However, governmental contracts executed under General Contracts Code No. 87 of 2004 and the Regulations of Governmental Contracts Implementation No. 2 of 2014 (Article 12/Second) shall be governed by Iraqi Law.

Certain contracts executed with private parties and government entities in Iraq are subject to international arbitration; in this regard, Iraq is a party to several bilateral arbitration treaties and international arbitration conventions. For instance, although Iraq has recently ratified the New York Convention for international arbitration, the mechanism of enforcing arbitration awards in Iraq is cautiously available, but the enforcement of judicial judgments is more accessible in theory and practice than the enforcing of arbitration or tribunal awards.

 

Dispute resolution

Generally, the contracting parties are allowed to choose the place and ways of solving disputes at their discretion. However, governmental contracts are subject to the following provisions.

First, disputes after signing the contract shall be resolved amicably by forming a joint committee of the disputing parties according to provisions of the law and the relevant regulations, and the contract terms and conditions. Minutes shall be prepared for the foregoing, which will be authenticated by the head of the government contracting party.

Second, if no amicable settlement is concluded, one of the following mechanisms should apply, which shall be included in the contract:

  • arbitration, which shall be as follows: 
    • domestic arbitration. This shall be according to the procedures outlined in the tender conditions or the Civil Procedural Code No. 83 of 1969; 
    • international arbitration. The governmental party of the contract may choose to settle the disputes by international arbitration in case of emergency, for big and significant strategic projects or if one of the contracting parties is foreign, provided that the following should be considered:
      • the accredited international arbitration body to be chosen; 
      • the place and language of arbitration should be designated;
      • using Iraqi laws as the governing law; and
      • the governmental party shall have employees whose qualifications meet the requirements of settling the disputes by this mechanism; or
  • referring the dispute to the competent court for determining its subject matter.
Payment methods

How are contractors, subcontractors, vendors and workers typically paid and is there a standard frequency for payments?

The most applicable payment method for contractors, subcontractors or vendors in Iraq is based on the contractual mechanics, which often apply the form of progress payments against the letter of credit opened, based on the allocation of the project funds. The most common form of payment is through banking wire transfer to the contractually agreed upon bank account of the vendor or contractor.

Payments to workers by their employers vary based on the contractual mechanism in effect; for local employees, the most common practice is cash payments; and, for foreign employees, employers tend to pay their salaries through the banking system, to accounts either in Iraq or in their home countries.

Contractual matrix of international projects

What is the typical contractual matrix for a major project in your jurisdiction in terms of the contractual relationships among the various construction project participants?

In Iraq, the government entity that owns the project usually announces the project and invites the contractors to provide their commercial and technical offers. After an extensive pre-qualification and qualification process, including the verification of good standing (eg, not being blacklisted by the Iraqi Minister of Planning) and the availability of required capabilities, the government entity awards the project to a specific contractor or contractors. In such a case, the project owner enters into an agreement directly with the entity awarding the contract. There are several forms of invitation to bid applicable under the Regulations of Governmental Contracts Implementation No. 2 of 2014, and also there are certain standard forms of contracts, whether for construction, service, consultancy and other activities to be provided under the contract.

PPP and PFI

Is there a formal statutory and regulatory framework for PPP and PFI contracts?

The Iraqi parliament is drafting a law for public-private partnerships (PPP). However, certain practices of PPPs were entered into between government agencies, such as the Ministry of Electricity, and the private sector, such as electricity production and distribution companies, to renovate certain power plants. These arrangements may be considered a success and could be used as a model for others to follow regarding the contractual terms and the special approvals received for that arrangement. As for PFI, we are not aware of the existing statutory or regulatory framework, knowing that legal provisions in the Iraqi governing contractual system permit any contract to be entered into as long as mandatory legal requirements do not restrict it. We believe PFI would be available to be executed under the standard or general legal conditions in force.

Joint ventures

Are all members of consortia jointly liable for the entire project or may they allocate liability and responsibility among them?

Members of consortia are usually jointly liable for the entire project (before the project owner) if the tender requirements or conditions stipulate so, but this is not applicable by default under the Iraqi Civil Code. In this respect, note that the liability and responsibility of each member of the consortium can be allocated by mutual written agreement of the parties (the members of the consortium).

Tort claims and indemnity

Do local laws permit a contracting party to be indemnified against all acts, errors and omissions arising from the work of the other party, even when the first party is negligent?

Under the Iraqi Civil Code, it is not permissible to conduct an agreement by which tort liability may be dismissed or waived; from a practical legal perspective, any party that caused an injury to another must be subject to compensation, regardless of any arrangements to the contrary.

Concerning contractual liability and indemnification therefrom, the bilateral contracts bind both parties if either party has failed to perform its obligations under the contract, and the other party may, after service of notice, demand rescission of the contract and where necessary claim damages; the court may, however, accord the debtor a further time limit to pay and may also reject the application for rescission if that which the debtor has not performed is trivial in terms of the total obligation.

In addition, the injured contracting party is allowed to claim compensation for damages incurred by it owing to the default of the other contracting party to fulfil its obligations under the contract. Conditions of liability for compensation are met if the elements of the damage (eg, fault, damage and causative relationship between the fault and the damage) exist. Nevertheless, the assessment of the compensation value will be subject to other factors, such as the action of the injured party that participated in the damage or the injured party's negligence in avoiding increasing the damage.

Liability to third parties

Where a contractor constructs a building that will be sold or leased to a third party, does the contractor bear any potential responsibility to the third party? May the third party pursue a claim against the contractor despite the lack of contractual privity?

Under the Iraqi legal system, there is what is called the 10-year liability of the engineer and contractor. Article (870) paragraphs (3.1) of the Iraqi Civil Code states that: 

 

The architect and contractor shall guarantee what happens within 10 years of total or partial demolition of the buildings they constructed or what they have erected from other fixed installations even if the demolition was caused by a defect in the land itself or the employer has authorised the erection of the defective installations unless the contracting parties may want these facilities to remain for less than 10 years, and the period of these 10 years begins from the time the work is completed and delivered, and every condition intended to exempt or limit this guarantee is void.

The warranty stipulated in Paragraph (1) of this Article includes all defects in buildings and installations that may threaten the durability and safety of the building.

 

Article (871) of the Iraqi Civil Code stipulates that:

 

if the architect confines himself to designing the design without being tasked with supervising the implementation, he shall be responsible for the defects that came from the design without defects that are more likely to be executed. He shall be held accountable except for faults that occur in the implementation, without the defects that come from error or lack of foresight in the design development’.

 

If both the architect and the contractor are responsible for the defect in the work, they should be jointly liable.

 

Personal scope of decennial liability

Article (8) of the bylaw of the Engineers Syndicate defines consultant engineer as: 

 

anyone who has been practising engineering at the rank of a licensed engineer for five years, and he may then assume responsibility for engineering projects, planning and coordinating the work of specialists in the various engineering fields therein without specifying his specialization.

 

According to the previous definition, a consulting engineer is a specialised person with extraordinary qualities distinct from any other engineer. This engineer must fulfil the conditions required by law and the instructions regarding whoever is classified as a consultant engineer and is registered in the Engineers Syndicate in this capacity, as well as the contractor who carries out the works, so he or she must register according to the instructions for registration and classification of Iraqi contractors No. 1 for 2005, which define the contractor as a natural person who practices contracting work and holds the identity of registration and classification of Iraqi contractors. As for the contracting company, this is a company established under the Companies Law No. 21 of 1997 and engages in contracting business according to its activity, and has the identity of registration and classification of contractors. Note that the engineer guarantees the defect or demolition of the building, even if the employer has permitted the construction of such defective installations because he or she is obligated to resist the wrong desires of the employer, which stems from his or her commitment to sharing awareness to others on professional practice.

 

The contractual liability of the engineer and contractor

It is evident in the field of contractual liability that if there is a valid contract with the parties to the consultant engineer and the contractor on the one hand and the injured project owner, the damage results from a breach of the contractual obligations. As for the default responsibility or liability in tort towards other parties not in contract with the engineer or the contractor, the liability of the consulting engineer and the contractor is established in every case in which the engineer and the contractor inflict harm to others (third parties). Such liability is subject to the general rules of tort liability of the necessity of an error on the part of the consultant engineer or contractor, damage to others and a causal relationship between the error and the damage.

Insurance

To what extent do available insurance products afford a contractor coverage for: damage to the property of third parties; injury to workers or third parties; delay damages; and damages due to environmental hazards? Does the local law limit contractors’ liability for damages?

There are two sides to this question. The first is the liability of the contractor, which is to be established based on either contractual liability or tort liability, which would be available to third parties to claim compensation equal to damage or injuries that they suffer from the contractor's default or wrongdoing, although they have no contractual arrangement in place with that contractor. The second part of the answer concerns the insurance coverage for contractual or in-tort liability. Under the Iraqi legal system, insurance is a contract and may cover any form of liability that the contractor may request, subject to each insurance company's field of activity or services that they offer, knowing that several local insurance companies provide comprehensive insurance and others provide reinsurance services locally or abroad as they represent international insurance companies providing coverage of different kinds to companies doing business in Iraq.

Iraqi law does not provide for the limits of insurance coverages for damages to the properties of third parties, delay damages and damages due to environmental hazards and also does not provide for the limitation of the contractor's liability for such damages; the matter is subject to the contract to be concluded with the insurance company and, of course, the verification of financial capability of that insurance company.

Damages resulting from injury to workers are subject to the provisions of the Pensions and Social Security Law No. 39 of 1971. This law, along with the Iraqi Labour Law, both provides specific legal requirements and governs the employers' liabilities towards their employees in case the latter suffer from a work injury or incident, whether minor or severe, or even if it results in partial or total disability or death. There is no legal stipulation concerning financial compensation for the injured employees, but pension payments are available as well as health coverage that the employee may benefit from; this is the mandatory coverage available to employees. However, employers are also entitled to offer voluntarily (by agreement) private insurance coverage to their employees, often to expatriate employees, aside from the governmental coverage provided under the foregoing laws, for the latter only constitute essential benefits.

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19 May 2021