Contractual Risks & Disputes...

In this Article, I would like to throw limelight on the Contractual risks and possible remedies under FIDIC 1999, with regard to Shari’ah law in Saudi Arabia.

Contractual disputes are very common in the Construction Industry especially in the Middle East. Therefore, it has been frequently observed that Contract disputes are the main causes of delays, product quality deterioration and many other problems on the Projects. Wang et. al. (2009) said, “the increase of Contract risks are not the only risks for  acquisition of the tender, but also strangle willingness of tendering from honest companies, which forms the vicious circle of “bad elements driving good elements away” and hence no protection is provided on construction quality. As per article of Quinlan (2009), when parties find themselves initiating the dispute resolution provisions in their Contracts then any flaws in the drafting of such provisions often come to light.

In the present global construction market, there are different types of national construction Contracts being followed in different countries; for instance, JCT and ICE Contracts are applicable in  UK,  CCAG and CMP contracts in France or the VOB in Germany but there is a very little or no consideration whether these Contracts appropriately align the goals (Cox & Thompson, 1997). FIDIC form is the most widely used from of construction contracts in UAE. The standard FIDIC forms are usually amended as per the requirements of the parties, or the peculiarities of a specific project or according to legal framework of certain jurisdiction. Due to absence of any standard conditions of Contract form in UAE, there is a perpetual contractual risk in any Contract. Few years back, Abu Dhabi based Clients started adopting NEC conditions of Contracts as a standard form, but unfortunately various amendments were made by different Clients and the goal of standardization was not fulfilled.

Construction contracts deal with project risks through their allocation to the parties involved. The construction contracts which have been modified by the Clients are seldom fair and unbiased. Certain exculpatory clauses are often introduced by the Clients to transfer maximum risks to the Contractors.

As per my experience, I would like to advise QS/Contract team of the Contractors to go through the conditions of the contract very carefully and diligently and try to find out exculpatory clauses. By doing this, you will be able to find out some clauses which represent considerable HIDDEN COSTS.  

Nowadays, another major obstacle and issue in the Middle East construction market from the Contractor’s perspective are payments. In the current financial scenario, the Contractors are being faced with substantial difficulties in getting the payments released from the Clients in a timely manner. Nevertheless, Contractor has few options in the contract for getting their payment released on time. 

FIDIC 1999 contract contains some clauses related to payments, supervision and termination such as, if the Contractor does not get paid, then there are two options; a) After 21 days, give a notice of his intention to suspend the works under clause 16.1 or b) After 42 days, give notice of his intention to terminate the contract under clause 16.2. If the provisions of these clauses have been deleted by the Clients by amending / modifying the standard contract, then the Contractor can seek a suitable recourse through the civil law. Especially under the UAE Civil Law, the Article no. 247, allows a party to refuse to fulfil his obligations as per contract, if the other party doesn’t not perform its obligations under any conditions of the contract.

However, in KSA perspective, the Shari’ah Courts focus on a fair solution, any claim that was not robust in its nature would probably not survive.

Shari’ah Courts generally deal with ‘social’ issues, whereas, the Administrative judiciary system known as the Board of Grievances (Diwan al-Mazalem) deals with all commercial issues, as I understand it (please correct me if my understanding is wrong).

In government contracts, while Shari’ah is considered as merely the base of the law, whereas in private sector Shari’ah law is on top. While parties are free to contract how they choose any dispute will require to be resolved on the basis of Shari’ah law. Hence, any Notice provisions or damages wording need to be carefully worded to ensure they comply with law and didn’t give another party the right to claim frustration or set aside certain parts of the Contract.

Declaration: I, Laeeq Hassan confirm that this article is my own work and expressed in my own words with some references from journals/articles.