The reason why the use of letters of intent within the construction industry gives rise to such concern is because, despite the fact that they often look like a piece of official contractual documentation, the very nature of these letters is such that they can easily be perceived as merely a part of the negotiation which took place between the parties prior to the conclusion of a contract, rather than as a contract in their own right. A contractor may, therefore, commence works, believing that a letter of intent somehow guarantees a particular entitlement to payment, when, in fact, it provides no additional legal rights at all.

It might seem crazy for a contractor to expose its business to such a needless risk. However, the crux of the issue is that the risk is not ‘needless’. Construction contracts often contain a great deal of technical detail which can take time to finalize; yet neither contractor, nor employer, wants to wait around for every last calculation to be checked or specification to be agreed before they can commence with preparatory activities such as mobilization and material procurement. Indeed, it may seem to contractors trying to win work in the marketplace that lawyers are crazy for advising against entering into the letters of intent.

The fact that letters of intent present a ‘risk’ is not a problem in itself. Risk is an intrinsic part of all construction projects. Problems arise when there is no assessment or management of this risk. The questions set out below are some of the questions that a contractor might want to consider before commencing work on the basis of a letter of intent.

Is it really necessary?

Although letters of intent are often a necessity within the construction industry for reasons set out above, it is useful for contractors to look at the real reason why a letter of intent is being proposed. If the failure to conclude negotiations of the contract is down to a lack of diligence or commitment from one or both of the parties this is the issue that needs to be addressed. If a contract can be concluded in time for works to commence, it should be.

Does this letter actually provide my company with any legal rights at all?

A letter of intent needs to be a binding contract if it is going to provide a contractor with any rights in addition to those it would have had if it had just commenced work without it. It is beyond the scope of this blog to explore the various legal requirements for an enforceable contract in the UAE and in other GCC jurisdictions and any contractor considering entering into a letter of intent should take legal advice on these issues. However, the issue of intention to create legal relations is of central importance and care will have to be taken in the drafting of such a letter if it is to stand as a contract in its own right not simply as a non-binding record of the parties’ intentions during negotiations.

Is my company clear about its rights and obligations under this letter?

In practice many letters of intent do not tend to stipulate lengthy terms and conditions for the performance of the works being undertaken pursuant to them. This is usually because the parties intend to agree detailed termed and conditions as part of the contract. However, it is important that the letter of intent is sufficiently detailed to allow the contractor to understand the nature and scope of the work that it is being required to do, how it will be expected to perform this work (including any requirements in respect of the timescale of the works), what it will be paid for doing this work and how such payment will be made.

What happens if a contract is not concluded?

Ultimately a contractor that proceeds with a construction project without a detailed contract in place is in the same position as someone who is playing a card game where he is not sure of the rules. He might get lucky, but, ultimately, the chances of him losing are higher than they would otherwise have been.

A contractor may be prepared to take this risk while the contract is being negotiated. However, the risk that the contract will not be finalized and the contractor will never be certain of the rules of the game must be addressed by making provision within the letter of intent to allow both parties to terminate before the full scope of work on the project is completed.

Some letters of intent will stipulate an expiry date (and, if one does, in the vast majority of cases, the contractor should not work past it). Where there is no expiry date in the letter of intent and there is a genuine stalemate in contractual negotiations, then the contractor will have to make a judgment call between whether to cut his losses and terminate the letter of intent or risk suffering losses as a result of performing a contract where the rules of the game are unclear. However, where the contract has not been concluded simply because the contractor has been happy to continue to proceed on the basis of the letter of intent and has allowed the contractual negotiations to fall by the wayside, then this is an instance where the contractor is risking proving the doom-mongering lawyers right.

Co-authored by Rachel Larkin, a solicitor in Pinsent Masons’ Dubai office

Liquidated Damages in UK PPP transactions

In the UK, the general presumption is that a Project Company will not be liable for delay liquidated damages in the event that the service availability date (or “commercial operation date”) is not achieved by the relevant target service availability date (or “scheduled commercial operation date”). Indeed, English guidance suggests that delay liquidated damages should only be included in exceptional circumstances.

The main reasons for this are three fold:

First, English law prohibits the levying of penalties and liquidated damages must be a genuine pre-estimate of loss. In the majority of PPP projects it is difficult to envisage how a procuring authority will suffer any loss and, accordingly, how liquidated damages will be held to be anything other than a penalty. This is because the procuring authority is unlikely to have made any capital contribution or other payment during the construction phase and the fact that it will not be obliged to pay the service charge until the service availability date is actually achieved. Therefore it is unlikely that the loss that the procuring authority suffers as a result of any delay to commencement of the service will be greater than the service charge it will no longer be obliged to pay in respect of such delay.

Secondly, the way in which PPP projects are structured means that there is already a large incentive on the Project Company (and the Construction Sub-Contractor) to achieve the service availability date on or before the target service availability date. As mentioned above, the procuring authority will not start paying the service charge until the service availability date is achieved. However, the payment profile of senior debt (principal and interest) is likely to require repayment to start on, or soon after, the target service availability date. Where, as a result of delay, the service charge is not being paid to the Project Company on the date that it has to start making debt repayments then the Project Company has a funding gap. This funding gap is filled by the Project Company levying delay liquidated damages on the Construction Sub-Contractor under the Construction Sub-Contract. Accordingly, the Construction Sub-Contractor is incentivised to minimise delay through the operation of a delay liquidated damages mechanism even where no such mechanism exists in the Project Agreement.

Thirdly, best value for money is not likely to be achieved by including a delay liquidated damages mechanism in a Project Agreement. As we have already seen, a PPP Construction Sub-Contract is likely to include a delay liquidated damages mechanism even if the Project Agreement does not. The Construction Contractor will mitigate its exposure to such delay liquidated damages by both including a financial contingency in its price and a time contingency in its construction programme. Both such contingencies will be included in the Project Company’s service charge and construction programme. Should the procuring authority include a delay liquidated damages mechanism in the Project Agreement, then the Project Company will simply pass down in full such mechanism to the Construction Sub-Contractor in addition to the “debt service” liquidated damages that would have be included in any event. Obviously the effect of this is that the financial and time contingencies in the project would be significantly increased and this is unlikely to provide best value for money.

The common position in the Middle East

General market practice in the Middle East is almost entirely the opposite. The inclusion of substantial delay liquidated damages in PPP/BOT Project Agreements is common. Of course, this means that a full pass down of risk from the Project Company will require the Construction Sub-Contractor to assume both the Project Agreement delay liquidated damages and well as the “debt service” delay liquidated damages (referred to above). This is likely to create a significant daily liability for the Construction Sub-Contractor.
The reasons for such a differing approach could be down to the combination of a number of factors:

The law of most Middle Eastern countries does not prohibit penalties in the same way that English law does. Accordingly, there is less of an emphasis on whether the Project Agreement delay liquidated damages are a genuine pre-estimate of loss. However, note that under the Civil Code of many countries in the region, where the amount of compensation payable in respect of a breach has been fixed in advance by the contract (eg. delay liquidated damages) a party may apply to the court and request that such compensation be adjusted to reflect the actual loss suffered by the relevant party. In some jurisdictions that adjustment may be downwards only, in others it may be upwards or downwards. Whether the courts actually exercises that discretion in practice is a different matter and difficult to predict.

The majority of PPP / BOT projects tendered to date in the region are for process plants and not accommodation based projects. It may be that the price that the procuring authority would pay for the relevant off-take (eg. power or water) under the relevant purchase agreement is significantly less than the price that it is paying, or costs that it is incurring, for its current supply. In such circumstances it is possible to envisage that any delay in achieving the commercial operation date could cause the procuring authority to suffer a loss.

The procuring authorities in the region are not subject to the same obligations to achieve “best value” as their counterparts in the UK. Often, as is typical in the region, the emphasis is more on the speed of delivering the relevant asset than on achieving the absolute best value solution. To an extent, and certainly from a presentational perspective, it is possible to understand why this could lead to including delay liquidated damages in the Project Agreements.

Finally, there other cultural, commercial and structural factors. For example, whilst there have been a number of PPP / BOT projects in the region, some on a staggering scale, the market is still in its relative infancy and is a melting pot of different international contractors and advisors, each with a different idea of the “correct” way of doing things and all with a desire to do business in the region. Arguably, this leads both to the seeking of commercial positions that would not, necessarily, be sustainable in other markets as well as the willingness to accept commercial positions that may be severely resisted in the relevant home market. It remains to be seen whether an economic upturn might lead to a hardening of position on this and other points by the private sector.

Co-authored by Rob Graham, an associate in Pinsent Masons’ Dubai office

I had the good fortune to attend the Middle East Nuclear Energy Summit in Amman, Jordan last month. Jordan is arguably second only to the UAE in the race for peaceful nuclear energy. Indeed the Chairman of the Jordan Atomic Energy Commission told the conference of his country’s plan to become a net exporter of electricity, and to use their indigenous supply of uranium as part collateral to assist with the financing of new nuclear new build. There has been further progress in Jordan since the conference with the site selection team identifying suitable sites for a nuclear power plant, the inauguration of a waste facility for low and medium level waste and the award of a contract to build a 5MW research reactor.

Other countries in the region plan to follow suit: at the conference we heard from representatives from Bahrain and Yemen who are considering nuclear power. Separately the Kingdom of Saudia Arabia recently launched plans to consider the feasibility of nuclear power, and Qatar, Kuwait and Oman are reputed to be engaged in similar plans.

However it was clear from all the speakers that one of the big unresolved issues for many of them (and for some countries in the region this will be more critical than for others as there is a vast disparity in wealth), is securing the financing that will be necessary to pay for these very capital intensive projects. There was a good deal of debate on whether project financing, which has been successfully used in a number of countries in the region to finance significant power and water projects, could be the answer.

As the global nuclear renaissance marches on and the world becomes more familiar and relaxed about nuclear technology it seems likely that in due course there will be a nuclear power project that is project financed. For now though, risks that will concern lenders of project will be many and varied but are likely to include political risk, the reliability of the chosen technology and the reliability of the price to build it, the legal and regulatory frameworks including the robustness of the licensing regime and the nuclear liability regime, demand risk and so on. Arguably, many of the mitigants to these risks (eg robust licensing frameworks, de-politicised decision making, compliance with international conventions on third party nuclear liability) are more readily found in countries with experience of nuclear power and which are well immersed in the nuclear industry, rather than countries seeking to build their first nuclear power plant. Jordan may be an exception that proves this rule though as it has clearly evinced an intention to adopt a PPP model for delivery of its nuclear power ambitions. Indeed Abu Dhabi is also reputedly about to appoint a further set of financial advisers which suggests they again might be about to break new ground. Time will tell.

It must be the case though that not every Middle Eastern country claiming an interest in nuclear power will be successful. The reasons are well documented in the industry and the problems well rehearsed – there are serious shortages in the supply chain to meet the current and predicted global demand, there are insufficient people with the sufficient skills and experience to meet the current and predicted global demand, and perhaps even more obviously the economics don’t make sense: if most countries in the region have a nuclear power plant, to whom will they all export their electricity?

Safety and the Role of The Regulator

As anyone involved in the nuclear industry will testify, safety is paramount both in the inherent design characteristics of the technology itself and in the operating procedures adopted on site. For safety also to be seen to be paramount, the role of an independent oversight authority is of critical importance, as enshrined in the IAEA Convention on Nuclear Safety. Under the convention the regulator is required to implement and enforce a regulatory framework which sets out national safety requirements, a system of licensing for nuclear installations and a system of inspections and assessment of nuclear installations. Aspiring nuclear powered countries will need to set up such a regulatory body, and ensure its independence.

In this regard it is interesting to note that as well as setting up an independent regulator headed by an internationally recognised individual (the former Executive Director for Operations of the United States Nuclear Regulatory Commission), the UAE has also collected together an illustrious group of individuals to comprise an International Advisory Board to advise it on matters such as safety and security. As the UAE has recognised, an acceptance of peer review, openness and an absolute commitment to safety and security as well as the peaceful use of nuclear energy is essential in convincing existing nuclear countries to allow and encourage their contractors, reactor vendors and suppliers to share their technology and work on new nuclear new build projects in a country.

Liability for third party nuclear damage

The term third party nuclear damage means broadly, damage to property and people unconnected to the nuclear installation but caused by a nuclear incident – in contrast to conventional damage which is has no nuclear cause. It is extremely rare. Yet, it’s the big risk to the nuclear supply chain and the big issue for populations of nuclear powered countries or countries near to nuclear powered countries (nuclear damage doesn’t respect territorial boundaries). As such the international nuclear world has devised a way of addressing the risk and seeking to balance the needs of any victims of third party nuclear damage with ensuring that the nuclear industry can operate without fear of financial ruin. Essentially the big idea is to channel all the liability for third party nuclear damage to the operator of the nuclear installation where the nuclear incident occurred. This means all the victims know who to sue, the insurance industry knows who to insure, and the other parts of the supply chain only need to worry about (and insure) conventional liabilities. Of course it is more complicated than that and currently debates abound about the scope of damage covered and the limitations to the operator’s liability, but essentially the key is the channelisation of liability.

As you will have realised, channelisation is only any good if the principle is harmonised across the globe so that if damage does occur in the neighbouring country to the nuclear installation country, the victims in that neighbouring country should still be able to (and be obliged to) sue the operator. Different rules shouldn’t apply. Such an international harmonised regime was the goal behind the development of a number of international conventions which enshrine these ideals, known as the Paris convention and the Vienna convention, and then latterly the Convention on Supplementary Compensation for Nuclear Damage.

Unfortunately no such harmonised regime is in place. Over half the nuclear reactors worldwide are currently in countries which have not ratified any of these international conventions. While a number of these countries do have national laws which reflect the principle of channelisation they don’t and can’t address trans-boundary issues.

The UAE in its Policy Statement clearly recognises the need for the UAE to introduce a regime of nuclear liability which complies with these international conventions and also indicates an intention to conclude the Vienna convention. This would be a welcome development to those who seek a harmonised regime, and give new impetus to such efforts. It is to be hoped that the nuclear renaissance can lead to increased pressure on all nuclear powered countries to adhere to these principles as part of a globally harmonised regime.

Conclusion

In the manner in which it has addressed and has committed to address key legal issues for new nuclear new build, the UAE has set the bar high and it is to be hoped that other countries in the region will follow suit when developing their legal and regulatory framework for nuclear power plants in their countries. In this regard the author will be attending the Middle East Nuclear Energy Summit in Jordan next week at which representatives from Jordan, Saudia Arabia, Bahrain, Yemen and the Arabic Atomic Energy Agency will be speaking and hopes to learn of a similar approach being adopted.

Mediation is an alternative dispute resolution procedure that allows parties with a dispute to engage a neutral third party to facilitate communication between the parties, with the aim of resolving the dispute. As it is a voluntary and consensual process, parties must agree to mediate and are free to withdraw at anytime. Mediation is also non-binding and it may well not lead to a resolution of the dispute. However, if the parties do reach agreement on the dispute, they then record that agreement in writing and it then becomes enforceable in the usual way.

The pros

Mediation is inexpensive when compared with litigation and arbitration which are also far more time intensive, so there is a significant time and cost saving if the dispute is successfully resolved without reference to these more traditional dispute resolution methods It is also quicker: specifically in Dubai, arbitration can take up to two years and parties may face issues in relation to enforceability of arbitral awards in the local courts. Mediations usually last one or two days, although to ensure the greatest chance of success it is important that significant preparation is done in advance, and that perhaps a programme for the mediation is agreed, although flexibility on the day will be important.

Further, mediation, as with arbitration, should also be a confidential process. This is important so parties feel able to make concessions without fear of repurcussions. If everyone attends feeling that whatever they say may be used against them, then there will be little movement from entrenched positions. The confidentiality of proceedings and presence of an experienced mediator also allows a party to test out an argument and perhaps even get an opinion from the mediator as to its chances of success. This may make it more or less amenable to settlement.

Moreover mediation is often regarded as having a number of significant commercial benefits. More often than not, a contractor will wish to be seen as cooperative and will want to try and preserve, to the extent possible, a good relationship with its employer. As anyone who has been a party to litigation or arbitration will testify, it is very difficult to maintain even civil relations with the other side. Avoiding the loss of a business relationship is a benefit that surely cannot be overestimated in the market conditions facing contractors in Dubai and elsewhere

Culturally, mediation would seem to fit in Dubai and the Gulf where bargaining is an art form and where, in the construction industry, we see instinctive reluctance to take drastic action against an employer.

Cons

The most obvious down side with mediation is that neither party can force the other to use it, unlike litigation or abitration which once prescribed in a contract, must be adopted to resolve any disputes arising from that contract. However, the pros outlined above are in both parties interests and even if a party is convinced that right is on its side, it will still incur a degree of irrecoverable costs and considerable time expended if it brings or defends litigation or arbitration proceedings.

In addition, the increase in disputes in Dubai will inevitably lead to pressure on resources in the Dubai courts and the Dubai International Arbitration Centre, which may well lead to an increase in the time taken to litigate or arbitrate a dispute, thereby increasing the financial and human cost of these routes, which only benefits lawyers!

The current position

Dubai does have a mediation centre already for property disputes, which was established as a direct result of the high case load of the property court (only those of you living on another planet will not have heard about the downturn in the Dubai property market and the difficulties caused for investers and developers).

Within the construction industry, again, as has been covered extensively in the media, there has also been a considerable downturn resulting in projects being delayed or stalled (latest figures suggest over 300 stalled projects) and contractors and consultants are experiencing delays in payments and severe payment shortfalls. Only yesterday Lord Mandelson representing the British Government was in Dubai seeking to further the cause of British contractors and consultants still owed vast sums. Could this pressured situation be ripe for resolution of dispute by mediation?

It is probably important here to make a distinction between issues of non-payment and disputes about termination, defects etc. In the former case it is hard to see the benefit of mediation – the sum is owed, but the money is either not available or not being made available. Mediation will not advance the creditors position and a more definitive step is probably required. However, if a contractor does see some benefit in maintaining a business relationship with that employer, mediation may still have some value in allowing parties to consider more creative ways for the debt to be repaid.

Contrast issues of termination and defects where a mediation, if properly approached, may provide a genuine alternative to parties spending the next two years absorbed in and paying for resolution of such issues by litigation or arbitration.

Conclusion

Mediation is useful if there is a genuine dispute and/or relationship issues and certainly has a place in Dubai. The current increase in construction disputes enhances the case for mediation and probably the likelihood of its use increasing. However if faced with a non-payment claim where there is a lack of money or lack of willingness to pay undisputed sums and no ongoing relationship issues to be considered, a more definitive and enforceable approach is probably necessary.

co-authored with Helen Turner

If a company has invested significant time and money in the creation of designs for a particular project then it will want ownership rights in relation to those designs. Copyright provides some protection against third parties copying your designs.

Copyright becomes particularly important in the event of a dispute where one of the parties to a construction project may try to move on and to take your valuable designs with them. If you do not own the copyright in those designs then you will not be able to prevent others from using them on other projects.

Who owns the copyright in the designs?

Provided that the designs are original, then the owner of copyright in those designs will be the person who created them. This sounds fair enough. But, unlike other jurisdictions such as the UK, UAE law does not provide that the copyright in works created during the course of employment will vest in the employer. This means that the individual employees involved in the creation of the designs will own the copyright in those designs and not the employer.

You may now be thinking that this isn’t a problem for you because your employees’ employment contracts contain the usual standard clause assigning all intellectual property created during the course of employment to you as the employer. Well, unfortunately under UAE law there is a further problem.

The UAE Copyright Law states that a copyright owner cannot assign copyright in more than five future works. The threshold for when copyright attaches to a work is low – a simple email or sketch on a piece of paper will likely be a copyrighted work.

Therefore, even if your employment contracts contain a clause assigning intellectual property, the effect of such an assignment may be minimal. As soon as the employee has created five pieces of work, which he or she may do within hours of beginning work, then the assignment provision is no longer effective and the employee will own the copyright in all further future works.

What can you do?

The first step is check your employees’ employment contracts to ensure there is that provision in there which assigns all intellectual property in work created by them during their employment to you. The “five future works” law is yet to be tested in the courts and there remains a chance an assignment provision will be upheld beyond that limitation.

Secondly, we recommend that all construction companies operating in the UAE regularly require employees involved in the creation of potentially valuable works to which copyright attaches to make a written assignment to them of the copyright in all works that the employee has already created. There are no limitations in the UAE Copyright Law on the assignment of the copyright in works that have already been created.

The position in the UAE is not ideal and reflects the fact that at the moment intellectual property protection here is less well developed than in other jurisdictions . However, if you know about the problem, there are steps you can take to solve it.

By Brett Sherrard and Melanie Grimmitt

Common Law Approach

In most common law and European jurisdictions, party autonomy and freedom of contract (whilst being gently eroded since the 19th century) are concepts that are recognised and respected. English law, for example, allows commercial parties to contract freely, provided that the agreement does not contravene any laws or public policy, and the courts will generally try to support the agreement between the parties. Although we can’t deny that notions of equality of bargaining power and fairness are increasingly being used to justify an interventionist stance, the courts of common law jurisdictions are – by and large – slow to use the doctrines of misrepresentation, mistake and economic duress to vary the terms of a commercial agreement.

The UAE position

The UAE, on the other hand, is a civil law jurisdiction, with its codified laws based on the Egyptian code, which in turn is derived from the French code. In addition, the laws of the UAE are influenced by Shari’a law. Nevertheless, as a general rule, under UAE law, the parties are entitled to agree on any contractual terms that they deem fit, provided that such terms are not inconsistent with the provisions of law or contrary to public order or public morals (pursuant to Article 2 of the UAE Commercial Code). Thus the common law concept of freedom of contract exists in the UAE but is subject to certain further limitations, based on ‘moral’ considerations.

Whilst in general the position in the UAE appears broadly similar to the English law position, there are some important differences, including the fact that in the UAE the scope of public policy exceptions and a court’s power to strike down or vary a contract are broader. This can cause challenges for parties who have become accustomed to operating in a secular legal and political environment, who may now be faced with having their contract varied or struck down on the basis of principles which may find their genesis in the Shari’a, for example.

In a construction context, the more limited application of freedom of contract in the UAE has important consequences for concepts that international contractors and developers may be familiar with, or take for granted, such as the interpretation of limitation of liability and liquidated damages clauses.

Examples of the differences in approach

Like English law, UAE law includes statutory implied terms that fetter the doctrine of freedom of contract. For instance, pursuant to the Civil Code parties are required to perform their contract in a manner consistent with good faith, (Article 246(1)). These statutory implied terms are different to those one might expect under English law, which are generally more tangible and objective.

A further example is the different approach taken to limitation of liability provisions as explained in my last blog.

Another interesting example is the different approach that the UAE takes to termination provisions, such as a termination for convenience clause. Again under English law, the Courts will generally uphold an agreed termination provision, including the right for one party to terminate its contract for convenience. The validity of such provisions in the UAE, however, is highly questionable. This is because UAE law prescribes the circumstances in which a contract may be terminated (which are limited and do not include a right to terminate a contract without cause) and because such provisions are considered to be contrary to Shari’a law. This is a topic to which we will return!

Therefore, whilst the concept of ‘freedom of contract’ can be said to exist in some form in the UAE, it is not the same as in English law. In the UAE there is a greater risk of the terms of a contract being altered and reinterpreted. In these circumstances it is vitally important to ensure contracts have been reviewed by lawyers familiar with UAE law so at least the areas of potential uncertainty are understood and action can be taken to mitigate consequential risks.

But which approach is better?

Well that, of course, depends.

The flexibility provided by the UAE law in some circumstances may be very helpful. For example a contractor faced with paying liquidated damages in circumstances where the employer has not suffered loss to an equivalent extent is likely to welcome the opportunity to argue that the liquidated damages provisions he agreed to should be varied by operation of the UAE law.

On the other hand greater certainty of contract may be argued to be a pre-requisite to construction risk management, which will surely be the focus of attention of the international contracting industry as it picks itself up from the worldwide economic downturn.

Perhaps the more interesting question is whether as a matter of principle the UAE should reach the same position in relation to freedom of contract as that found under the common law? Should freedom of contract supersede moral or religious considerations when determining the terms of an agreement between two commercial entities, or are the latter considerations more important?

We’d be pleased to hear your views …

By Melanie Grimmitt and Stephanie Mylchreest

After a diversion a fortnight ago to address the newsworthy events in Dubai, normal service resumes with this blog. The previous two blogs in this series considered decennial liability and liability for harmful acts under UAE law.

This blog will briefly consider whether it is possible to limit liability under your contract eg by including liquidated damages provisions, and whether the courts will give effect to such a provision.

Limiting liability

On the face of it there seems clear evidence that it is possible to limit liability under a contract – take a look at Article 390(1) of the Civil Code.

However, it is not so certain that such a limitation will be upheld. In fact, the very next provision of the Civil Code (Article 390(2)) suggests that a judge may vary a clause seeking to fix compensation in advance so as to make the compensation fit the amount of loss suffered in the particular circumstances. Not exactly what contract drafters from common law jurisdictions will have expected!

But our contract is commercial not “civil”!

Some commentators have argued that the Civil Code does not apply to commercial contracts, and that therefore parties to commercial contracts can afford to ignore this possibility. This view is based on previous court decisions where the court has declined to apply the Civil Code to commercial contracts. Such a position would accord with English law where additional protection is given to consumer contracts, but where commercial parties who have equal bargaining power have far greater freedom to determine the apportionment of risk and liability between them.

However there is also plenty of case law where the courts have applied the Civil Code to commercial contracts. So better to err on the safe side and assume that this provision is relevant to commercial contracts.

No excuse for fraud or gross negligence anyway

In addition, even were it to be found that the Civil Code did not apply to commercial contracts, the courts would still be likely to interfere with any purported limitation of liability for fraud or gross negligence on public policy grounds.

When will a judge interfere and how?

There is no express guidance in the Civil Code as to the circumstances in which the court will exercise its power under Article 390(2) to adjust the measure of damages to reflect the actual loss. So far as I am aware, even Egyptian law, on which UAE law is in large measure based, only provides guidance on when a fixed amount of compensation may be reduced, rather than when it may be exceeded. Interestingly a similar provision under Bahraini law (also based on Egyptian law in large measure) expressly only refers to a reduction in the amount of fixed compensation where it can be established that no loss has been suffered or the amount fixed was grossly exaggerated (not far from “genuine pre-estimate of loss” perhaps, albeit that the test for genuine pre-estimate of loss is applied at the time the damages are fixed rather than when the loss is suffered).

However, it is possible to draw conclusions as to the application of Article 390(2) from general principles inherent in UAE law that relate to the conduct of parties to a contract. On this basis the courts would be more likely to adjust (or ignore) a limit on liability if the harm results from, for example, conduct by a party which is contrary to good faith, or an act which is wrongful or deliberate.

What to do?

Perhaps the best advice is to adopt the usual methodology to liquidated damages clauses and other “fixing” of liability clauses which would be adopted in common law jurisdictions: make sure the fixed compensation is actually likely to reflect the loss which will be suffered, rather than a windfall gain. And if you receive a claim for what you perceive as a windfall gain, don’t assume you must pay it even though the sum is clearly due under the terms of a contract – there might be grounds for challenge.

Why is it relevant for PPPs?

As most readers of this blog will be aware, PPP projects are usually largely funded by debt borrowed by a Special Purpose Vehicle (SPV). The SPV uses the money to build an asset gets paid by the public sector for the provision of services or utilities connected to that asset over the long term. The payments to the SPV come from the relevant public authority to whom the services/utilities are provided eg the schools authority, or the power offtaker.

So you can see that for the lending banks and the shareholders in the SPV (Sponsors) it is important they are comfortable that the government entity responsible for the payments necessary to repay the debt will make those repayments.

PPPs have been planned in the region for rail projects, road projects, power projects, desalination projects, wastewater projects, schools projects…..The region is looking to PPP to fund urgently needed and critical infrastructure.

Tough times already

PPP projects in the region had already been hit hard by the global economic crisis, with a number of large projects being financed on an expensive short term basis until lending conditions improved.

However, at the regional gathering of the International Project Finance Association in Abu Dhabi on Wednesday afternoon, shortly before the Dubai World story broke, and a day after the successful financial close of the USD1 billion Zayed University project by Mubadala, it was generally thought that 2010 would be the start of the upturn. What a difference a day makes…

Or will it?

Can Banks and Sponsors draw a distinction between the Dubai World story and government debt? As the media in this part of the world is emphasising, Dubai World is a government related entity and not the Dubai government. In addition, in PPP transactions in the region it is very common for banks to insist on state guarantees anyway as they very keenly aware of the financial covenant of the ultimate re-payee of their debt. Therefore, perhaps theoretically, it should be business as usual.

However, there is concern already that it might not be that straightforward. Worries about the fragility of the Dubai economy have led to worries about repayment of debt from other countries, and Abu Dhabi may suffer if it doesn’t stand behind Dubai, as it may be argued it allowed investors to believe it would.

A rethink in the air

It may be for this reason that The National, a local newspaper based in Abu Dhabi, yesterday ran a story that actually Dubai World may still pay that Sukuk…..

The previous blog on this topic considered the potential for liability to be unwittingly assumed by parties to construction contracts. This was highlighted by the example of decennial liability under the UAE Civil Code. This blog considers another perhaps unknown liability: strict liability for harmful acts under UAE law, and considers whether parties are able to exclude such liability by contract.

THE LAW OF TORTS IN THE UAE

Extent of Liability

The UAE law of tort is set out in Articles 124 and Articles 282 – 298 of the Civil Code. These articles appear to impose strict liability on an “actor” in respect of any harm done (it seems accepted by all commentators that this is whether by act or omission). This position accords with the general principle of Islamic law of censorship for harm regardless of fault, negligence or illegality. This position can be contrasted with with the common law concept of liability for negligence under which liability only arises where a party owes a duty of care to another party and fails to exercise such duty.

However, as with all good general principles, there are exceptions:

Exercise of Reasonable Care

In certain circumstances, it is likely that an “actor” will not be liable to make good harm where that person has exercised reasonable care. Those circumstances are where: “that which is required of an obligor is the preservation of a thing, or the management thereof, or the exercise of care in the performance of his obligation“. However the exercise of reasonable care is no excuse for fraud or gross negligence.

It may suffice for the purposes of this exception if the obligation to take reasonable care is contractual – as would most likely be the case under a contract for professional services and most construction contracts in respect of design obligations at least.

Force Majeure

It is also understood that a person is not liable to make good harm where a “natural disaster, unavoidable accident, force majeure, act of a third party, or act of the person suffering loss” caused the relevant harm.

Plenty of room for argument in this exception it would seem!

Consequential Loss

Finally, there is a potential limitation of “the actor’s” liability for consequential harm to circumstances where “the actor” has acted in a wrongful and deliberate way.

However, it seems the only time that this exception would apply is where there is consequential harm, but no direct harm. In the context of liability between contracting parties, it is difficult to envision circumstances where this exception would be useful.

Prohibition on Exempting Liability

Having identified that subject to limited exceptions, UAE law incorporates the general principle of strict liability for harmful acts, is it possible for a party to a contract to exclude or limit such liability?

Article 296 of the Civil Code states that:
“Any condition purporting to provide exemption from liability for a harmful act shall be void.”

This appears to be an unequivocal prohibition on any contractual provision seeking to exempt liability for “harmful acts”.

Yet, when considering the Civil Code, it is always worth checking the original arabic (or, as in my case to my shame, asking your arabic reading colleague to check the original arabic!) In this case, I am reliably informed that the arabic equivalent of the word “exemption” means a total or full exclusion rather than a limitation.

Accordingly, it may be possible to develop an argument that one should differentiate between a clause that excludes this liability and a clause that limits this liability, with the prohibition applying only to the former.

This view is supported by express provisions in the Civil Code (Articles 389 and 390) which are universally regarded as authority for the principle that parties to a contract can limit their liability to each other.

It is true to say that other commentators hold a different view, and consider that a purported limitation of liability for a harmful act is also prohibited. If any readers of this blog are one of those then please post here….

In addition there are issues around the effectiveness of limitation clauses, such as liquidated damages and caps on liability, which would also apply to a clause limiting liability for harmful acts….these will be considered in the next blog.

In the meantime, keep a careful watch for unseen liability…..