What You Need To Know and Why?
The private sector in the UAE and more recently the public sector in Abu Dhabi, have adopted FIDIC or at least a hybrid version of FIDIC for government use. This was done in part to reduce the risk of international contracting, but more importantly, to standardise terms of engagement to reduce uncertainty caused by the application and interplay of Federal Laws and the various Laws of the Emirates, in so far as they are applicable to construction contracts.
Given the importance of the FIDIC contracts, it is surprising there has been little commentary in the local media on the FIDIC 1999 Red Book form of building contract. We hope in part two of this two part series to redress this situation by providing a practical overview of some key provisions of the 1999 Red Book, following on from part 1 of this series that dealt with the rise of FIDIC and its recent adoption in Abu Dhabi.
The concept of General Risks
The concept of forseeability as a contractual term is now definedin the 1999 Red Book Contract. Subject to an express term to the contrary, risks that are fore see able are borne by the Contractor and in contrast those that are not foreseeable are borne by the Employer. When negotiating from either a Contractor or an Employers' perspective particular care should be taken to not extend or exclude risks of this kind. General risk provisions should be read in conjunction with any relevant insurance policy to confirm their applicability to those risks to avoid situations whereby you have agreed to an extended liability which is excluded from your insurance cover, and hence leaves a gap in your contractual protection.
Employer's Finances
An Employer is obliged to provide information (on request) to the Contractor that it is able to meet its payment obligations and to inform the Contractor of any changes in its financialcircumstances.
Failure to meet its obligations will entitle the Contractor to either suspend the works or reduce the rate of work. The Employer should be prepared to provide such information on request and accordingly ensure that it is readily available before entering the contract to prevent any claim for delay by the Contractor. As this article only covers the 1999 Red Book, the right or lack thereof to suspend under UAE law, is not discussed.
Payment
The Employer now has 56 days (as opposed to 28 days) to settle payments due to the Contractor following receipt by the project Engineer of any interim invoice for payment submitted by the Contractor. The fact that the Employer now has 56 days to make payment makes the provision in respect of the Employer's financialposition(theparagraphabove)more significantgiventheContractorworks an additional 28 days without payment of an interim invoice being due.
Notices and Time Limits
Strict time limits in respect of submitting notices are now imposed. Failure to comply with those time limits has the effect of discharging the recipient of the notice from liability pursuant to the subject matter of the notice. Examples include a Contractor's notice of claim or an Employer's notice of commencing the works. It is recommended that a project site diary be kept which should also contain (for ease of reference), the time limitations relevant to a project.
Performance Security
The 1999 Red Book Contract now includes as part of its forms of security an "on-demand" bond. The nature of this document is similar to a guarantee whereby an agreed sum is payable upon written demand. The 'on demand bond' is not new in construction contracts generally, however the recognition of this kind of bond by FIDIC adds a further measure of security to the Employer and a further obligation on the Contractor to be careful when negotiating the basis that the Employer becomes entitled to claim on such a Bond with particular reference to the grounds of the claim and the procedure to be complied with when making a claim.
Engineer's role
The Engineer shall be deemed by the parties to be acting for the Employer unless there are any express provisions to the contrary. The Engineer no longer needs to act impartially and accordingly there are mechanisms which deal with the independent resolution of any disputes during the contract period. This is a major shift from the 1987 Red Book. However in reality, the Engineer was always seen to favour the Employer which paid the Engineer's fees and was generally responsible for engaging the services of the Engineer. This shift in recognition of the role of the Engineer adds weight to the importance of the dispute resolution mechanism.
Ground Risks
Soil and ground conditions generally contribute to a large portion of claims for extensions or variations resulting from risks associated with ground conditions, either at the tender stage or during project ground works i.e. data The Red Book imposes an obligation on the Employer to provide the Contractor with all ground and environmental related information to carry out the works but the Contractor is ultimately responsible for interpreting such information.
The Engineer in deciding on applications for variations or extensions can now decide whether ground conditions affecting the works were favourable or detrimental to the Contractor in carrying out the works. Despite this almost neutral position in terms of site condition, neither a Contractor nor Employer should ignore any obligation which may have been adopted unsuspectingly during a tender process as part of an acceptance by the Employer or as part of an offer by the Contractor. An Employer or Contractor need to take reasonable steps to ensure they properly interpret and understand their respective obligations at the tender stage. Accordingly, the Employer should ensure it obtains proper legal advice in carefully reviewing the tender documents to ensure there are no couched or hidden terms which may have the effect of manifesting or overriding contractual terms.
Employer's Risks
Where due to the Employer's fault the Contractor enduces delays to the works or additional cost, the Contractor is only entitled to recover costs except in the circumstances where the works are designed by the Employer in which case the Contractor is also entitled to its reasonable profit.Toavoidanydoubtas to the amount, the Contractor and Employer can seek, with the assistance of the Employer's Consultant, to pre-estimate an amount of the Contractor's potential entitlement in respect of the Employer's risk and incorporate these amounts into the particular conditions of contract to narrow the ambit of any potential dispute.
Limitation of Contractor's Liability
The Contractor's total liability to the Employer under the Contract is limited in financial terms based on a sum to be inserted in the Contract. The Contractor should always be conscious of the limitation and ensure that the financialcap falls within the scope and limit of any insurance policy the Contractor is entitled to claim against or indemnities available from a Sub-contractor, under a sub-contract.
Claims
The Engineer is obliged to respond to notices submitted by the Contractor within a fixed period in respect of extensions of time giving detailed explanations regarding any decisions reached.
Dispute Resolution
The Dispute Adjudication Board is appointed from the date stated in the Contract or provides the option of reverting to the role of the Engineer to perform a dispute resolution function. It is not only important to ensure that you appropriately define the rules that govern the Dispute Adjudication process but also the jurisdiction to allow any enforcement of an arbitral award. Parties to any contract may create unnecessary hurdles in agreeing to local arbitral rules, for example, however identifying a foreign jurisdiction to enforce an award. This could lead to unnecessary expense and detract from the effectiveness of the process.
Conclusion
The FIDIC 1999 Redbook is a welcomed addition to the suite of FIDIC contracts in that it is more user friendly and generally provides greater clarity than its 4th Edition.
Be conscious of any pre-contractual obligations you may have entered particularly during the tender process. Define as many pre-estimated amounts,rights and liabilities as possible in the particular conditions for the avoidance of doubt and to reduce the risks associated with delays or variations.
The reader should appreciate this article is not definitive or comprehensive in scope and is intended to be used as guidance only. Accordingly legal advice should be sought regarding the choice of FIDIC contracts and more importantly the applicability of their provisions under UAE law, to suit the requirements of your project.
By Edward Sunna
© Al Tamimi & Company 2007
