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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
Concerns over skills levels
Yes 57.4%
No 42.6%
Are the right skills available in the Gulf construction sector?
Anti-bribery protocols are common
Yes 78.7%
No 21.3%
Implementing anti-bribery compliance protocols across Gulf businesses?
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
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
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
Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by
the Solicitors Regulation Authority, and by the appropriate regulatory body in the other jurisdictions in which it operates. The word „partner‟, used in
relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with equivalent
standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP‟s
registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use „Pinsent Masons‟ to refer to Pinsent Masons LLP and affiliated
entities that practise under the name „Pinsent Masons‟ or a name that incorporates those words. Reference to „Pinsent Masons‟ is to Pinsent
Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2012
For a full list of our locations around the globe please visit our websites:
www.pinsentmasons.com www.Out-Law.com