Under both the contractual process and subsequent formal dispute resolution proceedings, contemporary records form a critical part of the evidence to be utilised in evaluating the contractual entitlement. The importance of good record keeping – by both contractors and employer’s agents or engineers—cannot be overstated.

The maintenance of ‘contemporary records’ is an important risk management strategy under any form of contract or subcontract. Under the FIDIC suite of contracts, the failure to maintain contemporary records can severely prejudice or completely extinguish a contractor’s entitlement to additional time or cost.

Sub-clause 53.2 of the FIDIC Conditions of Contract 1987 (the ‘old Red Book’) provides that ‘the Contractor shall keep such contemporary records as may reasonably be necessary to support any claim he may subsequently wish to make.’ Of course, in the event that a contractor subsequently seeks to make a claim, the ‘contemporary records’ are often insufficient or are supplemented by subsequent evidence, such as witness statements from site staff, prepared a long time after the event and in contemplation of the claim.

The issue of what constitutes ‘contemporary records’ and whether or not ‘contemporary records’ can be supplemented by further evidence was considered in the often cited case of Attorney-General for the Falkland Islands v Gordon Forbes Construction (Falklands) Limited (No 2), before the Falklands Islands Supreme Court.

In this case, the court was asked to decide whether or not a witness statement prepared for formal dispute resolution proceedings (significantly after the event giving rise to the claim) could be used to prove a claim under an old Red Book contract where no contemporary records existed. In the judgement on this issue, the court stated that ‘contemporary records’ meant:

‘original or primary documents…prepared at or about the time giving rise to a claim, whether by or for the contractor or employer.’

The court also said that contemporary records does not include witness statements produced after the event, as such documents cannot be said to be original or primary documents prepared at the time. In so doing, the court confirmed the fear of the contractor – no contemporaneous documents means no entitlement.

The judgement in this case stands as a stark reminder of the criticality of ‘contemporary records.’

The situation under the FIDIC Conditions of Contract 1999 (‘the new Red Book’) may not be as desperate as under the old Red Book, but contemporary records remain critically important and the failure to maintain such records still has the capacity to seriously affect the contractor’s rights of recovery.

The new Red Book contains a similar obligation under sub-clause 20.1 as was imposed under sub-clause 53.4 of the old Red Book. Sub-clause 20.1 states, in part, that:

‘the Contractor shall keep such contemporary records as may be necessary to substantiate any claim…’ Sub-clause 20.1 also states that ‘if the Contractor fails to comply with this or any Sub-Clause in relation to any claim, any extension of time and/or additional payment shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the claim…’

While the Gordon Forbes case is authority for the proposition that failure to maintain contemporary records under the old Red Book may extinguish the contractor’s entitlement, failure to maintain contemporary records under the new Red Book may also prejudice the contractor’s rights or ability to recover. It is worth noting that the emphasis and value of witness evidence will of course be different from jurisdiction to jurisdiction. In civil law jurisdiction such as the UAE, for example, witness evidence may be more compelling than in common law jurisdictions. These differences do not affect the importance of maintaining contemporary records.

So at the risk of labouring the point, the moral is simple – record what happened, when it happened. While the tasks of maintaining a site diary, staying on top of correspondence, and keeping minutes of meetings may appear to be an inefficient use of site staff and managerial resources, such ‘contemporary records’ can be the key to securing contractual entitlements.

By Sachin Kerur and William Marshall

News headlines in the UAE have recently proclaimed that “companies defaulting on salaries will soon be a thing of the past” (Gulf News), as the UAE government has launched its Wage Protection System (the “WPS”). Certainly the WPS is a significant step to protect the rights of workers in the UAE, and given the size and importance of the construction sector in the UAE, the WPS will also have a big impact on how employers in the UAE construction industry operate and pay employees. Below we look at the WPS, how it will operate and the impact the WPS will have on employers and employees across the UAE.

WHAT IS THE WPS?

The WPS is an electronic salary transfer system that requires companies to pay workers’ wages via specific financial institutions, such as banks and bureaux de change, approved and authorised by the government to provide such a service.

The system, developed by the Central Bank of the UAE, allows the Ministry of Labour (the “Ministry”) to create a database that records wages payments in the private sector in an attempt to guarantee the timely and full payment of agreed-upon wages. The WPS is essentially an initiative to safeguard the payment of workers’ wages – a system that is arguably overdue in the UAE.

REQUIREMENTS OF THE WPS

In order to comply with the WPS, a company will need to do the following:

• register with the Ministry;
• have a bank account with a bank operating in the UAE;
• enter into a contract with any financial institution approved and authorised by the Central Bank of the UAE to provide the WPS service;
• transfer workers’ wages via WPS by the specific deadlines set by the Ministry; (which is within 2 weeks of their due date or on the dates specified in the work contract if wages are to be paid more frequently); and
• meet all costs and expenses incurred in complying with the WPS.

CONSEQUENCES OF FAILURE TO COMPLY WITH OR JOIN THE WPS

Compliance with the WPS is mandatory for all businesses operating in the UAE and, of course, there are consequences for those businesses that fail to comply. The current sanctions are as follows:

• Institutions failing to transfer workers’ wages by the specific deadlines set by the Ministry will be denied the right to obtain new work permits. This ban will only be lifted 1 month after the transfer of the workers’ wages in full; and
• Institutions that delay wages’ payment more than 1 month after the due date will be denied the right to obtain new work permits, as well as all the institutions owned by the violating institution and all those responsible for the violation will be referred to court (in accordance with Ministerial Resolution No. 788 of 2009).

IMPACT OF THE WPS

Advantages

It is thought that this new system will apply to over 4 million employees when fully implemented and one significant advantage is that it is likely to enhance the Ministry’s ability to implement preventative measures to reduce labour disputes over wages.

The system will allow the Ministry to know, on a ‘real time’ basis, whether or not salaries have been paid in full.

Defaulting companies can be easily identified, and as the supervision and sanctions will be administered by the same Ministry, the application of sanction should also be quite simple. As discussed above, defaulting companies will be prevented from obtaining new work permits, which may create significant problems for employers and therefore be a significant incentive for a company to comply with the WPS.
Another consequence of the WPS is that disclosures must be made to the Ministry, impacting on the ability of local companies to ‘sponsor’ the employees of international businesses that do not have a corporate presence in the UAE. The illegal, but widespread, practice of local companies ‘sponsoring’ foreign individuals that are in fact employed by and performing services for an international business without a corporate presence in the UAE, will be affected by the disclosure and transparency required under the WPS. Under the new system, such arrangements will be harder to maintain.

While the WPS offers wage protection to all employees, it is unskilled workers, who are particularly vulnerable, that are arguably most in need of the protection afforded by the WPS however as is noted below, some difficulties are apparently being experienced in extending the WPS to this sector of the labour market.

Difficulties

It is apparent that there have been some teething difficulties in implementing the System, which unless resolved, may affect the utility of the System. Some businesses have cited the unwillingness of some banks to open accounts for low-income workers, which may represent a major obstacle in satisfying the requirements of the WPS. Time will tell how such issues are resolved.

WHERE TO NEXT?

The WPS is a positive step for the UAE in respect of disclosure and transparency, and may serve to protect the interests of often powerless employees. While the WPS appears to have been implemented to address a specific problem, it is inevitable that questions will be asked whether the centralisation and disclosure of labour and wage data to the Government may not also represent the first step towards subsequent governmental wage or employment policies.

By Sachin Kerur and Nicola Milne, Pinsent Masons Gulf Region

In the past many companies working in the region have been wary of pursuing their entitlements through formal dispute resolution processes, due to perceived cultural sensitivities, many now feel that they have no choice but to consider the available debt recovery options.

In many instances, the amounts owed are not disputed. However, in the current market some developers/contractors consider that they should not be obliged to pay their debts in full, and are attempting to avoid, defer, reduce and/or make piecemeal payments over a substantial period of time.

How to Recover Your Debts in the UAE?

Wherever you are from, outstanding payments can be frustrating, not to mention costly. However, a contractor will usually be aware of the tools available in its home jurisdiction in order to speed payment along.

When working overseas, however, the different cultural, legal and practical issues can make the whole process much more challenging. In the UAE, this challenge is in part due to the local civil legal system. Those instruments that common law practitioners are so used to wielding are not present in quite the same form.

The options available to pursue non-payment of due monies will depend on the dispute resolution mechanisms contained within the relevant contract. Typically, a contractor/consultant will have to litigate or arbitrate to recover payments.

In addition, there are a number of procedures available under local laws that could assist in the recovery of debts. Potential options available under UAE law include:

1. An Order of Payment

1.1 An order for payment within the UAE is a developing area of law. It can therefore often be hard to determine the likelihood of success before the UAE Courts when making such an application.

1.2 It is a procedure where a party applies to the Courts for summary judgment against a defendant for commercial debts, substantiated by a commercial instrument such as a bill of exchange, promissory note or cheque, which are valid, but not paid.

1.3 If a party has a successful application for an order for payment, the outcome would be a direction from the Courts for the outstanding debts to be paid by the debtor. Success is by no means guaranteed, but the mere threat of an order for payment can be a persuasive tool for the creditor, as an outstanding debt can bring with it considerable public embarrassment within the local community. This in turn can act as an incentive for the debtor to settle any outstanding debts.

2. Precautionary Attachment Order

2.1 A precautionary attachment order, if granted, essentially allows the Court to seize the assets in question at the claimant’s request prior to judgment/arbitral award in order to preserve those assets during the trial. It is as close to seeking injunctive relief as it gets in the UAE. The procedure, timing and effect of precautionary attachment orders can at times be somewhat unclear.

2.2 Precautionary attachment orders are made in absence of the other party and are ordinarily used as a tool to ensure that assets are not disposed of prior to receiving the court’s judgment/arbitration.

2.3 The order can be made against any assets in the UAE, including machinery, bank accounts, goods or other assets owned by the defendant and under his possession or owned by a defendant, but in the possession of a third party. It should be noted that the assets, money or material to be attached must be client specified before the application will be granted.

2.4 If a precautionary attachment order is granted, the substantive case must be filed at Court within eight days.

3. An Order for Sale

3.1 This is a procedure whereby a claimant applies to Court for an order that a property or part thereof be sold where a defendant has failed to pay for material and equipment supplied for that property.

4. An Order for a Lien Over Property:

4.1 In certain circumstances a contractor can exercise a form of lien over a property on which it is doing work until payment for that work is received.

Substantive Action

As discussed above, pursing substantive action is also a possibility, either through the local courts or via arbitration. Litigation in Dubai can be both costly and time-consuming. There are cases that continue for five years or more and only local advocates can appear and plead before the Courts. Arbitration might allow a claimant to remain within their common law comfort zone, however cases usually take at least a year to reach a decision and the costs are not insignificant.

Practical tips

(a) Examine the payment terms in the contract;
(b) Ascertain your entitlement to the outstanding debt and collate all the documentation in support of it;
(c) Review the dispute resolution mechanism in the contract, if any;
(d) Determine what assets the debtor owns and where these assets are held; and
(e) Review the amount in question and determine what is the best avenue for recovery.

Final thoughts

The road to debt recovery within the UAE, as in many countries, can be a protracted one. A supplier of services should, as far as possible, try to recover the amounts outstanding from the debtor before bringing any action for recovery through the Courts. A claimant needs to demonstrate clear and strong evidence of the outstanding debts if their application before the Courts is to be successful. With advocacy and court fees included, the process can be a long and costly one, so you should make sure that the amount outstanding will offset the cost. If you have an arbitration agreement then this can be a less costly mechanism for substantive recovery if the other avenues, such as the payment order, fail.

Helen Turner and Andrew Mackenzie

Price pressure, or margin compression, is likely to a common theme faced by EPC contractors in the ‘new world.’ Whereas debt financing for government-sponsored or privately backed projects in the Gulf was readily available prior to the Global Financial Crisis, and despite the ‘green shoots’ of recovery that have sprouted around the world, international banks remain reluctant to support large infrastructure projects.
Increased liability and further exclusions from liability caps
When times were good, EPC contractors were able to negotiate overall limitations of liability in the region of 20% – 50% of the total contract price. Assuming that the employer’s performance criteria were sufficiently precise and the contractor had undertaken sufficient due diligence to be confident of its attainment, the likelihood of the EPC contractor suffering a net loss on the project was, to an extent, mitigated.
With the advent of PPP delivery, and given the reluctance of financiers or equity participants to accept any risk in project delivery coupled with the thin capitalisation of the SPV, EPC contractors are unlikely to see limits of liability in the range of 20% – 50% of the total contract price. We expect imitations of liability at 100% of the total contract price, coupled with a raft of exclusions from the liability cap.
Performance security and bonding risks
Employers will continue to require performance security typically in the form of unconditional bank guarantees. The events that may entitle an employer to call on a bank guarantee are greater under an EPC contract than under a traditional construction contract, and the fact that debt financing remains tight means that employer’s may be more willing to call on bank guarantees than would previously have been the case.
Erosion of contractor autonomy
While a number of the major standard form EPC contracts do not contemplate the involvement of an engineer (see, for example, the FIDIC Silver Book), the involvement of employer’s representatives and employers themselves is apparent and is likely to continue to increase. There are a number of reasons for this, but typically the reasons at the core of the involvement are employer’s mistrust of the EPC contractor’s ability to deliver what is required and, on occasion, a misunderstanding of the contractor’s right under an EPC contract.
Although the risks facing EPC contractors are increasing, the Gulf market will provide a fertile hunting ground for the well advised and disciplined EPC contractor. An important strategy for success in the new market will be implementation of appropriate risk mitigation techniques, coupled with effective contract administration.

By Sachin Kerur and William Marshall

The construction sector in India employs around 40 million people. The granting of ‘industry’ status to the Indian construction industry by the Indian Government has resulted in fast track procurement procedures and enabled construction companies to obtain crucial working capital at market rates. As a result, institutional investors have re-rated many Indian construction stocks and many joint ventures are being discussed with foreign construction companies.

Before plunging head long into this rapidly growing sector, here are four issues for contractors to consider for developing a coherent development plan to take advantage of the opportunities in India:

Consider: A Local Presence

For the serious players, a physical presence in India is recommended over a fly in fly out approach. A local presence helps the development of relationships with clients and key contacts in the local industry and also allows the monitoring of the supply chain or a joint venture partner. The intelligence that can be gained by such a presence is invaluable.

Consider: Structuring the Vehicle

A prime choice of corporate vehicle is an incorporated, limited liability company which can be set up as wholly owned subsidiary under the Companies Act 1956 (an Indian statute) or through a joint venture company, usually with an Indian partner. This will be treated as a domestic company, and will allow for post-tax profits to be repatriated to the foreign parent (usually as dividend payments).

It is also possible to set up unincorporated entities. These are principally liaison or representative offices, branch offices or project offices. But beware – the liaison/representative and branch offices are unsuitable as a vehicle for the carrying out of construction work. The former is not allowed to carry out any commercial activities in India and a branch office will not be authorised to carry out construction work.

A project office can be an attractive vehicle if the foreign company is only planning to execute a specific project in India rather than planning for a permanent presence. It will be treated as a foreign company but has the advantage that, with the permission of the Reserve Bank of India, it may send any surplus of the project outside India on completion.

Consider: Taxation

A key factor in deciding whether to go for an incorporated subsidiary/joint venture or a project office is taxation.

A project office will be treated as a foreign company and taxed accordingly. The basic tax rate for foreign companies ‘resident’ in India is 40% (plus surcharges and cess). Compare this with an incorporated subsidiary/joint venture company, which will be treated as a domestic company for tax purposes, and is taxed at a basic rate of 35%.

If a foreign company is not ‘resident’ in India, the tax imposed will depend on the nature of the company’s income earned from a business connection in India or from Indian sources. The Double Taxation Agreement between UK and India could also be relevant in this context.

However, these figures can only ever be a guide, and the advice of a local tax lawyer is essential before deciding on a structure.

Consider: The Local Rulebook

Contractors should be sure to familiarise themselves with the regulations relating to labour (of which there are numerous in India), tax, land use, building permits, plan approvals, work inspections and work certificates. It is very important to obtain advice from locally based advisers in relation to these issues in advance of any venture.

India’s construction sector is growing rapidly, and investment is becoming more and more attractive. To maximise the opportunities on offer, a clear and concise plan at the outset is vital – plus a little help from the local experts!

It is true that there has been a collapse in demand regionally for the large, private developments and indeed it seems the speculative real estate market may be a thing of the past. This has led to a severe cooling off in the Gulf construction market that was in any case overheating towards the middle of last year. At the same time this has led to a decline in input construction prices. This means that if a developer is sure there is a market for a development, the project becomes economically more viable. Not every developer will be able to take advantage of the decline in costs because bank lending remains tight. However governments will be encouraged to procure faster to take advantage of a cheaper cost market and spend more on major infrastructure projects. Certainly the Gulf power, water, health, education road and bridge sectors are expected to receive major boosts in development spending.

Whilst the menu of project delivery methods has evolved in many directions over the last few decades globally, the Middle East tended to remain wedded to traditional methods of procuring works and services. However during the last couple of years there has been a trend towards greater collaborative working between employers and contractors and the enhanced efficiency of the procurement process. A number of significant projects in the region were awarded on the basis of turnkey arrangements that accounted for fluctuations in price and incidental project costs. With so many projects on offer, contractors were spoiled for choice and were starting to demand more progressive contract terms.

Another noticeable regional trend was contracts procured on a “best value” principle. What this means in practice is that the project is geared towards delivering a high quality, cost effective scheme through an open book method of procurement. Depending upon who you speak to, open book procurement can mean the usual adversarial culture of the traditional method of procurement but the consequential cost implications can to some extent be avoided through a partnership approach.

Other trends that began to emerge over the last couple of years in the Gulf were sustainable procurement policies, e-procurement and management contracting for the procurement of infrastructure management services.

However with the amount of projects on offer declining abruptly, we have already seen a swift return to traditional methods of competitive procurement using fixed price lump sum turnkey contracts to ensure negligible cost overruns. The concern of many contractors is that we are back to what they see as the bad old days of onerous contract conditions where the lowest priced bidder always takes the spoils.

There is little doubt that the scale of construction projects in the region led to more innovative procurement and contracting policies than had ever been seen before. We will have to wait and see whether progressive and non-adversarial techniques will survive in this market.