Damage control

Failure to spot potential construction disputes early can be costly.

International law firm Al Tamimi & Co senior associates in construction & engineering practice Eric Teo and Dean O’Leary outline five common contractual issues.

01 The right to suspend works

Under 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 sus- pend works and the employer (through the engineer’s instruction) to require works to be suspended. Forexample,Sub-Clause40.1of 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 pay- ment 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 whether the party who suspended the works or initiated the suspension was right to do so and what are the reciprocal rights and reme- dies of the other party? Another common issue — in the absence of a contractual right to suspend works or failure to properly initiate relevant provisions — is there any provision under the UAE laws that could provide some form of relief or remedy? We often hear con- tractors complain that despite being instructed by the engineer to suspend the progress of the works (due to poor market conditions); the engineer would not grant an extension of time and costs as a result of the suspension.

02 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 pro- gressorphysicalstatusoftheworksindicate 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 the contractor is obliged to give effect to such an instruction and, if so, would the contractor be entitled to claim the addi- tional 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 inves- tigation of the historical events and a com- plex technical and factual analysis by delay analysts to ascertain the cause and effect of such delays.

It is crucial that these tasks are under- taken with the advice of the parties’ respec- tive lawyers.

03 Employing 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. Except under 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 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 con- tractor is badly behind schedule or has sus- pended its works due to non-payment? As mentioned above, there are limited situa- tions in which an employer can engage a third party to intervene without terminating the contract. One such situation is contem- plated 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 engi- neer. But what other situation allows the employer to engage a third party? Can the employer rely on certain provisions of the Civil Code to circumvent the restriction upon him in engaging a third party without terminating the contract?

04 Who is the “engineer”?

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 con- tracting 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 instruc- tions to the contractor to vary the works, issue payment certificates upon which the employer must make payment within a cer- tain 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 pro- ject will be designed and constructed free from any defects that may threaten the struc- tural integrity or safety of the building or structure. Furthermore, they are also profes- sionals 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 usu- ally 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 profes- sionals that an employer may employ on the project, e.g. various specialist designers, architects and engineers, supervising archi- tects 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 dele- gate 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 approv- als to the contractor is not named as the engi- neer 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.

05 “Back-to-back” or “pay-if- paid” payment provisions

These terms are notorious within the construc- tion 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 correspond- ing payment from its employer.

There are a number of jurisdictions (for example, the 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 disap- proves such practices and coupled with the principle of freedom of contract and the con- cept 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 uncertainty with these provisions is exacerbated by badly-drafted provisions, such as what is meant by “the sub- contract 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-contrac- tor 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 to 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 sec- tors 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, 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 demands from industry to deal with these complex issues. It will be interesting to see how local legal jurispru- dence will develop to resolve the issues that are now plaguing the industry.

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