UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for May 18, 2010

Contractor’s Liability Under UAE Construction Law versus FIDIC 1999 Red Book Contract

Article 878 of The Civil Transactions Law, Federal Law No. 5 of 1985, “The Civil Transactions Law” states:

“The contractor shall be liable to bear any damage or loss resulting from his act or design, whether or not by way of trespass or default.  However, the liability for damages shall not be invoked if this results from an unavoidable accident.”

Article 880 of the Civil Transactions Law states:

  1. If a job contract is for construction of buildings or other fixed installation designed by an architect and executed by the contractor under his (architect’s) supervision, they shall be JOINTLY liable to indemnify the client for any total or partial dilapidation that occurs, within ten years, in the buildings or installations constructed or erected by them, and for any defect that threatens the strength and safety of the structure if no longer period is fixed in the contract, unless the two contracting parties want the installation to survive for a period of less than ten years.
  2. The liability for said indemnity shall remain even if the fault or dilapidation arises from a defect in the land itself, or if the client agrees to the construction of the defective buildings or installations.
  3. The ten years period shall start from the delivery of the works.

 

Under UAE law, the contractor is subject to unlimited liability for major defects affecting the stability and safety of a structure.  However, the contractor may be exempted from defects which are the result of acts which the contractor could not have prevented.   If the execution of the design was supervised by the architect, than the contractor and architect may be jointly liable for major defects under UAE law, depending on how the contract is drafted.  Contractors and architects cannot contract out of their liability.  However, architects can limit the scope of their liability to drawing and design errors under Article 881 of the Civil Transactions Law as long as they only design and do not supervise the implementation of the design. 

Article 882 of the Civil Transactions Law states:

“Every condition which tends to exempt the contractor or the architect from his or her liability for damages or to minimize such liability shall be void.”

However, the way around this for the contractor is to specify liquidated damages in the event of delay or defect due to the contractor.  For example, in the construction contract, the contractor could state that the maximum amount of damages the contractor would have to pay the employer would be 10% of the contract price in the event of a major defect which affected the stability of the structure or delay.  In regards to minor defects which do not affect the stability of the structure, it is possible to limit the contractor’s liability.  The employer can request an irrevocable bank guarantee from the contractor for the liquidated damages amount. 

In the FIDIC contract, damages for delay can be in the form of liquidated damages, however, defects liability remains unlimited.  Furthermore, under the FIDIC contract, the contractor is required to provide a performance guarantee to the employer and it has to be valid and enforceable until the contractor has executed and completed the works and has remedied any defects.  In fact, the contractor is obligated to extend the validity of the performance guarantee until the works have been completed and any defects have been remedied.  In addition, the FIDIC Contract clearly states the procedure for employers to make claims against the performance guarantee in contrast to the UAE law.  It may be useful to use FIDIC provisions such as these to fill in the gaps of the UAE law, however, with the knowledge that UAE law supersedes the FIDIC provisions and it may be unpredictable how the UAE courts would judge such a matter.

For example, in Clause 4.2 of the FIDIC Contract, Performance Security, it states:

“The Employer shall not make a claim under the Performance Security except for amounts to which the Employer is entitled under the Contract in the event of:

a.)  failure by the Contractor to extend the validity of the Performance Security as described in the preceding paragraph, in which event the Employer may claim the full amount of the Performance Security;

b.)  failure by the Contractor to pay the Employer an amount due, as either agreed by the Contractor or determined under Sub-Clause 2.5 [Employer’s Claims] or Clause 20 [Claims, Disputes and Arbitration] within 42 days after this agreement or determination,

c.)   failure by the Contractor to remedy a default within 42 days after receiving the Employer’s notice requiring the default to be remedied, or

d.)  circumstances which entitle the Employer to termination under Sub-Clause 15.2 [Termination by Employer] irrespective of whether notice of termination has been given.

The Employer shall indemnify and hold the Contractor harmless against and from all damages, losses and expenses (including legal fees and expenses) resulting from a claim under the Performance Security to the extent to which the Employer was not entitled to make the claim.  The Employer shall return the Performance Security to the Contractor within 21 days after receiving a copy of the Performance Certificate.”

Liquidated damages in construction contracts may be subject to adjustment in the UAE courts if the judge decides that the damages amount does not fairly reflect the losses incurred by the employer.  Thus, it is best to state a detailed liquidated damages clause explaining the intentions of the parties and potential liabilities which both parties foresee in order for the provision to be upheld in the UAE courts. 

Contrast to FIDIC 1999 Redbook Contract (“FIDIC Contract”):

Article 11.1, Completion of Outstanding Work and Remedying Defects, of the FIDIC Contract states:

“In order that the Works and Contractor’s Documents and each Section shall be in the condition required by the Contract (fair wear and tear excepted) by the expiry date of the relevant Defects Notification Period or as soon as practicable thereafter, the Contractor shall:

  1. complete any work which is outstanding on the date stated in a Taking-Over Certificate, within such reasonable time as is instructed by the Engineer, and
  2. execute all work required to remedy defects or damage, as may be notified by (or on behalf of) the Employer on or before the expiry date of the Defects Notification Period for the Works or Section (as the case may be).  If a defect appears or damage occurs, the Contractor shall be notified accordingly, by (or on behalf of) the Employer.”

 

Clause 11.2, Cost of Remedying Defects, of the FIDIC Contract states:

“All work referred to in sub – paragraph b of sub-Clause 11.1 (Completion of Outstanding Work and Remedying Defects) shall be executed at the risk and cost of the Contractor, if and to the extent that the work is attributable to:

  1. any design for which the Contractor is responsible,
  2. Plant, Materials or workmanship not being in accordance with the Contract,
  3. or failure by the Contractor to comply with any other obligation.

 

If and to the extent that such work is attributable to any other cause, the Contractor shall be notified promptly by (or on behalf of) the Employer and Sub-Clause 13.3 (Variation Procedure) shall apply.”

Clause 11.10, Unfulfilled Obligations, of the FIDIC Contract states:

“After the Performance Certificate has been issued, each Party shall remain liable for the fulfillment of any obligation which remains unperformed at that time.  For the purposes of determining the nature and extent of unperformed obligations, the Contract shall be deemed to remain in force.”

Contractor’s liability under UAE law and the FIDIC Contract is relatively equivalent to each other.  The FIDIC Contract contains more detailed procedure in terms of notification of defects  and the scope of liability of the contractor is wider under FIDIC than under UAE law as the contractor is liable for:

  1. “any design for which the Contractor is responsible,
  2. Plant, Materials or workmanship not being in accordance with the Contract,
  3. or failure by the Contractor to comply with any other obligation.”

 

Furthermore, the FIDIC Contract in Clause 11.4 goes into more detail than UAE law in terms of the contractor’s risk and employer’s rights if the Contractor fails to rectify the defect. 

Clause 11.4, Failure to Remedy Defects, of the FIDIC Contract states:

“If the Contractor fails to remedy any defect or damage within a reasonable time, a date may be fixed by (or on behalf of) the Employer on or by which the defect or damage is to be remedied.  The Contractor shall be given reasonable notice of this date. 

If the Contractor fails to remedy the defect or damage by this notified date and this remedial work was to be executed at the cost of the Contractor under Sub-Clause 11.2 (cost of remedying defects), the Employer may (at his or her option):

  1. Carry out the work himself or by others, in a reasonable manner and at the Contractor’s cost, but the Contractor shall have no responsibility for this work; and the Contractor shall subject to Sub-Clause 2.5 (Employer’s Claims) pay to the Employer the costs reasonably incurred by the Employer in remedying the defect or damage;
  2. Require the Engineer to agree or determine a reasonable reduction in the Contract Price in accordance with Sub-Clause 3.5 (Determinations); or benefit of the Works or any major part of the Works, terminate the Contract as a whole, or in respect of such major part which cannot be put to the intended use. Without prejudice to any other rights, under the Contract or otherwise, the Employer shall then be entitled to recover all sums paid for the Works or for such part (as the case may be), plus financing costs and the cost of dismantling the same, clearing the Site and returning Plant and Materials to the Contractor.”

 

The FIDIC Contract provides a clause for liquidated damages in the form of delay damages.

Clause 8.7 of the FIDIC Contract, Delay Damages, states:

“If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to Sub-Clause 2.5 [Employer’s Claims] pay delay damages to the Employer for this default.  These delay damages shall be the sum stated in the Appendix to Tender, which shall be paid for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking-Over Certificate.  However, the total amount due under this Sub-Clause shall not exceed the maximum amount of delay damages (if any) stated in the Appendix to Tender.

These delay damages shall be the only damages due from the Contractor for such default, other than in the event of termination under Sub-Clause 15.2 [Termination by Employer] prior to completion of the Works.  These damages shall not relieve the Contractor from his obligation to complete the Works, or from any other duties, obligations or responsibilities which he may have under the Contract.”

However, this clause applies to delay and not defects liability.  In regards to defects liability under FIDIC, the contractor is subject to Section 11 of the FIDIC Contract, which some of the provisions are mentioned herein and are not subject to liquidated damages.

So you might be asking yourself ‘where does the employer’s liability lie?”

The FIDIC Contract is obviously lopsided in the employer’s favor. 

Clause 14.14 of the FIDIC Contract, Cessation of Employer’s Liability, states:

“The Employer shall not be liable to the Contractor for any matter or thing under or in connection with the Contract or execution of the Works, except to the extent that the Contractor shall have included an amount expressly for it:

a.)  In the Final Statement and also;

b.)  except for matters arising after the Taking Over Certificate for the Works in the Statement at completion described in Sub-Clause 14.10 [Statement of Completion].

However, this Sub-Clause shall not limit the Employer’s liability under his indemnification obligations, or the Employer’s liability in case of fraud, deliberate default, or reckless misconduct by the Employer.”

Clause 15.5 of the FIDIC Contract, Employer’s Entitlement to Termination, states:  

“The Employer shall be entitled to terminate the Contract at any time for the Employer’s convenience, by giving notice of such termination to the Contractor.  The termination shall take effect 28 days after the later of the dates on which the Contractor receives this notice or the Employer returns the Performance Security.  The Employer shall not terminate the Contract under this Sub-Clause in order to execute the Works himself or to arrange for the Works to be executed by another contractor.

After this termination, the Contractor shall proceed in accordance with Sub-Clause 16.3 [Cessation of Work and Removal of Contractor’s Equipment] and shall be paid in accordance with Sub-Clause 19.6 [Optional Termination, Payment and Release].”

Clause 17.2 of the FIDIC Contract, Contractor’s Care of the Works, states:

“The Contractor shall take full responsibility for the care of the Works and Goods from the Commencement Date until the Taking-Over Certificate is issued (or is deemed to be issued under Sub-Clause 10.1 [Taking Over of the Works and Sections] for the Works, when responsibility for the care of the Works shall pass to the Employer.  If a Taking-Over Certificate is issued (or is deemed to be issued) for any Section or part of the Works, responsibility for the care of the Section or part shall then pass to the Employer.

After responsibility has accordingly passed to the Employer, the Contractor shall take responsibility for the care of any work which is outstanding on the date stated in a Taking-Over Certificate, until this outstanding work has been completed.

If any loss or damage happens to the Works, Goods or Contractor’s Documents during the period when the Contractor is responsible for their care, from any cause not listed in Sub-Clause 17.3 [Employer’s Risks], the Contractor shall rectify the loss or damage at the Contractor’s risk and cost, so that the Works, Goods and Contractor’s Documents conform with the Contract. 

The Contractor shall be liable for any loss or damage caused by any actions performed by the Contractor after a Taking Over Certificate has been issued.  The Contractor shall also be liable for any loss or damage which occurs after a Taking Over Certificate has been issued and which arose from a previous event for which the Contractor was liable.”

Therefore, not only does the contractor bear the brunt of liability from commencement of works until the taking over certificate is issued under FIDIC, however, the employer seems to have free reign to terminate the contract at anytime for almost any reason and make claims against the performance guarantee.  The only place contractor’s seem to be protected is in the delay damages or liquidated damages for delay provision.  However, the door is wide open for defect liability and liability for care for the works from the commencement of the works to the issuance of the taking over certificate.  However, the contractor still seems to remain liable even after the taking over certificates is issued.

“The Contractor shall be liable for any loss or damage caused by any actions performed by the Contractor after a Taking Over Certificate has been issued.  The Contractor shall also be liable for any loss or damage which occurs after a Taking Over Certificate has been issued and which arose from a previous event for which the Contractor was liable.”

The full extent of the disproportional liability of the Contractor is explicitly detailed in the FIDIC Contract while the architect and employer seem to be exposed to very low levels of liability.  The UAE law attempts to draw a balance between the liability of the contractor and the architect, however, still underexposes the employer to liability.  Why is it that the most powerful always get off scot free?

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance