Pinsent Masons‟ 5th Annual

Construction and Engineering

Law Conference

Tuesday 20 November 2012

Pinsent Masons in 2012

• Legal Week/Corporate Counsel Middle East

Construction & Property Team of the Year 2012

• Ranked No. 1 in all leading directories for Construction &

Engineering law in UAE/MENA

• Expansion of Infrastructure Group

• New office in Doha

• Pinsent Masons expansion in Paris & Munich; larger

team in Shanghai & Singapore

• New operations in the pipeline

Pinsent Masons‟ 5th Annual GCC

Construction Survey

Respondents

Revenues of Respondents

Sentiment is upbeat

Finance is still a challenge

Payment periods are a challenge

Order books are more healthy than last

year

Half are involved in PPP

Decline in those looking at Kuwait PPP

Water, power and transport remain key

Qatar has disappointed

Concerns in Qatar

Abu Dhabi has also disappointed

Disputes are forecast to rise

Upbeat sentiment on Dubai

Dubai remains preferred venue for

dispute resolution

Saudi backed for growth

Appetite for Africa is growing

Easiest markets to do business in

Concerns over skills levels

Yes 57.4%

No 42.6%

Are the right skills available in the Gulf construction sector?

H&S improving

Anti-bribery protocols are common

Yes 78.7%

No 21.3%

Implementing anti-bribery compliance protocols across Gulf businesses?

Most have CSR programmes

MENA Construction Market 2020

Annual Construction & Engineering

Law Gulf Conference 2012

“UAE CIVIL CODE: MYTH OR REALITY”

Mark Raymont, Partner

Bill Smith, Partner

Route map

• Optimists vs Pessimists

No one wants a construction dispute

Unfortunately they can be unavoidable

What scope does UAE law provide to avoid onerous

contractual terms or difficult commercial situations?

• We will examine:

Key legal principles underlying many if not all

construction disputes in UAE

Factors likely to influence outcome of those disputes

Myth vs Reality

• Our top 4 Civil Code issues:

Good faith

Conditions precedent and time bars

Main contractor liability for nominated subcontractors

Agreed damages and caps on liability

• Will explore the different ways these issues arise and the

ways in which arguments can be put

• But first issue is “Know your audience”

UAE Legal Landscape

• Civil law system

• No system of binding precedent

• Young jurisdiction

– Case law

– Academic writings

• Key question: Which forum?

– Local Dubai Courts

– DIFC Court

– Arbitration (Institutional/Ad hoc)

Who decides?

• Human judgment of human actions is true and void , that

is to say, first true and then void.... The judgment of the

word is true, the judgment in itself is void.... Only he who

is a party can really judge, but as a party he cannot

judge. Hence it follows that there is no possibility of

judgment in the world, only a glimmer of it. Franz Kafka

• When you judge another, you do not define them, you

define yourself. Wayne Dyer

• Don‟t underestimate the significance of the people who

will decide.

Who is your audience?

• Where you have a choice, tailor tribunal to case

• Where you have no choice, shape your arguments to

suit relevant experience/training/cultural background

• Underlying legal principles will not change but emphasis

will

• Underpinning whole UAE legal system and the way

rights are enforced is concept of “good faith”

Good faith

Article 246

(1) The contract must be performed in accordance with its

contents, and in a manner consistent with the

requirements of good faith.

(2) The contract shall not be restricted to an obligation

upon the contracting party to do that which is

[expressly] contained in it, but shall also embrace that

which is appurtenant to it by virtue of the law, custom,

and the nature of the disposition.

Good faith

• “It is not open to the contracting parties …. to withhold

their performance of their obligation if the other

contracting party has performed his corresponding

obligation in full or as to a major part of it….. in such a

degree as does not justify the other contracting party

in withholding performance of his corresponding

obligation and relying on non-performance, because

that would negate good faith, and would be an

arbitrary exercise of his right.”Cassation No: 220/229 and 235/2009 – commercial, 8th December 2009

Example 1:

• Construct only contract

• AED 100 million performance bond

• Facade elements not compliant

with specification – Moose grey, not

Goose grey

• Employer takes the bond to the

bank ...

Are there any good faith issues?

Applying good faith

Example 2:

• Variation instructed by Engineer

• Will delay completion by at least 3

weeks

• EOT claim is rejected

“... the Engineer must not grant an

extension unless it first obtains the

Employer’s express consent ...”

• Employer deducts liquidated

damages

Are there any good faith issues?

Applying good faith

“A Just Claim Never dies……”

• Failure to give notice a recurring theme

• Is strict compliance a pre-requisite

The parties must comply with clearly worded obligations

(Articles 257, 258(2) & 265(1))

Neither party to a contract should act in bad faith (Article

246(1))

A party must not exercise its rights in a manner which is

oppressive or abusive (Article 106)

A party shall not be unjustly enriched by its actions

(Articles 318 and 319(1))

A party shall not agree to a different limitation period to

that laid down under Federal law (Articles 483 & 487(1))

…… Or does it?

• Enforcing the clause

Article 257

“The basic principle in contracts is… that which they

have agreed to do in the contract”

Article 265(1)

“If the wording of a contract is clear, it may not be

departed from by way of an interpretation to ascertain

the intention of the parties”

Conditions Precedent

• Resisting enforcement

Good faith

Unjust enrichment?

Likely to be fact sensitive

• Conclusion

Variations (Article 887)

Other claims

Liability for Nominated Subcontractor

• Common law position?

• UAE Code

Article 890 of the Civil Transactions Law (Federal Law

5/1985):

(1) The contractor may assign the whole work or part of

it, if nothing in the terms of the contract prevents

him, or if the nature of the work is such that it is not

necessary to do the work by himself

(2) The principal contractor shall remain responsible to

the client

Liability for Nominated Subcontractor

• BUT!

Dubai Court of Cassation in Appeal Case 266/2008:

“In case it is proven that the employer (owner of the

building), or a subordinate of the employer, has

selected or appointed the sub-contractors, then any

delay in the completion of the work will be the

responsibility of the owner (the employer) not the

original contractor. The original contractor shall not be

responsible for delay penalty if such delay is proven

to be caused by reasons beyond his control…”

Liability for Nominated Subcontractor

• Enforcing liability

UAE Code is unequivocal in placing responsibility for

the default of nominated subcontractors onto the main

contractor, whether they were appointed by it or not

The position put forward by the judiciary is of nor

application in circumstances where there is no

binding precedent created by case-law

Contractor will have its remedies (e.g. termination)

other recourse vs NSC under the Subcontract and

knew the position when it signed the Main Contract

Liability for Nominated Subcontractor

• Contractor Position?

The Court de Cassation decision reflects the

principles of fairness that underpin the UAE legal

system. Why should the main Contractor be lumbered

with the liability for the failure of the Client selected

NSC defaults?

Whilst not binding, superior Court decisions are

persuasive

Fact sensitive

Agreed damages and liability caps

Article 390

(1) The contracting parties may fix the amount of

compensation in advance by making a provision

therefore in the contract or in a subsequent agreement,

subject to the provisions of the law.

(2) The judge may in all cases, upon the application of

either of the parties, vary such agreement so as to

make the compensation equal to the harm, and any

agreement to the contrary shall be void.

Agreed damages and caps on liability

• When will Article 390 be applied?

Discretionary not obligatory

Will it apply to penalty clauses?

Will it apply to general liability case?

Conclusions

• Primacy of concepts of good faith

• Perception that Code provides greater flexibility for

mitigating harsh contract terms

• Always fact sensitive!

DOING BUSINESS IN IRAQ

“Our Experience of the Do‟s and

Dont‟s”

Daniel Tain, Partner

Alan Wood, Partner

A Snapshot of Iraq Today

• Large, well educated population – 32 million in 2011

• 2nd largest oil reserves in the world

• According to IMF, Iraq is predicted to grow faster than China over the next

20 years

• According to Iraq‟s 2010-2014 National Development Plan, Iraq must

mobilize $186 billion in investment, create 3.5 million new jobs, and cut

unemployment by half from 15 percent

• Priority sectors include oil, electricity, agriculture, transportation, telecom,

education, health care and construction

• Non-oil sector growth will be dependent on the reconstruction and

development of decrepit infrastructure throughout the country

• Improving electricity generation capacity, which currently stands at around

70% of estimated demand, is critical to non-oil sector growth

Go There…..

What Sectors Should We Be looking

At?

• Iraq has vast infrastructure development needs

• $186 billion on infrastructure, energy, education, health

care, and agri-business projects from 2010 to 2014

• A third of the country‟s budget expenditure is earmarked

for capital projects

• The government has announced a national housing

program to build one million new housing units

• The key oil and gas, infrastructure and energy

sectors are all open for business and are backed by

significant (and increasing) oil and gas receipts

Do we need a Local Partner?

• In this region, you often hear horror stories of partners being

imposed or joint ventures failing because of weak or inefficient

local partners

• My view on partnering in Iraq is completely different. Why?

Iraqi businesses tend to be strong and are often long established

family operations

Iraq is not an easy place to do business and to avoid „missing the

boat‟ as you gear up in a new location, a real partner can be a good

thing

Delivering projects on time in Iraq is full of hazards – securing in

country licences, logistics, finding strong local supply chains, security

issues, land mines etc

Just getting paid can be difficult

Compliance and Corruption

• Iraq is ranked 166th most difficult out of 183 countries to

do business in, in the World Bank‟s „Doing Business

2011‟ Report

• Iraq is ranked as the eighth most corrupt country in the

world according to Transparency International

• You need to go into Iraq with your eyes wide open

• Beware of the “Middle Man”

Banking and Money

• Banking: Iraq‟s banking market is immature, but is

developing quickly

• Finance – international financing in Iraq is complex and

extremely time consuming

• Bonding and Letters of Credit – these are all available,

but allow time to get them in place

• Getting money out – transfer of funds is not a major

issue. Just make sure you pick banks used to working

and trading in Iraq – Standard Chartered, HSBC,

Commerzbank etc.

The Law

• The company and investment laws have all been re-

issued and are designed for ease of business

Options for doing business

• Direct negotiations with GOI, KRG etc.

• Appointing an agent or distributor

• In country establishment

• Joint venture arrangements with Iraqi local partners(s)

• Probity issues and need for due diligence

Agents and distributors

• No distinction between “agent” and “distributer”

• Relatively low cost way to enter market

• Local agent/distributor can contribute knowledge of

legal and regulatory requirements

market opportunities

• Allows foreign company to leverage agent/distributor‟s

existing network of contacts/customers and logistics

in country workforce

• Need for thorough due diligence

Agents and distributors continued

• Legal framework provided by Commercial Agency Law

• Agents must be Iraqi citizens resident in Iraq and satisfy

other requirements

• Excluded individuals - government officials or those

employed in public service

• Agency Law affords limited protection to agents

no implied terms of exclusivity

no minimum commission entitlement

no automatic compensation or termination

In country set up

• Principle alternative structures

representative office

branch office

limited liability company (LLC)

• Language and legalisation

• Regional variations

Representative office

• Often a first step for foreign companies looking to enter

Iraq market

• Limited role to undertake

business development

market research and marketing

• Representative offices may NOT enter into contracts or

conduct business

Branch office

• Broadly similar process as representative office

• Ability to enter contracts and conduct business

• Establishment process

broadly similar to other GCC countries

parent “company” documents

additional requirements for specific industries/sectors

requirement for key personal to be resident in Iraq

Company set up (LLC)

• Limited liability

• Foreign ownership - legal vs commercial

• Minimums and maximums

• Managed by general manager resident in Iraq

• Typical timescales

Baghdad - up to 12 weeks

Kurdistan - up to 8 weeks

• Requirement to proceed via an authorised attorney

Joint venture arrangements

• No legal recognition of contractual JV‟s

• Typically utilise an LLC established as a special purpose

vehicle (SPV)

• Board of directors

„shadow board‟

„supervisory committee minority shareholder protection

• Shareholder agreement

• Probing and the need for due diligence

Current Trends in Regional EPC and

Construction Contracting

Simon Harvey, Partner

Introduction

• Level of competition is increasing – truly international

playing field

• Increasing levels of sophistication on all sides

• Greater understanding of risk; not necessarily allocated

to party best able to manage in contract terms

• ECA support key for players in BoT space

• Qatar is a key market: programme? Unfavourable

contract terms?

• Saudi Arabia – also very demanding contract terms

• Kuwait – BoT / PPP route

Tender process

• Movement away from sovereign guarantees

• Procurement laws / regimes followed

• Proposals outside competitive tender less common

• Improved transparency

• Tender Bonds difficult issue for bidders

• Required to submit a conforming tender; can submit an

alternative (non-conforming bid) but required to clearly

price each divergence

• FIDIC or bespoke Contract Agreement

• Tight timeframes – limited time / opportunity for bidder to

carry out its own investigations and due diligence

Tender process – contd.

• Limited supporting information – e.g. site and other due

diligence data

• Unable to rely on those investigations

• Employer‟s Requirements – often poorly defined and

Employer unwilling to stand behind

• Interface issues given inadequate consideration

• Unwillingness to cover bid costs, even where bid

process was clearly sub-optimal

• Frequency of bidding consortia increasing

Retention, bonding and guarantees

• Advance Payment: 5 -10% backed by Advance Payment

Guarantee

• Performance Bond: 10% of Contract Sum

• Retention: 10% of Contract Sum

• Release: 50% back on Taking Over / Completion /

PCOD

• Must be issued by a local bank (necessitates local trade

finance) and must be unconditional and irrevocable

• Acceptance of collateral (Bank Guarantee) in lieu of

Retention

Guarantees contd.

• PCGs sought for large projects

• Increasingly a requirement in Qatar – but how far up the

line do you have to go?

LDs & Liability Caps

• Delay damages; generally assessed daily

• Performance LDs for Plant

• LDs Capped at 10% - 20% of Contract Sum

• Liability Cap (overall) – 50% - 100% of Contract Sum

• Termination trigger if hit caps

• Exclusion of indirect and consequential loss

Dispute Resolution

• Local governing law

• Tiered dispute resolution provisions

• Recognition that arbitration is often more acceptable to

contractors than local courts

• Likely to be domestic (regional variation), not

international but varies

• Parties more willing to arbitrate

• Employer‟s more willing to call on performance bonds

and guarantees

Other issues

• Defects Liability Period – 1- 2 yrs, may be longer for

specific items

• Decennial liability for structural defects

• Greater flex around permitting and change in law

• No escalation in price for CPI increases or increased

cost of materials

• Increasing requirement for collateral warranties

• Relief for terrorism / sabotage only in relation to the host

country or country of main equipment manufacture

• Saudiisation / Omanisation – employment of nationals

and national supply chain contract requirement

Other issues contd.

• Fit for purpose warranties

• Assignment of contract by Employer

• Engineer in construct only or D&B agreement is (almost)

never independent

• Plant buy-down and rejection rights fairly common

• Backdoor nomination of subcontractors – sovereignty

over supply chain prejudiced

Concluding remarks

• Very dynamic area and we are seeing increased levels

of activity across the Region

• Greater recognition of the need to seek legal advice prior

to signing and during project delivery

• Potential to save money on disputes

• Knowledge of previous precedent and market practice in

relevant jurisdiction and sector is essential

Combining the experience, resources and international reach

of McGrigors and Pinsent Masons

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