Contract problems in Offshore Construction (Middle East background)
One of the most overlooked areas of marine construction is an Offshore Construction; as Mr. C W Chung puts it –
“it is a specialist area of marine construction in its own right, surviving without the benefit of standard contracts, nor any body of law specifically concerning offshore construction contracts.” (Beadnall & Moore, 2017).
All it is known, from the common man perspective, is about the movement of vessels (or in their view – “ships” and “boats”, and they say with excitement “wow, that’s huge”, if they get near to it). But what is it unknown is – the disputes in offshore construction are often very huge in such a way that it can be very devastating to the company involved in it. Not because, despite our sufficient skills and expertise gained over the years, the dangerous nature of the works, but to the
1. Own fault of Project Owners and Contractors whilst finalization of the Contracts or poor administrating the Contracts.
Unfortunately until date – there are no standard forms of contract exclusively for the offshore construction, thus leaving the room for errors which often lead to complications when the disputes arise, particularly not looking into detail of the contract form whilst signing it. Therefore here’s what you need to do – review the contract form when received at the time of tender from the potential employer, word by word, terms and conditions, do not leave it until the last minute whilst focusing only on the offer. Particularly if the contract form is not received by the potential employer – ask for it; or provide your suggestion of the contract form. It is understandable that the market is competitive and time is very short, in this case, it is recommended to have someone (for instance, professional advisor or in-house contract professional) view the contract form whilst making the offer. Because the contract form is obligation between parties where the parties (the contractor and the employer) agree, honor and abide by the signed contract by the very same parties. The contractor thereby abides and provide the services as per the employer’s requirements as agreed in the contract and in return, the employer thereby agrees to make payment in return as per contract terms. As DBSConsult correctly puts it –
“Don’t leave your contractual entitlements and which provisions you should be relying on… to chance…”
because
“As in past years, and perhaps not surprisingly, the most common causes of disputes continue to be the failure to understand or comply with contracts, poorly drafted contracts and inadequate project management and administration”
– Professor Renato Nazzini, Centre of Construction Law and Dispute Resolution (ARCADIS, 2019);
therefore one simply cannot rely on one clause whilst ignoring the other clauses (it is all about interpretation of clauses), always ask the other party whilst in doubt of any clauses which you do not understand or negotiate in such a way what is acceptable to both the parties (not just for you).
Again because you simply do not want to get into disputes – that will often cost time and additional money more than the project value itself. To make it clear – disputes is defined as
“a situation where two parties typically differ in the assertion of a contractual right, resulting in a decision given under the contract, which in turn becomes a formal dispute” [Emphasis added] (ARCADIS, 2019).
Therefore in order to avoid disputes, have your contract form (if received from the potential employer) thoroughly checked by the professional legal advisor or your in-house contract professional. To get a general idea of what needs to be check whilst formation of the contracts, referring to the article “Successful contract drafting and management techniques” by (Gould, 2014) would be helpful.
2. Contract Forms in Offshore Construction
As previously highlighted in point 1 – there are no standard contract forms in Offshore Construction which therefore leaving room for potential disputes. The commonly used of contract form is FIDIC, for its international reputation (either FIDIC Red book – Build only by Contractor or Yellow book – Design and Build by Contractor). However, as pointed out by Stewart et al. - there are two main potential pitfalls – one, FIDIC contract forms are mainly onshore contract forms that would need to be modified or adjusted (clauses) to offshore project requirements. Two,
“FIDIC is an international contract based on a traditional English-style contract, but which (when used offshore) is often governed by a civil code-based law in the jurisdiction where the project is situated. In these circumstances, great care must be taken to ensure that the provisions will be enforceable under the governing law.” (Eslick & Wertman, 2016),
in other words – if the contract is governed under common law and the project is located in the country where governed by common law, the contract terms agreed in the contract agreement are enforceable; on the other hand, if the contract is governed by civil law although the FIDIC form is largely based on the common law principles – then you should know that civil laws have the potential to override the FIDIC Clauses – such as decennial liability, liquidated damages, extension of time, limited liabilities etc. (Kanishka Singh, 2015).
Therefore suffice to say that contract agreement is not all about signing the contract, do the work as you will and wish, overlook some cases (like HSE), construct in your own way and get the money – it’s all about what was agreed between you (the contractor) and the employer in such way that not only the Employer may sue the Contractor for not implying as per the contract but also, the laws of the country will ensure that stringent laws will apply and if the contractor is found to be deviant to, not only deviant from the contract clause, but also deviant from the laws of the country, then its implications can be very devastating. Therefore it is vital to have your contract form/contract agreement be reviewed by professional legal advisor, contract professional in order to, not only follow the laws or clauses of the contract agreement, but maintain reputation.
Not surprisingly, as Kanishka Singh points out -
The civil codes of almost all the Middle East countries are derived from the Egyptian civil code which in turn is based on the French civil laws. It is therefore rather ironic that most of the Middle East countries whose legal setup consists of a mixture of civil and Shar’ah law have based their construction contracts on FIDIC standards. This despite the fact that the FIDIC contracts are largely tailored to common law principles.
To understand about its relations of the civil code/civil laws and FIDIC, one can look at the example – provided in this article where comparison is made between the FIDIC Red Book, 1999 with UAE Civil Code. Therefore one should cautiously be aware of all the pitfalls whilst signing the contract agreement - suffice to say, it is better to know the governing laws of the country where the project reside prior to viewing the contract clauses.
In most cases, due to complications of FIDIC (where largely derived on common principles) and civil law/civil codes, especially when Offshore Projects are susceptible to frequent weather conditions, it is not surprising to find many contractors draft bespoke provisions that provide relief where re-sequencing of activities is required as a result of poor or unpredictable weather whilst FIDIC Red Book talks about the weather conditions in generalist manner such that the Contractor is responsible for all weather delays (which means to say that, the Contractor whilst submitting the construction programme shall consider the all weather conditions except extreme weather if found normal weather history). Therefore it is one gray area which is not to be missed and again reiterate that - it is vital to have your contract form/contract agreement be reviewed by professional legal advisor or contract professional.
As for the Dredging and Land Reclamation – FIDIC Blue-Green Book, 2nd Edition (2016) is used. The parties will have to decide the governing laws and when in doubt, consult accordingly.
3. Alternative Dispute Resolution
This is perhaps the grayest areas where the parties often tend to overlook due to lack of realisation of its importance. The term “dispute resolution” doesn’t always synonyms with litigation or arbitration (the last stage) – It is inevitable that the disputes rise during the project, what is more important is how to resolve such dispute without jeopardizing the project completion or the employer’s requirements. Another point to note here is – dispute can arise at any point of time, and it can resolve if dispute resolution procedures are implied accordingly even during the project in progress. It usually begins with Negotiation (between the parties), then Mediation by the impartial third party and lastly Arbitration.
Although the FIDIC contract forms consist of the DAB procedural rules, most of the parties (the employer and the contractor) often omit this part whilst forming the contract agreement and thereby leading further complications whilst referred into arbitration. First and foremost, one has to check the type of dispute resolution measure either in FIDIC or Bespoke Contracts. Furthermore, it is worth noting that, the significant of selecting the seat of Arbitration is of high importance and will have to be selected/decided whilst contract signing. Because if the contract governed law is different from the seat of arbitration, then at the times of the dispute - the arbitrators will refer to the laws that governed by the seat of arbitration. For example, if there is project in Sultanate of Oman whose contract agreement is governed by the English law and the seat of arbitration is chosen as Dubai under ICC. If you are thinking that the contract is still governed by English Laws and the place Dubai is nearby to Oman and therefore saving air tickets and time instead of flying to London for referring the disputes, then you are in it full of surprises! The place, or technically - the seat of arbitration basically governs the contract, that is, when the award of the dispute will be based on the Dubai Laws / Dubai Arbitration Laws. And not based on the English Law. That is to say - at the time of contract signing and contract/project execution - the clauses mentioned in the contract are governed by English laws (the common law). In contrast, when the dispute is referred to ICC Dubai, the award of judgement will be guided as per the Dubai Laws (and again, there are different categories of Dubai laws/Arbitration, for instance, DIFC, DIAC etc). And do not forget - most of the middle east countries are based on the civil laws. Yes, as complex as it sounds, I again reiterate that it is best to refer the contract form to professional advisor or in-house contracts professional.
Usually the resolving of the begins with the negotiation (when either party raises the concern/dispute and endeavor to resolve within agreed days between the parties) and if not resolved by negotiation between the parties then to mediation or adjudication by impartial third party (where such third party are selected or agreed between the disputed parties) within certain time. Lastly progresses arbitration if either party provides NOD (notice of dissatisfaction) where such dispute not being resolved.
In terms of negotiation and mediation/adjudication – it is important to stress that, leaving aside the egos or monies, the parties must be willing to compromise for the best interest of the project as well reputation.
On the ending note, it is vital to understand that, as a Contractor/Employer/Engineer/Owner, as Jaeger, A.-V., & Hok, D.-S (2010) puts it -
Law is a useful and necessary feature because it makes decisions predictable and therefore calculable. It is the law which gives the engineer the powers to do what the parties expect him to do, although it is also the law which places constraints and limits on him when acting as a certifier or decision maker. Thus an exchange of ideas, impressions and experiences between lawyers and engineers appears to be not only helpful, but even essential.
it is necessary, although not mandatory, to have your contract form thoroughly checked because the most common dispute rise due to poor administration of the contract. Discuss with your employer/contractor/other party in case of doubts, always ensure open mind throughout the project, and ensure the contract is being well executed. Contracts is not just a mechanism or means to resolve misunderstandings and disputes.
As the former defence secretary of USA, Donald Rumsfeld says
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don't know we don't know..”
We must always be prepared beforehand in order to face, come what may.
Bibliography
ARCADIS. (2019). Global Construction Disputes Report . North America: ARCADIS.
Beadnall, S., & Moore, S. (2017). Offshore Construction: Law and Practice. New York: Taylor & Francis.
DBSConsult. (2020). Video on Contractual Entitlements. Retrieved from DBSConsult: https://www.dhirubhai.net/posts/juan-olwagen-fciarb-7243574b_activity-6656565805729239040-YaHz
Eslick, A., & Wertman, R. (2016, May). Defects during the project life cycle: FIDIC and UAE Law. Retrieved April 2020, from Reed Smith: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=2ahUKEwinssmpoPDoAhVSqHEKHXnQA3wQFjABegQIChAD&url=https%3A%2F%2Fwww.reedsmith.com%2F-%2Fmedia%2Ffiles%2Fperspectives%2F2016%2F05%2Fdefects-during-the-project-life-cycle-fid
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Jaeger, A.-V., & Hok, D.-S. (2010). FIDIC - A Guide for Practitioners. Berlin: Springer-Verlag.
Kwan, M. (2020, Febuary). Kabab-Ji: Determining The Governing Law For The Arbitration Agreement Under English Law, The Emerging Focus On The Express Choice Of The Parties. Retrieved April 2020, from Kluwer Arbitration Blog: https://arbitrationblog.kluwerarbitration.com/2020/02/24/kabab-ji-determining-the-governing-law-for-the-arbitration-agreement-under-english-law-the-emerging-focus-on-the-express-choice-of-the-parties/
Lexology. (2015, Febuary). FIDIC contracts in a civil law setting: guarding against inoperability by Kanisha Singh. Retrieved 2020, from Lexology: https://www.lexology.com/library/detail.aspx?g=2d610b74-9b15-4731-b939-4b666a382a6c
Stewart, M. (2017, October). FIDIC – the potential pitfalls moving from onshore to offshore. Retrieved April 2020, from Wikborg Rein: https://www.wr.no/en/news/publications/global-offshore-project---marine-renewables/fidic--the-potential-pitfalls-moving-from-onshore-to-offshore/
Stewart, M., & Fj?rvoll-Larsen, A. (2017, Febuary). A tricky course - the delivate business of using FIDIC contracts in off-shore projects. Retrieved April 2020, from www.inhouselawyer.co.uk: https://www.inhouselawyer.co.uk/legal-briefing/a-tricky-course-the-delicate-business-of-using-fidic-contracts-in-offshore-projects/
Strauss Hauer & Feld LLP. (2020, January). The Law of an Arbitration Agreement: Is it the law of the seat or the law of the underlying contract? . Retrieved April 2020, from Akin Gump: https://www.akingump.com/en/news-insights/the-law-of-an-arbitration-agreement-is-it-the-law-of-the-seat-or.html
Warren, L. (2011, September). The Seat of Arbitration-Why is it so important? Retrieved April 2020, from Clyde & Co.: https://www.clydeco.com/insight/article/the-seat-of-arbitration-why-is-it-so-important