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Tendering Tips and Traps

Posted By Samer H Skaik On November 12, 2009 @ 4:49 pm In Construction Industry, Contract
Administration | No Comments

This article will touch on some of the fundamental legal aspects of the tendering process
relating to construction and engineering projects and offer some guidance on how best to
avoid problems during this crucial stage of contract formation. Tendering for large and
complex construction or engineering projects can be a very expensive exercise for employers
and tenderers alike. However, it would be money well spent if the objectives of tendering
were achieved.

Most industry players will agree that the main objectives of tendering is two fold: firstly, the
tendering process enables the employer to secure a suitable contractor to carry out the
intended works at a competitive price; secondly, the process provides a level platform for
participating tenderers to understand the requirements of the intended works and the various
risks involved in carrying out the works before deciding on their bid price.

In a heated construction market such as Dubai was recently, parties do not often appreciate
the legal aspects of the tendering process. During the previous frenzied market conditions,
stakeholders of the construction industry were too engrossed in negotiating and closing deals
as quickly as they would after the tender closing dates. From our experience there have been
instances where parties have compromised on the legal issues during the tender process for
fear of missing the set milestones of a particular project.

The tender process

The tendering process in the construction and engineering industry has developed into a very
comprehensive and complex procurement process. It often involves many steps and
procedures which tenderers must undertake and numerous conditions that must be satisfied
before they are eligible to move to the next stage of the process.

The following provides the different phases of a tendering process.These phases were
extracted from a guideline prepared by the International Federation of Consulting Engineers
(FIDIC) (see The FIDIC Contracts Guide First Edition 2000). This outline of phases also
illustrates a typical tendering process for a construction project in the UAE:

• Pre-qualification phase
At this phase the employer will set its selection criteria (for example, contractors who are
experienced in a specific type of engineering works) and invites prospective tenderers who
satisfy the said criteria to submit their details and capabilities. The objective of this phase is
to enable the employer to select suitable contractors to proceed to the next phase.

• The tender invitation phase

The employer issues an invitation to the shortlisted contractors (those who were selected
from the pre-qualification phase) or to the public at large (if no pre-qualification phase was
carried out) to participate in the tender process.

• The tender clarifications and addenda phase

During this phase, each of the tenderers is expected to raise any queries in relation to the
tender documents or the requirements of the employer to enable them to price their offer or
bid. In responce, the employer will issue written clarification to the queries. The employer
may also issue tender addendums amending any part of the tender documents. Tender site
visits are usually carried out during this phase.

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• The tender offer or bid submission phase

Tenderers submit their offers or bids before the stipulated deadline along with the required
tender security.

• The tender opening and post tender clarification phase

The employer opens and evaluates the offers or bids and seeks clarifications from the
tenderers regarding their offers or bids (if necessary).

• The award phase

The employer issues a letter of acceptance to the successful tenderer.

• The formalisation of contract phase

The successful tenderer signs a formal agreement with the employer for the execution of the
project.

With regards to public procurement in the UAE, there are laws which govern public
procurement processes. In the Emirate of Dubai, Law No.6 of 1997 regulates contracts with
the government departments of Dubai. Law No.6 sets out the various methods of procuring
contractors by the Government of Dubai which include public and closed tender processes.
This law also prescribes the procedures by which tenders are to be conducted. The prescribed
tender procedures are generally in accord with the phases set out above.

The two-stage contract

From a legal perspective, an invitation to tender or a request for tender (RFT) document
should be framed in such a way that it does not create any legal relationship between the
invitor (the employer) and any prospective tenderers at large. Unless and until the
prospective tenderers have participated in the tender process, there should not be any legal
relationship between the invitor and each of the prospective tenderers.

The common understanding is that a contract will come into existence if and when the invitor
or the employer issues a letter of acceptance or letter of award in response to the tender.
However due to the complexity of the construction tender process, each of the parties
participating in the process, including the invitor, will be bound by a set of obligations
throughout the process. The fact that tenderers are required to furnish tender securities or
tender bonds is an indication that there is a contract in place. The typical tendering process
for a construction or engineering project is in effect, from a legal perspective, a two-stage
contract.

The first stage contract

The first stage begins when the employer issues an invitation to tender or RFT. By issuing the
invitation, the employer is making an offer to each of the prospective tenderers to enter into
the first stage contract or the “tendering contract”. The underlying obligation of the employer
under this contract is its promise to consider each of the bids that the tenderers submit in
accordance with the terms of the tender invitation. In consideration of the employer’s
promise, each tenderer will deploy its resource to participate in the tender process and in
turn promises to execute the project in accordance with its bid should the employer accepts
it. Therefore, it can be argued that individual tendering contract commences when each
tenderer begins to participate in the tender process.

It is common industry practice for employers to include in the tender invitation a document
usually labelled as the ‘Instructions to Tenderers’ or the ‘Conditions of Tendering’. These
documents will set out the obligations of the parties during the tender process for a fixed
period of time or until a specified event occurs (the conditions of tendering).

It is crucial for all parties to understand and appreciate their obligations during the tender
process. Depending on the terms of the conditions of tendering, a tenderer may be
disqualified from the tender process if it fails to comply with the conditions. On the other
hand any breach on the part of the employer may entitle the aggrieved tenderer to recover
damages. Therefore, it is not surprising to find in the conditions of tendering a host of rights
that favour the employers. Some of these rights are discussed below.

Employers’ overriding rights

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As mentioned earlier, it is the promise of the employers that they will evaluate and consider
the individual bid submitted by each of the tenderers. Therefore in the absence of any
express terms to the contrary the employers are obliged to evaluate the bids and award the
project to the successful tenderers. Otherwise, the employers may be liable to the tenderers
for the wasted costs and expenses incurred in participating in the tender process.

However, it is not uncommon to find a term in the conditions of tendering which provides that
the employer will not be bound to accept the lowest priced bid. Given the current economic
climate, employers may also include in the conditions of tendering an absolute right for them
to suspend or cancel the tender process at any time. With such discretionary rights, the
employers would be able to reconsider the timing or feasibility of their projects should they
need more time to secure the necessary funding, or if the market turns for the worse.

Other additional rights that employers might set out in the conditions of tendering include the
right to vary the procedure and timing of the tender process and the right to waive any
irregularity in the bids. At times, these rights seem to have gone beyond what is necessary
and reasonable at the expense of transparency and fairness to the tenderers.

Ultimately, employers need to be mindful of the overriding requirements of good faith under
UAE law whenever they exercise their rights pursuant to the conditions of tendering. They
must bear in mind that one of the main objectives of tendering is to provide an equal
platform for all tenderers to compete fairly. In this context, all tenderers must be treated
equally and fairly by the employer throughout the tender process. For example, each of the
tenderers should be given the same information and clarification within the same time as any
other tenderers during the process. Otherwise the tender process may be seen as a sham
and the eventual exercise of the employer’s right in turning down unsuccessful bids could be
construed as an exercise of bad faith.

To avoid any allegation of unfairness and bad faith, employers, (including their consultants
especially those who are responsible for conducting the tender process), must ensure that
each of the tenderers receives equal treatment and opportunity as any other tenderer. If
there is any additional information which has arisen either in response to a query of one of
the tenderers or late information that has not been included in the tender invitation, then the
employer must ensure that such information is disseminated to all tenderers in a timely
manner (unless the information is only relevant to a specific tenderer who needs it in order to
be able to submit an alternative offer as allowed under the conditions of tendering).

The procedure for disseminating information to all tenderers is often set out in the conditions
of tendering and is usually done by way of conducting site visits, convening tender
clarification meetings and issuing various tender documents such as addendums, clarifications
and a collection of questions and answers.

In the context of disseminating information, we consider that the practice of interactive

tendering should be encouraged, whereby interactive sessions are built into the tender
process giving each of the tenderers the opportunity to discuss and clarify the requirements
of the employers and perhaps to further develop the specifications or project brief contained
in the tender documents. Such sessions can also be implemented after the tender closing
date as long as each of the tenderers is given an equal opportunity to revise its offer or bid
after taking into consideration any information arising from these sessions.

Whilst the interactive sessions must be conducted in strict confidence in order to protect the
know-how of the tenderers, transparency and fairness must prevail such that any material
information or errors discovered during the sessions are shared amongst the tenderers by
way of issuing further tender clarifications or addenda. Careful planning and staging of such
sessions will promote a truly competitive and effective tendering process.

Tenderers’ risks

In most conditions of tendering there are different types of disclaimers that protect the
employers. Employers will usually disclaim any responsibilities for the accuracy or correctness
of information provided in tender documents. Depending on the time and budget constraints
of the particular employer and the scope and nature of the intended works, it is always
advisable for employers to include in their tender document the amount and details of
information that are reasonably sufficient for tenderers to appreciate the risks that they will

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be undertaking if they are successful. This will certainly promote and encourage tenderers to
put in their most competitive prices.

Conversely, if the tenderers are to carry the burden of making their own investigations and
enquiries as to the accuracy and correctness of the information contained in the tender
documents, then subject to the risk appetite of the individual tenderer, most tenderers would
likely add on a premium to their bid or offer prices to cover the risks of any inaccurate or
incorrect tender information along with other associated risks.

It is also a common requirement for tenderers to assume the risks of any misinterpretation,
error or mistake on their part in construing the information given in the tender documents
and in pricing their bids. In this respect, it is highly advisable for tenderers to ensure that
they clearly and accurately record the assumptions and interpretations that they have
adopted in pricing or formulating their bids. These assumptions and interpretations should
then be discussed with the employer during tender clarification meetings. If the employer
finds it necessary, the appropriate addendum or clarification may be issued to all tenderers in
order to remove or minimise any ambiguity in the tender documents.

The second stage contract

The second stage sets in when the employer, after due consideration of the tender bids,
issues its acceptance of the successful bid. Depending on the conditions of tendering, it is
usually upon the issuance of the said acceptance that a construction contract between the
employer and the successful tenderer is created.

The conditions of tendering would usually specify the event upon which the second stage
contract, i.e. the construction contract is deemed to have come into existence. For example,
it may be provided that the construction contract will deemed to have commenced on the day
the successful tenderer receives the employer’s letter of acceptance. And it is usually
provided that until a formal agreement is executed between the parties the letter of
acceptance shall form a binding contract between them.

However, for the employer’s acceptance to be binding on the successful tenderer, the terms
of the acceptance must in substance correspond with the essential terms of the tenderer’s
bid. Otherwise there cannot be a meeting of minds between the employer and the tenderer in
order to form a contract. What could be an essential term to a contract is dependent on the
nature of the transaction itself. In relation to construction contracts, the contract price and
time for completion would be two obvious terms that are essential to the transaction.

A letter of acceptance that does not correspond with the successful tenderer’s offer will
amount to a counter-offer. The tenderer would then be in the position to either accept or
reject the employer’s acceptance. However, before the tenderer rejects the employer’s
purported acceptance it must be careful in determining whether the employer’s terms of
acceptance are, in substance, different from its own offer or bid, otherwise the employer may
encash the tender security or bond on the basis that the tenderer has failed to comply with
its obligation under the tendering contract.

The tenderers also need to be aware that there would be no obligations on their part to
proceed with the construction contract if they do not agree with the new terms introduced in
the employer’s letter of acceptance. In this situation they must refrain from conducting or
acting in such a way as if a contract has been formed otherwise they may be deemed to have
accepted the new terms.

Conclusion

As highlighted above, it is very important for parties to be aware of their respective legal
obligations during the tender process. Any inadvertent default on their part may give the
other party the right to claim compensation. To take an extreme view, a defaulting employer
may be liable to a disgruntled tenderer for the loss of chance of profits that the tenderer may
have earned but for the employer’s breach of its tender obligations. On the other hand, a
tenderer who refuses to be bound by its bid may be liable to the employer for the difference
between its tender price and the higher contract price of another tenderer who the employer
eventually engages. Therefore the stakes are high for both the employers and the tenderers if
they choose to ignore the legal aspects of the tendering process.

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As the global financial crisis grips hold of the UAE construction market, parties should take
the opportunity to revisit their practices either in their implementation of the tender process
or in their respond to tender invitations. Even though it seems that the construction market
in the UAE is currently in a depressed stage, it is certainly an opportune time for employers
to capitalise on the lower construction costs and for infrastructure projects to catch-up with
the building industry.

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Similar Topics

• Bonded issues
• Two stage tendering
• Contractors are left guessing in the Gulf
• Does every silver lining have a cloud?
• Christmas cheer for frustrated tenderers in public procurement contracts

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Construction Management Guide » The Cash Cow » Print Page 1 of 3

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The Cash Cow

Posted By Samer H Skaik On November 24, 2009 @ 8:05 am In Construction Industry, Contract
Administration | 1 Comment

On demand’ guarantee bonds are a typical form of contractual security in the UAE
construction industry, particularly on large projects. Their use in theory, is to afford the
employer with secured funds from a surety, in the event the defaulting party does not
perform under a contract or becomes insolvent.

Prior to the onset of the liquidity crisis last year, the general attitude of an employer (as a
beneficiary) would have been to threaten the encashment of a bond to impose commercial
pressure on a contractor to perform. A call upon an on-demand bond would have been made
if strictly necessary e.g. in the event of material or persistent default.

Due to the current liquidity crisis, employers are under increased pressure to view a bond as
an alternative source of finance as opposed to an instrument of security. In these
circumstances, the position of lenders is fraught with difficulty given their commercial
reputation may be tarnished if they refuse to pay out.

Attraction

The obvious attraction of ‘on demand bonds’ is that beneficiaries of such bonds do not need
to incur substantial costs and wait until a favourable arbitration or local judgement is
awarded before the surety of a bond pays out monies. Monies paid out, could in theory be put
to effective use by appointing an alternative contractor to complete the project and
potentially reduce the impact of delays and disruption. The attraction is heightened in
circumstances where the employer’s finances are not altogether strong.

It should however be noted, the costs of obtaining such a bond are normally passed on to the
employer which may artificially raise the contract price.

Future Industry Trend

Given the current lack of liquidity and the prevailing ‘wait and see’ approach now taken by
stakeholders, it is possible sureties might harden their attitude to their exposure on such
bonds. This would be particularly the case on large construction projects whereby there would
be more emphasis on due diligence on the financial strength and resources of the
contractors. The employer’s claim history on projects together with its finances may also
come under the microscope.

It would not be surprising if ‘on demand’ bonds become a feature of the past and become
‘conditional’ like they are in Europe and the US.

The nature of conditional bonds such as those currently proposed by FIDIC would for
instance, require a beneficiary of such a bond to only claim for amounts which are ‘properly’
due. Furthermore claims under FIDIC bonds must be established strictly in accordance with
the contract provisions.

This possible change in the form of performance bonds is likely to shift contractual risk on to
the employer. The employer will have to ensure it can be reasonably certain of its grounds for
claiming and to serve proper notice to allow the contractor a period of time to remedy its
breach. In practical terms this will cause the employer to ‘front load’ its costs in the
preparation of claim (in advance of any arbitration or litigation proceedings) as well as
sustaining the financial effect of any alleged breach before the surety under the bond is
lawfully obliged to pay out.

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Therefore payment by a surety would only be made as a last resort as opposed to being
pretty much immediate.

Hidden Danger

A contractor procuring a bond may try to resist a call on a bond on the basis monies paid out
to the beneficiary may never be fully recovered by the contractor in legal proceedings or
arbitration even if the call by the beneficiary was later found to have been without merit.

Conversely, an employer will seek to rely on its rights in calling upon such a bond for
immediate payment because it has paid a premium for such security in the event of
contractor led default. A frustration of an employer’s call in the form of the contractor seeking
temporary relief by way of attachment or injunction type proceedings can have potentially
serious financial consequences for the project as a whole. Indeed the financial survival of the
protagonists may be at stake.

Temporary Relief?

Given that lenders usually have to act promptly in complying with a call upon a bond
(typically made before any formal dispute has commenced) contractors may have to act very
fast in trying to prevent the lender from paying out to a beneficiary of a bond.

Regardless if formal arbitration proceedings have commenced, it is unlikely the Contractor

will have sufficient time to obtain the relief sought from an arbitral tribunal. This is due to the
fact it takes time for a tribunal to be appointed or for a tribunal (once appointed) to convene
to consider the application for relief.

Furthermore, given that arbitral proceedings are conducted in private and that a lender is not
a formal party to the arbitration, it is difficult to ascertain with any reasonable certainty, the
likelihood of an arbitral tribunal providing interim relief and even so the practical enforcement
of an award on the surety in practice.

The attractiveness of immediate resort to the local courts is therefore heightened. Whilst we
unfortunately do not have directly applicable remedies under the Federal Civil Procedure Law
or guidance as to how the local courts would treat an application for injunctive relief by a
contractor by way of a provisional attachment order, it would appear the contractor would
generally have to establish that:

The amounts claimed are disproportionate to the current amount being guaranteed under the
bond; or

The claim was evidently fraudulent or there was demonstrable bad faith.

It should be noted however, that even if a contractor is successful in obtaining such relief, it
is possible any interim relief may be overturned by way of an appeal by an employer thereby
providing little practical comfort overall to the contractor.

Conclusion

Given a current popular buzzword that ‘cash is king’, the likelihood of calls upon on demand
bonds at least in the short to medium term is likely to be high. Calls are likely to meet with
stiff resistance from Contractors particularly on large projects where the amounts in dispute
are high, the issues are complex and the contractor’s survival and reputation are at stake.

Disputes over entitlement to cash under these bonds may be viewed as a large ripple to an
impending wave of more formal and high value disputes, as disputes over bonds and the
underlying contracts are inextricably linked.

The response times of parties making and resisting a claim and the avenues in pursuing such
claims relating to bonds will be critical. This however naturally presupposes the paperwork of
the parties is all in ‘cherry pie’ order and the availability of an arbitral tribunal or a local judge
to deal with such applications on a short term basis.

Perhaps the attraction of ‘on demand’ bonds may not be so tempting after all?

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www.tamimi.com

Similar Topics

• Protection against contractor insolvency

• Bonded issues
• Making Demands on Advance Payment Guarantees and Performance Bonds – the
“fraud exception”
• Consultancy agreements and allegations of illegality
• Arbitration: Light at the end of the tunnel

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Construction Management Guide » Protection against contractor insolvency » Print Page 1 of 2

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Protection against contractor insolvency

Posted By Samer H Skaik On January 31, 2009 @ 1:51 pm In Contract Administration | 4
Comments

To safeguard their interests, employers should carefully word their bonds and underlying
contracts to ensure that they have the protection they need in the event that the contractor
does become or is likely to become insolvent, writes Martin Preston.

Are difficult times ahead? Employer-clients have begun asking how they can protect
themselves against the risk of insolvency of a contractor that they have engaged on a
particular project.

FIDIC and most other standard forms of contract provide for termination of the contract (or
the contractor’s employment thereunder) in the event of the contractor’s insolvency
whereupon the employer is relieved from making further payments to the contractor until
completion of the works and the contractor is required to pay to the employer any excess
costs incurred by the employer over and above the contract price due to the contractor’s
insolvency. This is the position under FIDIC Red Book which remains widely used in the
region. However, while these provisions enable the employer to avoid making payments to an
insolvent contractor who will not be able to complete the job, it is clear that an insolvent
contractor will not be able to meet any excess costs occasioned by such insolvency.
How then can an employer best protect itself to ensure that it does not have to bear such
costs?
If the contractor is a subsidiary, the most obvious (and cheapest) route will be to seek a
parent company guarantee from the contractor’s parent company, which enables the
employer to require the parent company to carry out (or procure the carrying out) of the
outstanding works or to meet any excess costs over and above the original contract price
incurred by the employer in doing so. Whether the parent company is required physically to
carry out the works or simply to make payment when the excess costs are known, will
depend on the exact wording of the parent company guarantee.
It may suit both parties for the parent company to be required to complete the works as the
parent company may be able to have these works carried out “in house” by itself or another
subsidiary. This may mean that the cost of completion (and the parent company’s liability) is
less than may otherwise be the case (because the parent company or its subsidiary may
forego all or part of its usual profit margin) and the employer is not required to find additional
funds to pay another contractor before it is able to recover such funds under the parent
company guarantee.
Withholding money from amounts otherwise due to the contractor by way of retention is
another way in which the employer may seek to protect, in part, against the contractor’s
insolvency. Typically, retention will be 10 per cent of the amount that would otherwise be due
to a contractor with 5 per cent being paid to the contractor on handover of the works and the
remainder being released on completion of the defects liability period. To preserve his cash
flow, a contractor will often ask that he be entitled to provide a retention bond rather than a
physical retention, and this is usually acceptable provided that the proposed form of bond is
on demand.
In addition to the possibilities mentioned above, it is customary for a contractor to be
required to provide a performance bond of between 10 and 20 per cent of the contract price.
Clearly, it will be important from the employer’s perspective for the bond to be callable on
insolvency. This will not be a problem with an on demand bond which, as its name suggests,
requires only a demand in the form prescribed by the bond to trigger payment. However,
with a proven default bond (where proof of contractor breach is required before a claim can
be made under the bond), it is important that the employer ensures that the bond will
respond when the employer expects it to should the contractor become insolvent.
There is a potential pitfall for the unwary employer if a proven default breach requires proof
of breach, and does not specifically address insolvency, as under the vast majority of
standard forms of contract (including the FIDIC forms), insolvency triggers termination but

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does not constitute a breach of contract. Breach by the contractor will therefore only occur
after the employer has paid to complete the works and the insolvent contractor has failed to
pay any excess amount over the contract price incurred by the employer in completing the
works. This means that the employer will not be able to access the bonded sum when it is
required on the insolvency of the contractor but will have to fund the excess itself before
claiming it under the bond. If this is the case, then the wording of the bond should be
amended to provide for a call to be made in the event of the contractor’s insolvency as well
as when a breach of contract has occurred. Further discussion of bonds can be found in my
article in the February 2007 edition of Gulf Construction.
Obviously, a parent company guarantee will only be available if the contractor is a subsidiary
and will only be worth seeking if the parent company itself is (and is likely to remain) a
creditworthy entity. Retention and/or retention bonds and performance bonds are
requirements of most construction contracts in the region, but employers should check
carefully the wording of their bonds and the underlying contracts to ensure that they have
the protection that they believe they have in the event that the contractor does become or is
likely to become insolvent.

Gulf construction

Similar Topics

• Safeguarding against employer insolvency

• Bonded issues
• The Cash Cow
• UAE laws do not favour contractor
• Nominated Subcontractors on International Projects

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The Importance of Documents During the Crisis Page 1 of 5

Issue 214 January 2009

Cover page»
The Importance of Documents During the Crisis
IN THIS ISSUE It is undeniable that UAE is now facing the
onslaught of the global financial crisis.
Corporate Although UAE’s oil revenue has cushioned
Commercial the impact of the crisis to some extent,
Banking & Finance the speed in which the impact of the crisis
is spreading across the real estate and
Construction & construction industries, particularly in
Engineering Dubai, is unprecedented.
Dispute Resolution
Intellectual The number of construction projects being
Property & IT scaled back or even suspended is on the rise. Consequently, we
have been receiving an increasing number of enquiries and
Jordan instructions from employers and contractors involving suspension
Qatar and termination issues. Inevitably, some projects will fall into
dispute whenever a party decides to suspend or terminate the
Property
contract. A dispute or a chain of disputes may occur at any level,
Martime, Aviation be it between the master developers and sub-developers, sub-
& Insurance developers and its consultants or contractors, or down to the
Saudi Arabia level between the contractors and its sub-contractors and
suppliers.
News
Events Very often in construction contracts disputes, it is when parties
About Us have no choice but to resort to either arbitral or court
proceedings to resolve their disputes will they learn (often the
New Staff hard way) the words of wisdom of Max W Abrahamson when he
USEFUL LINKS: wrote in his book entitled “Engineering Law and the I.C.E.
Contract”:
Send to a friend»
View Previous Issues» “A party to a dispute, particularly if there is arbitration, will learn
Subscribe» three lessons (often too late): the importance of records, the
Contact us» importance of records and the importance of records.”

This article will point out the importance of documents and

records (especially contemporaneous documents and records) in
relation to construction contracts claims. The author hopes that it
will serve as a timely reminder to employers, contractors and
sub-contractors the importance of managing their documents and
records during the challenging times ahead.

The role of documents and records

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The Importance of Documents During the Crisis Page 2 of 5

Any astute employer, consultant or contractor will agree that it is

crucial to have a good document or record management system
in place before running a construction or engineering project. It is
an indispensable part of project risk management.

Despite the consensus, many still succumb to the harsh reality of

their claims being discounted or thrown aside by an arbitral or
judicial tribunal due to the lack of contemporaneous documentary
evidence to establish their entitlements. On the other hand, for
the party who is defending against a claim or is pursuing a
counterclaim, the lack of contemporaneous documentary
evidence to support its defence or counterclaim will cause that
party to face the prospect of its case being discredited if not
thrown out.

Construction claims are notorious for its appetite to involve huge

volumes of documents. Sometimes the exorbitant costs and
expenses for compiling and preparing a claim deter a claimant
from pursuing its claim. It is not surprising to find situations when
a claimant would submit huge volumes of documents hoping the
sheer volume of the documents would somehow convince the less
informed opponent that the claim is bullet-proof, when in fact it
lacks the relevant documents to establish its entitlements..

A claimant (or a defendant who asserts a positive defence) is

legally obliged to prove its case. To succeed, a claimant needs to
be able to produce documents or records to establish one or more
of the following key elements required in any claims (the same
principles applies to a defendant’s case):

• the historical or factual events which gave rise to a particular

claim. And the claimant’s legal rights in relation to the said claim.
Such rights can arise from a number of circumstances, for
example: - when the other party breaches a term of the contract
or an obligation it owes to the claimant under the governing law
of the contract; or - when an event specified in the contract or
under the governing law which entitles a party to make a claim
arises.

• the causal connection between the occurrence of the particular

breach or specific claim event and the additional cost and time
incurred or loss suffered by the Claimant; and

• the amount of the particular cost or time incurred, or loss

suffered by the claimant.

A claimant will fail in its claim if it is unable to produce sufficient

evidence to substantiate its legal entitlement (the first element
above). However if the claimant is able to prove its entitlement
but unable to satisfy one or more of the remaining elements, then
its claim would be at risk of being denied or discounted for failing
to establish the causal connection between the particular breach
or claim event and the particular cost or time incurred or loss
suffered. This type of claim is popularly known in the construction

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industry as a “global claim” or “rolled-up claim”.

Documents that are relevant to a construction claim

Depending on the nature of the claim, documents or records that

are needed to establish each of the three key elements discussed
above can be made up from various types or forms of documents.
The following documents are usually relevant:

• The contract itself including the various attachments that form

the contract (conditions of contract, bill of quantities,
specifications, drawings, etc)

• Pre-contract documents (tender documents, contractor’s rates

build up records, taking-off sheets, etc)

• Works programs (baseline program, current progress program,

as-built program, etc)

• Drawings (tender drawings, construction drawings, shop

drawings, drawings register, etc)

• Progress records, reports and photographs

• Head office and site office’s correspondence including telephone

records, minutes of meetings, etc

• Various written instructions, approvals, requests, confirmations,

certificates, notices, claims and etc issued by various parties
involved in the project (employers, consultants, contractors and
sub-contractors including local authorities and other regulatory
bodies)

• Daily records (site diary, plant and manpower records, weather

charts, material delivery records, health and safety records, etc)

• Financial or costing records (Daywork records, plant hire

records, purchase orders, delivery orders, invoices, petty cash
records, site and HQ overheads records and other accounting
records)

How documents are used to establish a successful claim

Construction claims often involve complex and convoluted chain

of events from the source event which gave rise to the claim
down to the resulting effects of the particular claim. Furthermore,
a claim based on a single event may, depending on its impact to
the works, constitute a number of sub-claims. For example, a
claim by a contractor for additional payment and time as a result
of design changes instructed by its employer or the consultant
could give rise to a number of sub-claims as follows:

• A claim for variation work as a result of the design changes

involving additional work and material compared to the original

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design;

• A claim for disruption as a result of the contractor re-arranging

or re-sequencing its works pending issuance of the new
design/construction drawings;

• A claim for extension of time and prolongation costs as a result

of late issuance of the new design/construction drawings.

Based on the above illustration, in order to succeed, the claimant

would need to be able to extricate from a chain of events the
factual occurrences that can establish each of the three key
elements (discussed in the section above) for each of its claims.

With reference to the first bullet point example above, a claim for
variation under the standard FIDIC Red Book (1987 edition)
would require the contractor to produce documents and records
to establish that the changes to the design fell within the meaning
of variation as contemplated under Clause 51 of the Red Book.
The claimant then needs to show that the Engineer had issued a
variation instruction in respect of those changes.

If assuming the Engineer had only given an oral instruction to the

contractor in respect of the design changes, then by reason of
Sub-Clause 2.5, the contractor will need to produce document or
record to prove it had written to the Engineer to confirm the oral
instruction. The contractor would also need to show that its
written confirmation had not been contradicted by the Engineer
within 7 days of the written confirmation. These documents or
records would serve to prove that the oral instruction did in fact
occur and the timing of the occurrence, which may become
relevant depending on the issue at hand.

As to a claim for extension of time under the Red Book, the

claimant in the above illustration would need to be able to
produce documents and records to establish that the changes to
the design fell within one of the category of events under Sub-
Clause 44.1 (which will entitle the claimant to an extension of
time). In addition, the claimant would also need to show, again
by documents and records, that it has satisfied the claim
procedural requirements according to Sub-Clauses 44.2 and 44.3.

Pursuant to the Red Book’s standard conditions, contractors are

obliged to produce and maintain contemporaneous documents
and records in order to establish their claims for additional
payment and time (see Clauses 44 and 53). The fact these
documents and records were made during the time in which a
particular event took place, if not shortly thereafter, gives
credence to the veracity and accuracy of matters stated in those
documents and records.

In the absence of contemporaneous documents or records, a

claimant would face a challenge in establishing what had
happened in the past. Without any other corroborating or

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supporting evidence, mere reliance on witnesses’ memory to

recreate past events may not be convincing or sufficient to
discharge a claimant’s burden of proving its claim. Worse still, if
the particular witness was not even directly involved in the events
that gave rise to the claim or the events that followed.

Conclusion

There remain uncertainties in the near future as to the

sustainability of ongoing or even new projects, but one thing is
certain, that is, for all industry players alike, it will be challenging
times ahead for everyone. In times like these, all parties to a
construction contract need to be extra vigilant to ensure good
document and record management policy and system are in
place.

Construction claims should ideally be managed and resolved

during the course of the construction. However, very often such
claims escalate into formal disputes between the parties causing
the project to be suspended or even terminated because accurate
and detailed records of events were not kept thereby neither
party could accept or be convinced of the other party’s case.
Therefore, meaningful resources should be used to ensure that a
good document management policy and system are implemented.
It will be money and time well spent in implementing such a
policy and system as oppose to the parties engaging in protracted
negotiations or litigation to resolve their dispute.

Careful thoughts should be given to formulate a document

management system. The Society of Construction Law Delay and
Disruption Protocol published in October 2002 (see
www.eotprotocol.com) is a good starting point. It provides
excellent guidelines and recommendations in relation to keeping
of records (see Appendix C of the protocol). In any event, one
should always keep in mind of the three key elements of a claim
discussed earlier in this article.

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Decennial Liability and Latent Defects Contractors' and Developers' Liability in Dubai Page 1 of 2

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Decennial Liability and Latent Defects

Contractors' and Developers' Liability in Dubai
September-October 2009
Since the advent of Dubai's construction boom circa 2002, fuelled by the relaxation of restrictions on property ownership by foreign
nationals, thousands of new residential property units have been completed by developers and handed over to their new owners for
occupation. This relatively recent phenomenon of home ownership on any significant scale has heightened the need for both contractors
and developers to understand their potential legal exposure to home owners when defects begin to appear in the properties that they
have either constructed or sold to them.

Property defects can range from major structural defects that threaten the stability of a building, and in some cases cause its partial or
total collapse, through to more minor non-structural defects such as a leaky roof or loose floor tiling. In this article, we explore the
principles of decennial liability and latent defects under the laws of the United Arab Emirates ("UAE") and Dubai, and address the issue of
contractors' and developers' liability in respect of each. This article does not seek to address either contractual liability or tortious liability,
both of which also require consideration as circumstances dictate.

Decennial liability
Decennial liability is a form of strict liability arising from the French Civil Code. It has been widely adopted in Middle East civil code
jurisdictions, including the United Arab Emirates, Kingdom of Saudi Arabia, Kuwait and Qatar.

The UAE Federal Civil Code: Supervising architects and contractors liable to Developers
The source of decennial liability in Dubai is to be found in the UAE Federal Civil Code¹ ("Civil Code"), in Articles 880-883. In summary,
these Articles provide that the contractor and the supervising architect (which, where the context permits, can mean the supervising
engineer) are jointly liable to the employer for a period of ten years from the date of delivery of the work if:
The building constructed or installation erected suffers total or partial collapse; or
There is a defect which threatens the stability or safety of the building.

The available remedy to the employer is compensation, and the obligation to compensate arises notwithstanding that the collapse or
defect arises out of a defect in the land or that the employer consented to the construction of the defective buildings or installations. This
all applies unless the contracting parties intended that the installations should remain in place for less than ten years.

It is not possible for the supervising architect or contractor to "contract out" of decennial liability or to limit his liability. However, it should
be emphasised that where the role of the architect is simply to prepare plans and not to supervise their execution, he is liable only for
defects in the plans.

The "no fault" concept of decennial liability contained in the Civil Code is somewhat onerous for supervising architects and contractors
when compared with many common law jurisdictions, where liability will generally only attach to architects and contractors if they have
failed to perform their professional obligations in accordance with the requisite standards of professional skill and care.

It is clear from the foregoing that the supervising architect and contractor is liable only to the developer, as the employer, under the
decennial liability provisions contained in the Civil Code. Subject to what we say below regarding a contractual extension of liability under
Article 254 of the Civil Code, the architect and contractor are not liable to the home owner under the principles of decennial liability as
there is no direct contractual relationship between them.

Dubai's "Strata Law": Developers liable to home owners?

Whilst the Civil Code provisions relating to decennial liability described above impose potential strict liability only on supervising architects
and contractors, there are provisions in Law No (27) of 2007 on Ownership of Jointly Owned Properties in the Emirate of Dubai (the so-
called "Strata Law") which, in the context of strata developments, apparently extend the concept of decennial liability to developers
towards home owners and Owners' Associations. Article 26(1) of the Strata Law states (in translation):

"In compliance with the construction contract provisions in [the Civil Code] the Developer remains liable for 10 years from the date of
completion certificate of the building to repair and cure any defects in the structural elements of the Jointly Owned Property notified to him
by the Owners' Association or a Unit Owner."

Articles 880-883 of the Civil Code, which contain the decennial liability provisions described above, are the only Articles in the Civil Code
that specifically refer to a 10-year liability period for structural defects in relation to construction contracts (hence the term "decennial").
The implication is, therefore, that although the statutory remedies differ, the effect of Article 26(1) of the Strata Law is to extend the

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Decennial Liability and Latent Defects Contractors' and Developers' Liability in Dubai Page 2 of 2

application of decennial liability to developers vis-à-vis the owners of their properties in strata schemes and their Associations (the latter
with regard to the common areas in such schemes). We are not aware that this has yet been tested before the Courts or any arbitration
tribunal. At the very least, however, the effect of Article 26(1) is to extend a developer's liability for latent defects in the structure of the
property beyond the original contracting purchaser of his property to all persons who own that property within the first 10 years of its
completion. Latent defects generally are discussed further below.

Latent Defects
The examples referred to earlier of loose tiles and leaky roofs fall within the realm of latent defects. Simply put, latent defects are defects
which are neither discovered nor capable of being discovered at the time of issuance of the certificate of practical completion for the
building. They may be of a structural or non-structural nature.

The UAE Federal Civil Code: Contractors liable to developers; developers liable to purchasers
There are no provisions in the Civil Code that specifically deal with latent defects in relation to muqawala (construction contracts).
However, the Civil Code does recognise the principle of latent defects elsewhere, for example in Article 544. This relates to sale of goods,
but the principle has broad application, including arguably in respect of construction related issues.

Article 544 of the Civil Code deals with "old" (pre-existing) defects in goods sold and defines such defects as follows:
"(4) for a defect to be regarded as old it must have been latent, and a latent defect is one which cannot be observed by an external
inspection of the goods, or which would not be apparent to the ordinary man, or which could not be discovered by any person other than
an expert or which would only be apparent upon testing."

Thus, by virtue of the construction contract, a contractor is potentially liable to the developer for latent defects appearing in the property
that he constructs; and by virtue of the property sale contract, a developer is liable to a purchaser for the same latent defects. One
mechanism that a developer might employ in order to make the contractor directly liable to the purchaser is founded upon the provisions
of Article 254(1) of the Civil Code which states (in translation):

"It shall be permissible for a person to contract in his own name imposing a condition that rights are to enure to the benefit of a third party
if he has a personal interest, whether material or moral, in the performance thereof."

In other words, a construction contract may contain an express provision that, depending upon its precise drafting, effectively enables a
purchaser (as an interested third party) to directly enforce remedies for defective property against the contractor. This would not,
however, necessarily relieve the developer from his own liability to the purchaser.

Conclusion
In this article we have sought to explain the remedies that are available as a matter of general law under the UAE Federal Civil Code
when property defects occur after the property has been handed over by the developer to the home owner. We have looked at both
decennial liability and liability for latent defects, in the context of both a contractor's and developer's exposure for the same.

Of course, a construction contract or property sale contract will usually contain express warranties regarding defects, which often provide
wider rights to the purchasing party than those afforded under the Civil Code. A review of the contract is therefore also important,
alongside the provisions of the Civil Code.

Finally, in this article we have not explored the remedies available when property defects occur, the role of insurance or the applicable
limitation periods within which claims need to be brought. Each of these factors are also of relevance and must be considered when a
party, be it the contractor, developer or home owner, is involved with a claim for defective property.

By Lisa Dale & Steven Hunt - Dubai Office

© Al Tamimi & Company 2009

Article originally published by Al Tamimi & Company 18-Oct-09

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