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UAE Construction Law Briefing:

What Next? A Legal Perspective on theFuture of Contracting in the UAE

29 November 2011 - Dubai30 November 2011 - Abu Dhabi

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Chau Ee Lee – +971 (0)4 709 6316 – [email protected] Amai – +971 (0)2 418 5725 – [email protected]

Tarek Abdalla – +971 (0)2 418 5733 – [email protected]

Vincent Rowan – +44 (0)20 3116 3772 – [email protected]

Gordon Bell - +44 (0)20 3116 3765 – [email protected]

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Arash Amai, Partner

Abu Dhabi

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Contract Procurement

Tendering

Due Diligence

Risk Assessment

Contracting

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Pre-qualification

It is important to start with the right group:

prior similar experience

local experience/contacts/content

reputation

sufficient resources/capacity (people, equipment, etc) location of resources

ability to assume and manage risk

financial strength/capacity

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Tendering

Bids will only be as good as the information

provided and requested in the RFP/ITT Scope of services/Specification (Employer’s

requirement)

Form of agreement/contract

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Tendering

Tender process

Bargaining position

Responsive bids

Due diligence

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Tender process

Consider complete picture – technical, commercial

and legal issues impact upon each other Question and answer opportunities are very

important tactically

Keep it simple and help tick the boxes

Bid to evaluation criteria

How responsive is responsive

Interview

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Bargaining Position

Many legal issues will be “grey”

The strength of technical and commercial positionmay dictate the flexibility on legal risk issues

Establishing a legal risk strategy early in the bidprocess will allow time to develop and implement

tactics what are the deal breakers?

what is the desired risk profile?

is it desirable to discuss concerns with theEmployer?

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Responsive Bids

Evaluation criteria – technical, commercial & legal

A compliant bid usually required – risk ofdisqualification

Consider tactically

amending schedule rather than “Conditions”

adding to the draft Contract rather than changingit

point out provisions that do not work or make nosense and invite Employer to amend

point out contract terms which are very (notmarginally) onerous

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Due Diligence

Employer’s team and experience

Payment

There are legal risks which no company should ever take. Forexample

fixed price for uncertain scope

dependence on third parties to contract

unlimited liability

disproportionate penalties e.g. no payment for work done

on termination ineffective legal enforcement

Establish a formal legal risk procedure to check

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Standard Forms of Contract

Problems

incorporation by reference – “the contract will be based on FIDIC”

selection of wrong form

services

construction only

supply only

design and build

EPC

project specific

usually need to work with other legal documents andcontracts which are not compatible with the standard form

choice of governing law can change intended meaning

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Contracting

Hurry up and slow down – avoiding letters ofcommencement

Conform the agreement/contract

Get all ancillary documentation signed, e.g. sub-consultant/sub-contractor warranties, funder’s directagreements

Get all requisite documentation e.g. advancepayment and performance bonds, insurance, etc.

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Contracting

Start the way you want to proceed

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Recurring Contractual IssuesTarek Abdalla, Partner

Abu Dhabi

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Introduction

Uncertainty regarding viability and/or funding

for project

Payment issues

Role and attitude of Engineer/Employer’sRepresentative

Suspension/Termination

Project delays and programming

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Payment/Funding Issues

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Payment/Funding

Uncertainty regarding viability and funding

for projects is biggest issue in this market

Manifested in delinquency of payment tocontractors and consultants

Manifested in suspensions and termination

Basis of most claims in this market

Strategies for dealing with these issues fromboth a Employer and Contractor perspective

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Payment

FIDIC sub-clause 2.4 requires the Employer following requestfrom the Contractor to submit:

“reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the contract price . . .”; and

“If the Employer intends to make any material change to his

financial arrangements, the Employer shall give notice to the Contractor with detailed particulars.”

Frequently deleted by Employers, e.g., Abu Dhabi standard

Failure to provide such evidence can be basis for suspension,

slow rate of progress and termination

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Payment

FIDIC Payment Mechanism set forth in

Article 14 of 1999 Red Book

Payment due upon certification byEngineer

Interest upon delayed payment

Refusal to certify or pay certified amounts

can be basis to reduce rate of work,suspend or terminate

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Payment

Variation and Claims

many provisions require notice to be givenboth for additional time or money

during disputes or funding issues,compliance with all provisions will likely bechallenged

time bar of Article 20.1 likely to be invoked

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Payment

Article 20.1

Applies to “any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract”

Requires notice to be given “as soon as reasonably practicable, and not later than 28 days after the Contractor

became aware, or should have become aware of, the event or circumstance.”

If notice not given within 28 days, then no extension of timeand no additional payment due

Requires contractor to keep contemporaneous records tosupport claim

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Payment

Article 20.1

commentators and Courts have found Article 20.1to be a condition precedent to a claim

commentators have observed that such noticesare in addition to the other requirements for

similar notices parties have attempted to argue that the

provisions of Article 20.1 are unenforceable as

matter of law

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Duties of Engineer/Employer’sRepresentative

The Engineer under FIDIC Red Book 1999 Edition

Sub-Clause 3.1– “The Employer shall appoint the Engineer who shall carry out the duties assigned to him in the Contract. . . . .

If the Engineer is required to obtain the approval of the

Employer before exercising a specified authority, the requirements shall be as stated in the Particular Conditions.

Any limitations on Engineer’s authority must be in ParticularConditions

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Duties of Engineer/Employer’sRepresentative

1999 Version of FIDIC Red Book Eliminated Requirement ofEngineer “Impartiality”

“Whenever carrying out duties or exercising authority,specified in or implied by the Contract, the Engineer shall be deemed to act for the Employer.”

Still required to be fair

“…the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

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Duties of Engineer and Employer’sRepresentative

Duty of Good Faith Under UAE Law

“The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of

good faith.

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Suspension and Termination

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Suspension

No express right to suspend works under UAE Civil Code

Article 247 provides some limited comfort as it states that aparty may refuse to continue its obligations (i.e. carrying outof the works) if the other party is not performing itsobligations (i.e. payment).

risk in relying solely on Article 247 in suspending work is the

employer could seek to terminate the contract on the basisof the contractor’s performance breach

Under FIDIC

Contractor and Employer’s Right to Suspend

Effect of Suspension

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Suspension

Engineer’s Right

engineer has right to suspend all or part ofwork

no obligation to give reason for suspension

contractor obligated to store and secure workagainst damage, loss and deterioration

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Suspension

Consequences of Engineer’s Suspension

contractor shall be entitled to Extension of Time

contractor shall be entitled to costs of suspension

preserving work

resumption of work profits on such costs

Contractor entitled to payment for plant andmaterial not delivered to site

if Suspension more that 28 days; and

if plant and material marked for employer

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Suspension

Effect of prolonged suspension

If greater than 84 days, contractor may request rightto proceed

If no authorization to proceed issued within 28 days

of request treat as omission for the part of works suspended;

or

treat as termination if suspension affects all ofworks

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Suspension

Contractor right to suspend/slow rate of

progress failure to certify payment

failure to provide evidence of financial

arrangements failure to make payment

Notice of at least 21 days

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Suspension

Contractor entitlement upon suspension

extension of Time

costs of suspension

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Termination

Employer’s right to terminate under FIDIC for

default failure to comply with a notice to correct

failure to provide or extend performance

security contractor fails to proceed with the work

contractor fails to remedy defective work

insolvency

bribery

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Termination

Employer’s Termination for Default

very high risk decision

nearly always the subject of dispute

must insure proper basis and properprocedure

significant damages if arbitrator or court

determine decision incorrect or notexecuted properly

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Termination

Termination for Convenience

employer has right to terminate for anyreason

under FIDIC, employer cannot terminateto perform the work himself or by others

this provision frequently amended

pay for work performed, commitmentsmade and cost of termination

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Termination

Termination by Contractor

failure to give financial assurances failure to issue a payment certificate

failure to make certified payment

“Employer substantially fails to perform his obligations under the Contract”

prolonged suspension

insolvency

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Termination

Termination by Contractor

can be a high-risk option

must be adequate contractual and legalbasis

must be done properly

potentially significant damages if basis

inadequate or procedures defective

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Important Strategic Consideration for Both Employer

and Contractor Employer—how to address changed economic

conditions and/or unsatisfactory performance

suspend part/all of work omission of work

terminate for convenience

terminate for default suspend or terminate by agreement

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Important strategic consideration for contractor

when dealing with non-payment and/or otheremployer default

when/how to request financial assurance

whether/when to suspend or slow rate of progress

what to suspend and/or slow rate of progress

whether/when to give notice of termination

basis for any notice of termination political overlay

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Obtain advice on strategic issues

employer--dealing with changed economicconditions

contractor--deciding upon non-payment or

other default strategy drafting notices

will be an important exhibit in any subsequent

challenge must comply with appropriate provisions or

could be deemed a breach

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Project Delays

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Effect of Delays

Pressure to keep schedules short

Likelihood of culpable overrun increases

For contractors and vendors, actual damages,extended labour material and equipment costs,inefficiency costs, extended overheads

For employers, liquidated damages, loss of profit,construction costs

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EOT Provisions

If completion is late for reasons other than owner’s

fault, then contractor is liable for damages, unless the delay is caused by an event for which an EOT

is available, or

time is “at large”

To achieve a more balanced risk allocation, mostcontracts allow the contractor an EOT for a range ofdelaying events

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EOT Clause - Example

FIDIC 1999 “Red Book”

i. a Variation . . . or other substantial change in the quantity of an item of work included in the Contract;

ii. a cause of delay giving an entitlement to extension of time under a Sub-Clause of these Conditions;

iii. exceptionally adverse climatic Conditions;

iv. Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions, or

v. any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s personnel, or

the Employer’s other contractor’s on the Site.

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Assessing the EOT Entitlement

Assessment made by the Engineer based on his knowledgeand information provided by contractor

“EOT must be fair and reasonable” – courts suggest contractadministrator should

apply the contract

make a logical analysis of the impact calculate the time taken up by the relevant events

If improperly or unfairly addressed then time can be deemed“at-large”

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Compare and contrast

Engineer making assessment during projectbefore the full effects of the delay realised (i.e.speculative), and

Court / Arbitrator after-the-fact with the benefit ofknowing what actually happened

Will affect the method of acceptable programmeanalysis

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Various approaches used by programming specialists

Theoretical methods global impact method

net impact method

as-planned impacted method as-planned but for method

as built but for method/the collapsed as-built

method/simulated as built method May be appropriate for an EOT claim during project

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Practical methods

time impact analysis as built v as planned

windows/snap shot or update method

Should be used when presenting claim to court orarbitrator whenever possible

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UAE Construction Law Briefing:What Next? A Legal Perspective on the

Future of Contracting in the UAE

Project Management – how can project management be better

designed to address, reduce and remove issues as they ariseduring construction?

Vince Rowan, Partner

London

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Context – Contract v Project Management

Contract Management and Project Management – possible

distinction between these two terms Recent experience in the Gulf – increasing emphasis on the

former type of management

Is the increased reliance on the contract the cause of or thesolution to claims and disputes?

Is this approach to managing projects here to stay and why?

What might be the practical consequences of this shift?

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Context – Contract v Project Management

How should owners, contractors and consultants prepare for

the next phase of projects in the Region? What are the potential challenges and implications for

Government and Government linked projects? Change inmind set and attitudes

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Context - Contract Management

Unless and until the Industry suffers from another phase of

“irrational over exuberance” (and the ability to do a deal andmove on), greater awareness of and reliance on the contractis here to stay

Why? Because the industry is now set up to require it so:

Traditional contracts (FIDIC et al) demand it

New contracts (ECC et al) demand it

Cost plus contracts demand it

Partnering contracts demand it

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Context - Contract Management

ADR demands it

Protocols (SCL/AACE et al) recommend it

Greater regulation and project oversight demands it

Lawyers, consultants, industry associations et al advise it

Increasingly the Gulf is no longer immune to these trendsand pressures, given it’s importance it will/should be at thecentre of how they evolve

The Gulf is at the heart of the projects industry and shouldembrace how projects can be best delivered

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Recent Experience in the Gulf

Have projects in the Gulf been awarded and built (and

suspended/terminated!) using sophisticated contracts butwithout embracing the attitudes and principles designed tounderpin them?

Situation best avoided, but if this has happened, how might

that also justify greater care and emphasis on contractmanagement?

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Recent Experience in the Gulf Further factors that only serve to emphasise the need for

change and better contract management:

design readiness – design review process/scope creep

role of Engineer/Certifier – short/late payment

pricing realism – impact on claims

schedule realism – time claims/penalties

project importance/viability – work/payment linkage

financial stability of owners/contractor – work/paymentlinkage

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Implications for Contract Management No honeymoon period, awareness from the start and remain

consistent

Achieve that fine balance between project and contractmanagement, never one without the other

Holistic approach – roles for technical, commercial, legalpersonnel, risks of hiring at the ‘body shop’

Scheduling – greater investment in and real use, not simplyprogramming knowledge

Greater need for innovation and consistency indocumentation – play to the (future) gallery

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Implications for Contract Management Greater sensitivity in project review and consequential

decisions to make changes both internally and with

contracting counterpart Often leading to a more pro-active stance on need for

contract change and amendment (supplementalagreements)

Systematic project close-out review and transfer ofknowledge to future projects

Realism – awareness and steps to ‘nudge’ contracts and

their management in your favour

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Implications for Contract Management Internationally the drift is to increasingly rely on and expect

better and more sophisticated contract management, in both

the short and long term: claims processes

ADR processes, (DAB, Adjudication etc.)

arbitration

Front loading of effort to secure resolution of claims/disputesand best prepare for dispute processes

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Use of ADR in the Gulf

Will there be a move towards greater use of ADR, such as(‘formal’) mediation and adjudication in the Gulf?

If so, by whom, by when and to what extent?

Will the Gulf maintain a different approach on ADR to theone eventually taken in e.g. Hong Kong, the UK, Singaporeand Australia?

Be careful for what you wish for – frustrations and abuses ofADR

To what extent will it matter, as far as contract management

is concerned, if the Gulf contracts and the attitudes towardstheir execution largely remain unchanged?

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Some Conclusions

Which ever way the Industry heads (status quo maintained,use of new contracts, use of ADR etc.) – better and real

contract management is required

Change in attitudes and project delivery will take time, andmay never happen if the Industry does not discuss and

challenge the current status quo Beyond poor project/contract selection, insufficient and/or

poor contract management has caused or contributed tocurrent climate of claims and disputes

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Gordon Bell, Partner

London

Di R l i /A bi i

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How well has the arbitration process servedthe industry?

Is there need for change?

Dispute Resolution/Arbitration

St t t f F t (1)

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Large construction projects can be thesource of disputes

In difficult economic times, the number ofdisputes increase and the sums involved getlarger

Contractors and consultants are not simplydealing with backlog of claims but trying to

get paid undisputed sums due

Statements of Fact (1)

St t t f F t (2)

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As a direct consequence of the financialcrisis, and the claims that followed for non

payment, contract terminations, projectdelays, bond calls, there has been a hugeincrease in the number of formal disputes in

the UAE, most of which have been referredto arbitration

Statements of Fact (2)

Q ti

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Has the arbitration process proven to be,using a construction term, “fit for purpose”?

Does the industry have confidence in thearbitration process and those who administerit?

Or are there changes that could be made toimprove the arbitration of construction

disputes in the UAE?

Questions

Claims v Disputes

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Claims v Disputes

Most construction contracts provide for claims underthe contract, for example:

variations time – including delay and disruption

money – sometimes linked to time but not always

Not all claims turn into disputes

Many employers will recognise a good claim and willbe willing to negotiate; almost all employers will

recognise a bad claim and reject it

Claims and Dispute Resolution

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Resolution by inattention or a withdrawal of theclaim

Resolution by payment or an extension of time

Resolution by a a third party

the Engineer

dispute boards

mediation

litigation

arbitration

Claims and Dispute Resolution

Alternative Dispute Resolution (ADR)

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Contract may require ADR – alternative to what?

Methods include:

senior managers

mediation/conciliation

expert determination

dispute review boards

dispute adjudication boards

Tiered system (but costly and time consuming)

Alternative Dispute Resolution (ADR)

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Alternative Dispute Resolution

Advantages

speed cost

convenience

confidentiality

Disadvantages

perceived weakness cost

timing

limitation periods

Litigation

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Default position

Court proceedings

Local courts

Appeal courts

Legal systems

Judges/experts

Cost

Time

Enforcing judgments

Litigation

Arbitration

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A simple definition:

A method of private , binding , enforceable dispute

resolution which may be chosen by parties as an alternative to litigation before national courts

The autonomy of the parties is crucial

For some industries, and for some companies,

arbitration has become the chosen method for theresolution of international disputes

Arbitration is the most common form of disputeresolution in the UAE for construction projects

Arbitration

Why Arbitrate?

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The perceived advantages of International Arbitration

speed

cost

confidentiality

neutrality

expertise/competence of the Tribunal

enforcement

Why Arbitrate?

Arbitration in the UAE

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Arbitration has long been established in the MiddleEast

Economic growth in the region

UAE’s liberal approach to foreign investment

Signatory to the New York Convention

What is (still) missing is clear legislation (UAE Codehas limited provisions)

New law “coming soon”

Even without it, (some) awards are being enforced

Arbitration in the UAE

What Rules Govern the Arbitration?

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The Choices

Ad Hoc (as opposed to institutional)

UNCITRAL

The Institutions

ICC (founded in Paris in 1923)

LCIA (founded in 1892 as the London Court of

Arbitration)

regional centres (Singapore, Switzerland, Stockholm,Beirut, Dubai etc)

DIAC/DIFC-LCIA/ADCCAC

DIAC has more than 500 open cases (20% construction)

What Rules Govern the Arbitration?

Choosing the Right Arbitrators

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Sole or multiple

Independence

Impartiality

Experience

as an arbitrator

in the relevant law

in the relevant subject matter

Languages

Availability

Choosing the Right Arbitrators

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Cost Effective Arbitration (1)

The biggest problem for arbitration – and the reasonit may not be fit for purpose is that it is no longer

cost effective

This is not a problem with the UAE alone; it is aglobal problem

ICC Report

Conferences/Seminars

Cost Effective Arbitration (2)

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Sole v multiple arbitrators

Pleadings

Document management

Experts

Factual witnesses

Closing submissions

Timing of awards

( )

Conclusions

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Fit for purpose?

Changes – law

Changes – institutions

Changes – courts

Changes – arbitrators

Changes – lawyers

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Questions?

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29 November 2011 - Dubai30 November 2011 - Abu Dhabi

ReedSmith - 2011

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