Managing contractual disputes in the UAE

2015-12-14T16:22:04Z

Hour: Created page with " Managing disputes in contract Introduction The contract can said to be a valid agreement between two parties which obliges each person to do or not to do a certain thing. Fur..."

Managing disputes in contract

Introduction

The contract can said to be a valid agreement between two parties which obliges each person to do or not to do a certain thing. Further the terms of the contract should be such that it is enforceable in law by the parties. The terms of the contract should not be void and must make sense for both the parties. The both party must clearly understand (i.e. meeting of the minds) the terms of contract. Without contract, it won’t be possible to carry out business. The contract is executed by the companies, persons with regard to different types of services such as logistics, services, etc. The contractual controls must be there with the parties who entered in to the contract. The contract specifies certain condition in it to reduce the exposure of risk. If the risk of contract is not correctly analysed, then it will lead to unique risk for parties. With the increase in business, more contracts are entered in businesses. This makes it also very important to manage major risk exposure in contract.(Duhaime.org)

The terms of contract is very important, FIDIC a renowned consultant has been doing the execution of standard format of contract. FIDIC is considered to be a renowned consultant for its standard format of contracts. Standard format of the contract made by FIDIC always represent a type of compromise made between the parties. The main benefit in this type of contract is that most of terms are widely interpreted as same in court. If there is any case of dispute then, the same can be easily solved by court decisions. It is best for both parties in contract that what risks parties has to borne by themselves. Through this they will be able to manage the risk and will be able to take necessary actions so that it can be minimised. It is natural that there will be disputes in the course in execution of contract. By knowing various risks, both the parties will be able to understand it. (FIDIC, 2009)

Various types of risk in contract

There are different types of risk which varies upon the type of contract. It depends upon the costs of performance and the degree of the responsibility taken up by the contractor. There must be proper incentive and specified standard for both the party.

By signing a contract, the parties opens for a multitude of new risk. The contracts contains various types of risk which may erode the significance and value of the contract. If there is not good incentives offered to both the parties, then it may be likely to result in a dispute, it is very important to have incentives for both the parties. Planning and bad management is another reason for failure in execution of contract. Miscommunication may also lead to loss in momentum which increases the cost in contract. Lack of transparency between the parties is yet another contract related problems. This type of fundamental problem may due to various reasons. The contract commitment must be fulfilled by both the parties in contract by personnel appointed by the parties. Furthermore, other areas of risk also includes leakage in revenue, overrunning in cost, failure in the contract to meet the business needs etc. This all risks makes the parties to understand the contract in depth and they should manage the risk exposure in contract. They must fully understand the terms of contract to manage the risk.

Another way is that both the parties should see the project outcome in advance to avoid conflict between them. The risk should be identified as the first step to avoid future dispute in contracts.

Various factors that increase contract risk

The main reason for increase in contract risk is that parties does not manage the risk in contract using a systematic approach. The expectation depends upon that each parties should be able to fulfil their commitments in the contract.

<ol style="list-style-type: lower-roman;">
<li>Dependence on third parties for other service like logistics, manufacturing, payroll etc. are creating issue in completion of contract. Because third parties have different expectation on contract.</li>
<li>Companies licensing patents, copyrights, trademarks etc. wants to exploit newly developed infrastructure rather than development of infrastructure required for production and sales of goods internally.</li>
<li>With the increase in globalisation, regulatory and geopolitical risk is on increase this leads to operational and business risk in contracts.</li>
<li>There is a need of stronger corporate governance and fraud awareness with procurement of international contracts.</li></ol>

The parties ate facing either one or multiple issues as discussed above in fulfilling contractual relationships. These issue affects the functional areas of the parties to not properly understanding of the issue. Due to this the parties are in default for the non-compliance of the issue. So it is suggested that terms of the parties should have strong internal contract at the time of initiation of contract. The parties sometimes lack in focus on the administration and different risk management processes of the contract.

During the time initiation of contract, the parties to the contract review the terms of contract with regard to financial as well as business implications. Legal department of the corporates should review terms and conditions of the contract with eliminate any undesired liability, legal obligations or any type of limitation that exist in contract. Furthermore, the initiator and administrator of the contract must be reduce the knowledge gap with terms of contract. Managing the risk of non-compliance and its implications has increased the importance to manage the risk. (LLC, 2011)

Limitation of Liability

Due to risk in construction contracts, there is chance of huge loss exposure in the contract. By proper allocation and managing the risk, the parties in the contract can limit the liability. The clause for limitation of liability is also valid under UAE law. There are different types of liability which can happen after initiation of contract. Under UAE law, civil liability is the matter of either tort or contract. The contractual liability can be limited on agreeing on certain terms of the contract. The liability ceiling limit can also be agreed between the parties of the contract. UAE law also includes statutory exceptions with regard to employment or environmental law. Decennial liability is there where the liability arises due to structural defects. The tort based liability scope is broader than contractual liability because it includes foreseeable and unforeseeable damages both. Thus limitation of liability clause helps both the parties in limiting the loss exposure. (Attia, 2012) Under UAE law, the parties are free to agree the terms of construction contract.

UAE law of the contract differs with Red book used ion middle-east region. The contractor while initiating the contract in UAE law must carefully see decennial liability clause because it differs from Article 390 of the UAE civil code. In UAE law, the contractor should have also a ceiling limit on commercial liability exposure while under standard clause of red book there is no limit on commercial liability exposure. This liability is of the main businessmen who are coming from other parts of world to middle-east region.

Risk Allocation in Contracts

Contract risk must be allocated fairly between the parties to deal with future contingencies. The partitioning of the contract should be in terms of quantitative as well as qualitative factors of the contract. Proper portioning of contract will help in taking precaution and to exploit any comparative advantage to one party only. If there is any unforeseeable event then the parties may be able to negotiate and modify the terms of the contract. The cost of non-compliance with the terms of contract lead to increase in cost for compliance of the contract.

The quantitative part of partitioning deals with differentiation in price that may be upon fixed or flexible value of the contract. The fixed price provides a certain amount of revenue to the contractor against the contractual obligation. On the other hand, flexible price depends upon the valuation of the performance between the seller as well as buyer. For example – If the transaction is in spot price, then the risk is transferred to seller for fluctuation in the value of sale. Generally the contract price eliminate majority of the risk in contracts.

The qualitative partitioning enhances the efficiency of risk allocation between the parties. Clauses such as force majeure reduces the chances of specified events that may affect the value of contract. The common law of doctrine is applied when there any unexpected event occur during the performance of the contract.

Apart from the above two types of risk, there is residual risk after all the precautions are taken by the parties. The parties to manage this residual may take self-insurance by hedging its contract and other unexpected events. The professionals which are coming from UK are taking Insurance against the professional liability. The liability in the middle-east region differs as per the country. The damaged are minimised if the parties can take these precautions. (Triantis, 1999)

Importance of fair allocation of risks

The risk allocation must be fair between the parties for successful performance of the contract. This can be done by modifying the clauses of the risk in standard format. Non-standard risk should be further allocated between the parties. Fair allocation needs to be properly valid transfer of risk and the performance of contract. The deviation in risk clauses is to be properly taken care off while executing contract.

The reasons for not fair allocation may be due the fact that parties does not follow formal method of risk assessment while initiation. The risk is not fairly allocated between the parties who will be able to manage it in best possible manner. Sometimes, one party to the contract varies the risk in such a way that it deviates completely from the standard format. Risks has been often transferred to third parties who are unable to manage it. The parties to the contract are not able to do cost savings due to all this facts. Contracts and principals may have different view on the terminology used in contract.

The fair allocation of risk is thus can be done by following these steps-:

<ol style="list-style-type: lower-roman;">
<li>The parties to the contract must do formal risk assessment before entering in to the contract. It has been seen many of the parties does not have formal risk assessment methodology while tendering the contract.</li>
<li>The risk should be fairly allocated to the parties who will be best able to manage the risk. At the pre-tendering stage, the risk should be fairly allocated on the basis of efficiency of the parties. It has been surveyed that project initiator is less willing to take risk. If the risk is not allocated on the basis of efficiency then it will create problem at the contract delivery stage.</li>
<li>Parties to the contract are not following clauses of the standard format. The variation in the clauses of the contract is done as per interest of dominant party. It can only be changed if there is localised issue for changing it.</li>
<li>When the risks are transferred to outside contractors and consultants then it is possible to manage.</li>
<li>Financial cost to be borne by parties by changes in clauses is to be analysed. This means that price for the risk must be included in the tender price. If the parties merely are concerned about accepting contract and not interested in costing then they will accept the risk in anyway.</li>
<li>There is also seen that there is a lack of awareness among the principals regarding the risk allocation.</li></ol>

Through all the points for fairly allocation of risk it can be concluded that risk should be efficiently allocated. If the same is not done then there will be an increase in cost. Different allocation strategies can be included like educating the principals, developing guidelines, engaging professionals, undertaking scope of contract in more detail terms. (reality?, July 2001)

Managing risk in contract

Risk and conflict are two basic features in contract. Conflict starts when the risk in contract is not fairly allocated between the parties of contract. If the risk is shared is not equitably shared between the parties then there will be conflict. This can be solved only better governance and proper allocation of project risk. Project risk has more uncertainty involved and the degree of this uncertainty is to be reduced. Risk is to be negotiated and allocated on the basis of commercial and negotiated strength. If the parties to the contract is stronger and weaker then stronger party will try to shift the risk to the latter party. Thus improperly allocated risk will have an impact on total cost of project as well as ability to manage it. However fair risk allocation between the parties is not an easy task. The effect of risk allocation must be researched and documented while at the time of initiation of contract. While at the time planning, the planner have to consider various methods for dealing with risk. The allocation of risk should be on the ability to mitigate the risk. (Shapiro, 2010)

By taking Insurance on contract each party of the contract can further indemnify the obligations. However English law differs between the damage claim and damage claim under indemnity. At the drafting of contract the risk obligation should be identified and should be assumed by each of the party. These obligations should be rightly insured to cover the obligation. The contractor should further try to include sub-contractor also to cover the risk. (SC., 2015)

Unforeseeable Physical conditions

FIDIC standard forms of contract are now-a-days are included in both common law and civil law in encounter of project in different parts of world. This standard form of contract constitutes the international standard form to be accepted in world wide. In this we are going to discuss how FIDIC standard form of contract is about to deal with unforeseen physical conditions.

The important feature of red book is about the risk which is allocated to the contractor in relation to the unforeseen physical conditions of the contract. Under the clause of red book of FIDIC the contract is not affected by any unforeseen difficulties and costs. The practical difficulty which arose in this clause was what constitutes an adverse physical condition and artificial obstruction. For example – Artificial obstruction was concluded as the created by the parties themselves. If the materials are prevented from sending it to the site then it will be called as artificial obstruction. Now major change has been done clause 4.12 which said that physical conditions means natural as well as man-made physical conditions which exist in the contract. Before amendment, it was further depending upon the conditions which existed in site. But now the area also includes site as well as offsite area. Pollutants said to includes calamities such as tropical rain, fire etc.

Ways to avoid pitfalls

If the contractor is under the obligation to claim additional payment then the same can only be done by serving notice as per the requirement of red book. After the event happens, the contractor must give notice not later than 28 days. Further detail claim about the contract must be filled within 42 days after contractor is aware of the claim. Now as per the red book of FIDIC there is no ceiling on that amount claimed by the contractor.

Variation in terms of contacts should be well documented on the instruction of employer, or an employer’s request and value engineering proposal of the contractor. However changes in the terms of the contract must be documented in writing if it is through instruction of the engineer.

If the project completion is after the due date of completion of project then contractor will be liable for the damages in contract. If extension of time is available for contractor then the requirements of the contract must be accordingly fulfilled. The contractor is obliged for extension in completion of time if there is a variation in terms of contract, exceptionally bad weather, unforeseeable circumstances etc. are happened. The contractor further must strictly comply with the necessary notice requirement for the claim.

Dispute Resolution

Disputes under Red as well as Yellow book of FIDIC is referred to Dispute Adjudication Board (DAB). It may be started at the time of initiation of contract or when the dispute actually occurs. This process may also be known as informal process which increases the party involvement and the need for speed to resolve it. The notice of dissatisfaction must be given to both the parties. If the DAB is not able to give final decision then the same will be solved by international arbitration. The effective use of the contract must be administered to save cost as well as timings. It is very important for both the parties to write notice in unequivocal terms. Furthermore, effective record keeping will help both the parties to accurately solve the dispute between them. (http://www.out-law.com, August 2011)

Conclusion

This article was prepared to correctly analyse standard format of contract as issued by FIDIC. After initial drafting of the contract, we had analysed that there should be fair allocation of risk between the parties. The risk allocation should be allocated based on the ability of the party to control the same. Improper allocation of risk may hamper the quality of the contract and also increase the cost of project. It must be managed and coordinated between the parties appropriately.

This paper further had discussed the specific of industry studies, and had addressed some of the specific construction contract allocation between the parties. The allocation of risk must be should be in rational and in a more realistic manner. Responsibility of the party in the contract must be assigned to the party who can in best possible manner manage the risk. The risk which are not in control of both the parties should be shared. (Zamorsky, 2015)

The contractual controls must be there with the parties who entered in to the contract. The contract specifies certain condition in it to reduce the exposure of risk. If the risk of contract is not correctly analysed, then it will lead to unique risk for parties. With the increase in business, more contracts are entered in businesses. This makes it also very important to manage major risk exposure in contract.

The terms of contract is very important, FIDIC a renowned consultant has been doing the execution of standard format of contract. FIDIC is considered to be a renowned consultant for its standard format of contracts. Standard format of the contract made by FIDIC always represent a type of compromise made between the parties. The main benefit in this type of contract is that most of terms are widely interpreted as same in court. If there is any case of dispute then, the same can be easily solved by court decisions.

Disputes under Red as well as Yellow book of FIDIC is referred to Dispute Adjudication Board (DAB). It may be started at the time of initiation of contract or when the dispute actually occurs. This process may also be known as informal process which increases the party involvement and the need for speed to resolve it. The notice of dissatisfaction must be given to both the parties. If the DAB is not able to give final decision then the same will be solved by international arbitration.

References

Duhaime.org. (n.d.). Contract Definition. Learn Law, 1.

FIDIC, S. F. (2009). NOTES AND COMMENTARY ON THE FIDIC SHORT FORM OF CONTRACT . NADR UK Ltd 2004 , 1-2.

http://www.out-law.com. (August 2011). Standard Form Contracts: FIDIC. Construction standard from contracts, 1.

LLC, P. C. (2011). Managing Contract Risks. The Increased Importance of Contracts as a Risk Management Tool, 1-10.

reality?, E. r. (July 2001). A survey on risk allocation in major WA. Athol Yates & Bill Sashegy, 5-10.

SC., W. H. (2015). Risk Management in Construction Contracts: The Basics. REALDEAL, 1-4.

Shapiro, B. S. (2010). TRANSFERRING RISKS IN CONSTRUCTION CONTRACTS. Law Corporation, 1-5.

Triantis, G. G. (1999). UNFORESEEN CONTINGENCIES. RISK ALLOCATION IN CONTRACTS. University of Virginia School of Law, 10-15.

Zamorsky, T. (2015). Construction Briefing - Risk Allocation. CPR Introduction, 1.

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Managing contractual disputes in the UAE