JOANNE EMERSON TAQI* and JAMES KAY* explore differing positions of the common and local laws in construction agreements.
MOST of the construction agreements in the Middle East are based on international standard form agreements which are used on projects worldwide, for example the Fidic (Federation Internationale Des Ingenieurs-Conseils) suite of agreements. Even if such standard form agreements are not used, all construction agreements, regardless of their jurisdiction, invariably adopt similar structures and address similar issues.
While it is still common in the Middle East for construction agreements to be governed by English law, many construction agreements are governed by local (civil) law, particularly on government-sponsored projects.
Many international contractors and construction professionals working in the Middle East originate from (common law) jurisdictions such as India, Australia, the UK and South Africa. While these companies and professionals are usually immediately familiar with the construction agreements used in the Middle East, problems can arise when these companies and professionals seek to apply common law principles to the interpretation of standard construction issues.
This article identifies four such issues and explores how the common (with particular reference to English law) and local (civil) law positions differ.
Delay liquidated damages
Almost every construction contract will include a right for the employer to claim delay liquidated damages in the event of culpable delay on the part of the contractor. Under an English law-governed construction agreement, parties are free to commercially agree on rates of delay liquidated damages and the courts will enforce whatever is agreed, provided it represents a genuine pre-estimate of the loss suffered. However, where the rate of delay liquidated damages bears no relation to the loss that could conceivably result from the delay (that is, if it is extravagant and unconscionable compared to the greatest loss that would have resulted from the breach), its purpose may be to penalise the contractor, rather than to compensate the employer for any loss suffered as a result of that breach. If a court finds that delay liquidated damages constitute a penalty, it will strike out the entire delay liquidated damages clause. Therefore, under an English law-governed construction agreement, certain additional drafting would be advisable in order to address the possibility of the delay liquidated damages clause being struck out (and the possibility of the employer being left with no contractual remedy in the event of delayed completion).
By contrast, under a civil law-governed construction agreement, if either party considers that the rate of delay liquidated damages does not accurately reflect the actual loss suffered by the employer, then a party may petition the court to either increase or decrease the rate and amount of delay liquidated damages so as to accurately reflect the actual loss suffered by the employer.
Under an English law-governed construction agreement, one party cannot enforce the compliance of the other party with a contractual obligation when the first party has itself prevented such compliance. These events are known as ‘acts of prevention’ and the general rule in such circumstances is that the date for completion ceases to be applicable and the employer loses the right to claim delay liquidated damages – this is known as the ‘prevention principle’.
The civil law does not specifically recognise the ‘prevention principle’. Liquidated damages payable by the contractor for the delay are not automatically invalidated if the contractor is not granted an extension of time as a result of the delays caused by the employer. However, a party seeking to enforce a contractual completion date that it has, by its own actions, prevented from being achieved, may be in breach of its overriding obligation to act in ‘good faith’ (see below).
Limitation periods impose time limits within which a party must bring a claim, or give notice of a claim to the other party. Under an English law-governed construction agreement, limitation periods are imposed by statute – Limitation Act 1980. There are different limitation periods for different types of cause of action. For a normal contract claim, the limitation period is six years from the date the construction agreement was breached.
In the Middle East, limitation periods for breach of contract claims are generally longer – under UAE law, claims can be brought up to 15 years after the date the construction agreement was breached. Moreover, many jurisdictions in the Middle East – for example, the UAE and Bahrain – impose a lengthy 10-year liability period (a ‘decennial liability period’) on architects and contractors in relation to the total or partial collapse of a building or for a defect which threatens the stability of a building. Decennial liability can apply even if the construction agreement is governed by another law, that is English law.
The concept of ‘good faith’ is another key area of difference between civil law and common law principles. Under English law, there is no general duty of good faith in contract. Such a duty only arises in certain categories of contracts, for example insurance contracts, employment contracts and those where an express term to that effect is incorporated.
By contrast, most civil law jurisdictions impose a duty of good faith on contracting parties – often a duty of good faith is codified in statute. Under civil law-governed construction agreements, parties are expected to perform their obligations in accordance with good faith. Precisely how this impacts on a particular contract will be dependent on the facts and the specific terms of the contract. A party can face damages or orders for specific performance if it is deemed to be purposefully preventing the achievement of a construction completion date by not acting in “good faith”. A duty of ‘good faith’ has also been stated to extend not only to an obligation to do what is expressly contained in the contract but also to that which is relevant by virtue of law, custom and the nature of the transaction.
*Joanne Emerson Taqi is a partner and James Kay a trainee at Norton Rose Fulbright (Middle East) LLP Bahrain office.
Norton Rose Fulbright has had a presence in the Middle East for more than 30 years and has advised developers, lenders, and contractors in relation to the legal aspects of a wide variety of construction and infrastructure projects in the region.
Legal queries related to the construction sector can be addressed to Norton Rose Fulbright (Middle East) LLP through Gulf Construction magazine at firstname.lastname@example.org.