The UAE construction sector is a continually developing market with complex transactions becoming increasingly prevalent. The evolution of the construction sector has highlighted the need for more robust construction contracts that deal with all the relevant risk issues for a project.
Presently, many companies in the UAE rely heavily on the use of standard form construction contracts (“SFCCs”) as a basis for their contractual obligations, as opposed to using bespoke construction contracts drafted for each project.
There are various types of SFCCs which have been developed by different entities in different regions. Some examples of SFCCs include the Fédération International des Ingénieurs-Conseils or International Federation of Consulting Engineers (“FIDIC”) construction contracts, the Joint Contractors Tribunal (“JCT”) construction contracts, the Australian Standards construction contracts and the list continues.
The FIDIC Red Book 1987 and 1999 editions (which are construct only contracts) are the most commonly used SFCCs in the UAE.
The FIDIC 1987 Red Book is a more employer friendly contract, whereas the newer FIDIC 1999 Red Book is a more balanced contract. As the 1987 edition is an employer friendly contract, it is still used by many companies in the UAE.
Design and build (“D&B”) contracts and engineer, procure and construct (“EPC”) contracts have traditionally been used sparingly in the UAE. However, with the increase in the number of experienced contractors in the region over the past few years and the wide variety of expertise that is now offered by construction contractors, D&B and EPC contracts are finding their way into the market.
SFCCs are very useful instruments for parties seeking to enter into a contract for the performance of construction work. They generally address a majority of the issues which should be considered when entering into a construction contract and are particularly useful where the works to be performed are relatively simple. There are a variety of advantages with using SFCCs, which include the following:
• The terms of SFCCs have an element of certainty to them as they have been tried and tested and many of the provisions have been the subject of litigation in various jurisdictions. Therefore, the parties can ascertain how certain clauses have been interpreted in the past and will generally have familiarity as to their meaning and intent.
• SFCCs are relatively quick to procure (assuming they are not heavily amended) and parties are generally willing to accept the clauses in SFCCs as they are regularly used in the industry.
• The use of SFCCs generally results in reduced legal costs as a party may choose to use a SFCC that has only minor amendments. Furthermore, it is quicker to amend a SFCC rather than draft a bespoke construction contract.
• SFCCs generally cover most of the issues which need to be considered when entering into relatively simple or common construction contracts. Therefore, the parties can be less concerned that key issues are not addressed or considered by the parties when entering into a contract.
Despite being widely used and tried and tested, SFCCs are not appropriate to use for all projects. Parties need to carefully consider the terms of the SFCC and assess whether such a contract is appropriate in the circumstances. Some of the inherent risks with the use of SFCCs include the following:
• SFCCs are generic documents that must be amended to reflect the actual intent of the parties. The key risk areas for each project must be considered and the SFCC should be amended accordingly. Parties often make the error of relying on unamended (or inadequately amended) SFCCs which will not always address the unique risk issues in a project and may result in disputes arising as the contract does not adequately allocate risk.
• SFCCs are not always amended correctly, which can lead to uncertainty when clauses are interpreted. For example, if a party is filling in the blank for interest to be paid on outstanding invoices, the mere insertion of a figure will not be appropriate. Care needs to be taken to specify whether interest is calculated yearly, monthly or daily. This is an example of a very simple error to make, but it is surprising how frequent these errors occur when SFCCs are utilised.
• When amending SFCCs it is important to take care to ensure that the amendments flow through the whole contract and that all related clauses are amended. It is frequently the case that a party will amend a clause, which also affects the operation/interpretation of another clause, which in turn causes an inconsistency in the contract and leads to confusion.
• Certain clauses in SFCCs may be inconsistent with the applicable local law. It is important that parties consider this issue carefully, otherwise the situation may arise where a party is relying on a right in a contract which is not enforceable in a particular jurisdiction. For example, the enforcement of termination for convenience clauses in the UAE is questionable and a party seeking to rely on this right may find that they have no entitlement to do so. The same applies with respect to the applicability of time bar clauses. Therefore, it is important to consider whether the terms of a SFCC are purporting to introduce legal concepts which do not fit within the bounds of the local law.
From the above it can be seen that there are both advantages and disadvantages with using SFCCs. The key is for parties to consider the convenience and cost effectiveness of SFCCs in light of the need to have a more tailored contract which specifically addresses all the pertinent risk issues. Furthermore it is particularly important to assess whether the provisions of the SFCC are consistent with the local laws which govern the contract.
Care needs to be taken when using SFCCs. In an attempt to cut legal costs many companies use SFCCs without appropriate legal advice. Consequently, a SFCC which may appear to be your friend at the outset may well end up being your foe in the long run.
By Sachin Kerur and George Varma