IMMUNISE AGAINST CONSTRUCTION DISPUTES: A GUIDE TO BETTER DISPUTE OUTCOMES
The construction industry in the MENA region is suffering from difficult times. The saturation of Coronavirus-related commentary distorts the reality that Coronavirus is simply exposing the real and pre-existing difficulties faced by the industry.
While Coronavirus did bring limited disruptions to supplies and labour, progress on most contracts largely continued unaffected and Coronavirus-related claims have fallen into the general mix of claims. The result is that most causes of disputes have and will remain the old favourites, being delay and variations (performance bonds are featuring also and we will be addressing this in our next webinar).
We expect the next 12-18 months to bring a significant increase in the number and magnitude of disputes in the construction sector. This article is intended as a road map to avoiding the litigation / arbitration train and securing better outcomes when major disputes cannot be avoided.
Approaching Final Account – A Typical Scenario
Let us assume a typical scenario – a mixed-use commercial/residential tower, with a FIDIC Red Book 1999 as the base contract document. It is 90% complete and the ‘Time for Completion’ has lapsed. The Contractor has claims for delay but has not made any formal delay submissions. There are variations both positive and negative, only a few have been recorded formally by the issue of VOs, but none have been assessed or determined. The Employer has failed to pay the last five interim payment certificates and the Contractor is financially squeezed to pay subcontractors and keep them on site.
The Contractor needs to be able to shore up its position as the Employer is threatening to claim delay damages and encash the performance bond.
On the other hand, the Employer is concerned over the quality of the work, given the Contractor’s financial troubles, the ability of the Contractor to complete, and not overpaying the Contractor should the interim certificates be paid and then its claims exceed the retention and performance bond held.
Back to Basics
First, some broad truisms about disputes:
- Don’t make vague and unsubstantiated claims.
- Don’t pull a gun unless you intend to shoot; making a threat without being sure of your grounds before proceeding can destroy a relationship, whether it is threatening suspension or encashing of the bond. Don’t become the boy who cried wolf.
- Only present legitimate (i.e. arguable) claims. Otherwise, you will be seen as ‘claims aggressive’ which is, again, a credibility issue.
- If the contract requires notices to be given to preserve your rights, give the notices. If you receive such notices, do not consider them as acts of aggression or hostility; they are only given because they are required.
- Developing a ‘best friends’ relationship on the other side is to be welcomed, but not at the expense of maintaining the project management principles discussed below.
- Don’t place too much weight on a relationship with a specific person on the other side; there is no guarantee they will be there at crunch time. And, even if they are there, as soon as other departments or external consultants become involved their hands may become tied.
- Giving unachievable assurances will inevitably cause the project to spiral toward dispute.
Contract is Key
Remember the starting point in the UAE is that the contract is your law.
Of course, there is also the backdrop of the Civil Code which affects how the law is applied and what outcomes will be from certain facts, in particular the obligation of good faith, especially in administering the contract. Operating successfully in such an environment relies on implementing and following good project management practices.
As always, the onus is on you to prove your claim. As such, it should be no surprise that the lack of proper records or accessible records is usually the biggest obstacle to mounting or defending a claim. The key is not to produce records for their own sake but for establishing cause and effect, i.e.:
- what effect did the event have on the direct or other work faces?
- was labour reallocated for that time?
- what mitigation measures were considered and taken?
Records must also be accessible. Keeping records on personal laptops and mobile phones is not good practice. Trying to retrieve WhatsApp conversations may be impossible.
After a project is completed, it is difficult to keep all the relevant staff or witnesses around. Good records assist with not having to rely on fading memories as to what a note meant or the impact of an event.
Importance of Notices
Notices are not just a matter of convenience, they are essential requirements of FIDIC clause 20. You may recall that, where a delay is concerned, the general sequence of notices is:
- Notice of delay within 28 days of the occurrence of the event;
- A fully detailed claim within 42 days of occurrence;
- A further 42 days for Engineer approval or disapproval (but not necessarily a final determination).
It may seem straightforward to comply with this, but it can be very onerous, especially where there is ongoing delay and it remains to be seen how much it will delay completion. Rarely do contractors or employers deal with this situation well.
Our advice is that contractors should keep sending the update letters but quality, not just quantity, is important. Where the delay is ongoing it must set out a range of things, namely:
- which activities cannot be commenced?
- how many days is that activity delayed by?
- what impact will this have on completion? The most recently updated program should be used to conduct at least a rudimentary analysis.
- what have you done to mitigate this? Have you dedicated resources to other work fronts? Have you demobilized any resources? Were you able to re-sequence in any way?
While you may arrive at a different delay duration after the event, when you can have a delay analysis done properly, it will be very difficult to challenge the underlying facts feeding into the analysis if the progress, and all steps taken, were documented as and when they were occurring.
At worst, it should narrow the scope of the dispute substantially and this will make a big difference on whether you can avoid an arbitration.
The Contractor’s View
A major difficulty is that there are no time frames prescribed for the Employer or the Engineer to act regarding determinations and assessments of variations and EOTs under the Red Book. The Contractor is still obligated to follow the instructions by the Engineer given under Sub-Clause 3.1 and 3.3. This leaves the Contractor to argue that the Engineer should have issued a variation or extension but failed to do so – a breach by the Employer.
With the project nearing completion, yet with numerous claims on the table, a Contractor can face a crossroads of sorts. Cash flow can be at its tightest point, yet throwing all resources towards completion is usually seen as the best solution. However, Contractors should always pause to contemplate – is there any reason to think the Employer will treat my claims more favourably post-completion? The answer is probably no.
A Contractor’s Next Steps
Naturally, a balance needs to be struck between wanting to be friendly and co-operative with the Employer on one hand and being professional and properly protecting your rights on the other.
The following are key:
- The program: Keep the program up to date and relevant. If there are changes, note why those changes have occurred and particularly any updates to linkages between activities.
- Progress reports: Ensure progress reports are completed, containing relevant details and not just simple fact recording; add analysis where it is needed on causes and consequences.
- Outstanding information: Where there is outstanding information, follow up with the Engineer with RFIs. The Contractor should also respond to the RFIs issued by the Engineer to avoid being blamed as the cause of the issue.
- Suspension: Regarding the unpaid certificates which will inevitably have arisen, the Contractor should consider what rights it may have to suspend or slow down the progress of the work.
The Red Book (Sub-Clause 16.1) contains a right for the Contractor to suspend if the Engineer fails to issue interim payment certificates properly. However, the Contractor needs to be confident he is on solid ground before taking such a step.
Consider also that the Employer bears the risk that the suspension is found to be lawful. Remember that there is no obligation to suspend if the Contractor does give the notice of intention, but credibility may be affected.
It should go without saying that the Contractor should take legal advice before going ahead with any suspension.
- Third-party review: Consider getting an independent third-party audit of the claim. This does not necessarily have to be a full-blown analysis including liability and quantum but it is worthwhile spending some time on testing the assumptions that have been made. Often, those too close to the trenches may form views based on the need and pressure of cost minimisation and without the benefit of a cool and unbiased head.
The Employer’s View
For the Employer, the following items are generally on the table:
- Claims for delay damages.
- Claims to come from the Contractor.
- Possible claims for negative variations and defect claims.
There may also be a concern over the ability of the Contractor to complete.
Employers should consider the following:
- Unlike Contractor claims, there is no strict time bar clause for making Employer claims, such as under Sub-Clause 20.1. Rather Employer claims are to be made as soon as is practicable under Sub-Clause 2.5.
- Despite the lack of a strict time bar, check that pre-conditions for claims have been met, e.g. the pre-condition under Sub-Clause 8.7 for levying delay damages being the Engineer’s determination under sub-clause 3.5.
- The unenforceability of delay damages (where they have liquidated sums under the Contract) does not remove the right to claim damages generally if liquidated sums are challenged under the Civil Code, so the Employer may need to be able to establish actual damages suffered due to the delay. Again, this highlights the need for proper records on the effects of delay.
- Whether to have all variations assessed and determined where a dispute is pending, particularly where the determination will be a rejection of the Contractor’s claim or the issue of a negative variation.
- Where there is defective work, ensure that the Engineer has issued the required notices to remedy that work. These are pre-conditions for the Employer’s right to recover or take-out. In our experience, these procedures are rarely followed properly.
As the project nears completion, in many cases the Contractor holds more leverage than he previously has. But this is not true in all cases. There can be a fine balance between cutting losses and opening exposure to hefty damages.
On the Employer side, consider:
- Low risk of damages claims if you terminate invalidly, given that there will probably be minimal, if any, profit left for the Contractor.
- Under UAE law, should the Contract be terminated before works are completed, the secondary obligation regarding payment of delay damages may fall away and be unenforceable.
- There is still the performance bond and retention.
- Administrative problems of procuring a new contractor to complete.
- DLP is wiped by termination.
- Approvals are still needed.
- Possibility of engaging subcontractors directly, which is not permitted under Red Book per se but can be done successfully if managed properly.
On the Contractor side, consider:
- Low additional risk if you suspend or terminate as a potential claim for the ‘additional cost to complete’ is comparatively minimal.
- Risk to performance bonds and retention.
Joint Non-Binding Opinion – Last Stop Before Arbitration?
Where there has been no compromise, negotiations will likely commence as a pre-cursor to arbitration. This will usually involve some members of senior management weighing in.
Typically, this will narrow down some of the issues, and hopefully, the major ones. But where there is no solution that both sides can live with, are there any options left to avoid a costly and drawn-out dispute?
If, as will commonly be the case, there is no DAB process, then consider proposing that the parties jointly appoint an independent expert for a non-binding opinion before negotiations. While we are not generally in favour of non-binding procedures, if they are limited in scope and time, they can help give the reality check that is needed. It is open for the parties to agree that neither of them can call that expert in any later arbitration.
Should I Move First to Request Arbitration?
This is a commonly asked question in circumstances where claims are or will be flowing in both directions.
Getting in first can bring considerable advantages. Why? Because the Claimant has better control of the timetable.
There is very little time to prepare a response, especially if you lead with a fully detailed Statement of Case, rather than a brief Request for Arbitration. Your opponent will also be under cost pressure from the outset. Their lawyers will have to get up to speed rapidly, which will come at a cost.
Naturally, though, the availability of this option is only as good as your preparation.
Having some form of independent expert analysis is ideal, particularly for EOT claims. If you do the reality check early on, you can avoid spending money developing a claim which had no merits to start with.
Last, it should be remembered that it is also possible to arbitrate while the project is ongoing, usually on a discrete matter. While this is often considered a nuclear option (or at least premature), there is nothing to stop it in principle. Again, it depends on the quality of your preparation and the dynamic of the relationship.
If you would like to discuss any dispute avoidance strategies or any live dispute issues, please contact Josh Kemp (firstname.lastname@example.org) or Scott Lambert (email@example.com).