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Signature : ............................................
June 2014
DECLARATION
I declare that this thesis entitled “common contractual issues faced by Malaysian
contractors operating in Middle East using fidic form of contracts” is the result of
my own research except as cited in the references. The thesis has not been accepted
for any degree and is not concurrently submitted in candidature of any other degree.
Signature : ............................................
ii
DEDICATIO N
To Abubaker my late father, Anas, Osama, Hussam, Jihad, Majed, Abadi, Khalid my
brothers.
Thank you, Gentlemen for the inspirations and moral support
iii
ACK NOWLEDG EMENT
Then comes, my family including my parents, wife, who taught me a new meaning
of sharing and unconditional love, my aunts, brothers and sisters, for the support and
encouragements.
Not forgetting, my Supervisor Assoc. Prof. Dr. Rosli AbdulRashid for his timeless
effort, understanding, knowledge, mentoring, guidance, inspirations, and never
ending friendship. Much respect and deep appreciation to him and to Dr. Shadiya
Mohammed S. Baqutayan who guided me on the use of SPSS and statistical analysis
methods appropriate for my study.
I would also like to thank my lecturers, Dr. Maizon and Mr. Jamal, for the great
knowledge I acquired from them as well as other lecturers and staff of the honorable
University Technology Malaysia who made my study pleasant and beneficial.
Lastly, I wish to thank and acknowledge those who have given me a helping hand
and provide assistance throughout the project, especially to those correspondents of
this research.
iv
ABSTRACT
v
ABSTRAK
vi
TABLE O F CONTEN TS
DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENT iv
ABSTRACT v
ABSTRAK vi
Table of Contents vii
LIST OF TABLES x
LIST OF FIGURES xi
1 INTRODUCTION 1
1.1 Background 1
1.2 Problem Statement 4
1.3 Aim 5
1.4 Objectives 6
1.5 Scope 6
1.6 Research methodology 7
1.6.1 Literature review 7
1.6.2 Data collection 7
1.6.3 Data analysis 8
1.6.4 conclusion and recommendations 8
2 LITERATURE REVIEW 10
2.1 Introduction 10
2.2 Fédération Internationale des Ingénieurs-Conseils (FIDIC) 11
2.2.1 The Red Book: 12
2.2.2 The Yellow Book: 12
2.2.3 The Silver Book: 13
2.2.4 The Green Book: 14
2.3 Issues 15
2.3.1 Interpretation, ambiguity and Language related Issues 15
2.3.2 Choice of Law related Issues 18
vii
2.3.2.1 Common law 21
2.3.2.2 Civil law 23
2.3.2.3 Differences between common law and civil law 24
2.3.2.4 Shariah law 27
2.3.3 Contractual Claims and Disputes 30
2.3.4 Variation 36
2.3.5 Delayed Payment 38
2.3.6 Risk Allocation and liabilities 39
2.3.7 Delay Damages (Liquidated Damages v. Penalty) 44
2.4 Construction Industries of Saudi Arabia and United Arab Emirates 46
2.4.1 Saudi Arabia 47
2.4.1.1 Introduction 47
2.4.1.2 Contracts, Procurement and Finance 48
2.4.1.3 Restrictions on International Contractors and Labors 49
2.4.2 United Arab Emirates 50
2.4.2.1 Introduction 50
2.4.2.2 Procurement 51
3 DATA COLLECTION 53
3.1 Introduction 53
3.2 Questionnaire survey 54
3.3 Respondents 55
4 DATA ANALYSIS 56
4.1 Introduction 56
4.2 Overall results of questionnaire distribution 57
4.2.1 Part 1: Background of the project: 57
4.2.2 Part 2: Issues and causing factors 60
4.2.3 Part 3: Extras (optional) 63
4.3 Causes of issues 67
4.3.1 FIDIC 67
4.3.2 Language 68
4.3.3 Governing law / legal system 69
4.4 Level of Significance 70
4.4.1 High significance issues 70
4.4.2 Medium significance issues 70
4.4.3 Low significance issues 71
4.5 Important key issues to the unwary 72
4.5.1 Amendment of FIDIC clauses 72
4.5.2 Disputes resolution 73
viii
4.5.3 Delayed payment 73
4.5.4 Risk and liability 74
4.5.5 Delay damages 75
ix
LIS T OF TABLES
Table 2. 1: Some of the terminologies' differences between common law and civil
law ..........................................................................................................................25
Table 2. 2: Contractors claims. ................................................................................32
Table 2. 3: Employers Claims .................................................................................33
Table 4. 4: Result of part 2 of the questionnaire describing the relationship between
issues and causing factor .........................................................................................62
Table 4. 5: Causes of Issues ...................................................................................67
Table 4. 6: High significance issues ........................................................................70
Table 4. 7: Medium significance issues ...................................................................71
Table 4. 8: Low significance issues .........................................................................71
x
LIS T OF FIGURES
xi
CHAPTER 1
1 INTRODUCTION
1.1 Background
1
Wong, P. (2007), Winds Of Change: Ensuring Malaysian Builders Win In The Global Race, Master
Builder Association, Malaysia.
2
Dikmen, I. and Birgonul M. T. (2004), Neural Network Model to Support International Market Entry
Decisions, Journal of Construction Engineering and Management, Vol. 130 (1), 59-66.
1
Construction projects became more complex and multi-dimensional,
demanding more disciplines and skills. Therefore, construction projects, nowadays,
in developing countries are often carried out in joint ventures with construction
companies from developed countries. International collaboration can be of particular
benefit to all parties of projects. Trans-global economic developments offer an
opportunity to develop products using the most up-to-date expertise and knowledge
in a cost-effective manner.3
3
Clark, H., and Ip, A. (1999). ‘‘The Peifan-Lucky Star—A car for China.’’ Design Manage. J., Fall, 21–28.
2
(Malaysian government agency under the Ministry of Works which appointed as a
professional body to promote, stimulate and assist the development of Malaysian
construction industry). And that was comprehensively published in CIDB’s
newsletter, issue 02 December 2012, as the latest update on international
construction ventures.
4
Raymont, M. (2010, March). THE EMERGENCE OF ASIAN CONSTRUCTION CONTRACTORS IN
THE MIDDLE EAST. www.cmguide.org. Retrieved December 27, 2013, from
http://www.cmguide.org/archives/2151.
3
What is the scenario of international construction process? What are the
issues arising from working in different country? Under different legal system than
the one practiced in home country, Malaysia? How did they (Malaysian contractors)
overcome the language differences? How to implement FIDIC? Are the terms and
conditions of FIDIC compatible with the legal system of that country? How was
FIDIC interpreted by the parties of different backgrounds? How well is the FIDIC
contract amended and drafted using words (apart from the drawings) to express in the
light of events and circumstances in prospects? In general, what are the issues faced
by other contractors working in the same host country? In case of disputes, how were
they avoided/resolved? And many other questions triggered this research.
This research tends to focus on the third point of the list above and study in
depth the common contractual issues that are creating obstacles for the Malaysian
contractors performing in the Middle Eastern countries, Specifically, Saudi Arabia
and United Arab Emirates (UAE), which occurs while using FIDIC forms of
contract. Being located in Malaysia would make it a proper and beneficial site for my
4
study to analyze different legal system’s (Common Law in Malaysia, Civil law in
UAE and Shari’ah Law in Saudi) interpretations, and examine the effect of different
languages used for communication, in relation with the issues arising from the
application of international construction contract (FIDIC).
1.3 Aim
5
1.4 Objectives
1) To identify and categorise the issues arising from the use of FIDIC in the
Middle East.
2) To determine the effect of the factors (legal systems, language and
application of FIDIC) on the issues.
3) To determine the key issues arising from working in UAE and Saudi
Arabia.
1.5 Scope
This study focuses on the responses and data’s obtained from the Malaysian
contractors performed construction projects in the Middle East using FIDIC
conditions of the contract. There are many bespoke or standard forms of contracts in
use internationally and it is not the purpose of this research to refer to them but rather
use FIDIC as it is the most commonly used, therefore, avoid confusions that the
reader may get by making quotations and illustrations from various forms of
contracts. As discussed earlier, the main countries in the Middle East with numerous
development projects are Saudi Arabia and United Arab Emirates. Therefore,
limiting the study to these two countries is the scope of my research.
6
1.6 Research methodology
The methodology adopted in this research is sub divided into several stages,
viz.; identifying the research issues, literature review, data collection, data analysis,
conclusion and recommendation. Refer to Error! Reference source not found. below.
Extensive literature review is carried out, using books, articles web sites and
e-journals to produce and evaluate models.
7
1.6.3 Data analysis
The collected data will be studied, and analyzed using SPSS based on the
issues. Data will be analyze and performed in tables and graphs for easy reference.
Shows the findings and conclusion for this study. Recommendations are, also,
suggested for contractors working or willing to work in Saudi Arabia or United Arab
Emirates, to enhance the level of understanding of the construction/contractual issues
faced by Malaysian contractor using FIDIC in the Middle East generally and Saudi
Arabia or United Arab Emirates specifically.
8
Development of research proposal
Literature Review
Objectives
Data Collection
Data Analysis
Conclusion and
Recommendations
9
CHAPTER 2
2 LITERATURE REVIEW
2.1 Introduction
This chapter represents the literature review done for this study. It is divided into five
section. First section, reviews the background of FIDIC and its different books
covering only four of them i.e. red, yellow, silver and green. Seconnd section,
reviews language and the issues related to it. 3rd section, represent the overview of
the governing law related issues with brief explanation about different legal systems
(including comparison between them) and how engineers, contractors and lawyers
from civil and/or Shariah law background perceive FIDIC Standard forms. The
forms are not only written in formal legal English, they are also obviously drafted
with a common law background in mind which will typically affect the interpretation
of the conditions. 4th Section, Discusses some issues of which it is practiced
differently in KSA and UAE according to those countries procurement act and other
government legislations when the countries' law is the chosen law to govern the
contract. 5th Section, encompasses the construction industry in the Middle East with
Saudi Arabia and UAE in focus.
10
2.2 Fédération Internationale des Ingénieurs-Conseils (FIDIC)
The FIDIC general conditions, containing 20 clauses and 160 sub-clauses, are
the standard document which must be included, unchanged, in every contract. Any
changes or additional obligation required by the employer can be included in the
particular conditions. Any changes must be kept a minimum, must not disturb the
balance between the employer and the contractor and must be carefully checked to
ensure that there is no conflict with any other clause. The guidance (prepared and
provided by FIDIC and is attached to all forms) is very important, extremely
valuable and it should be studied carefully because it suggests the wordings for
clauses to be included in the particular conditions, in order to avoid conflicts between
clauses in the general and particular conditions.
11
In 1999, FIDIC has published its latest edition of conditions of contract in
new style and layout to suite the diversity of different legal systems, procurement
system, and construction works procedures due to the size and complexity of the
project. The totally new set of standard forms of contract comprises the following
four contract forms:
12
Conditions, Forms of Tender, Contract Agreement and Dispute Adjudication
Agreement.
The EPC and Turnkey Contract (Conditions of Contract for EPC Turnkey Projects) –
General Conditions, Guidance for the Preparation of the Particular Conditions,
Forms of Tender, Contract Agreement and Dispute Adjudication Agreement.
Suitable for the provision on a turnkey basis of a process or power plant, of a factory
or similar facility, or of an infrastructure project or other type of development, where
(i) a higher degree of certainty of final price and time is required, and (ii) the
Contractor takes total responsibility for the design and execution of the project, with
little involvement of the Employer. Under the usual arrangements for turnkey
projects, the Contractor carries out all the engineering, procurement and construction
(EPC): providing a fully equipped facility, ready for operation at the “turn of the
key”. There is no engineer in the Silver Book, although the employer can (and often
does) appoint a representative in order to advise him on claims; and to facilitate
communications with the contractor.
13
2.2.4 The Green Book:
The old set is divided into the ‘Red’ and ‘Yellow’ forms on the basis of the type of
the project to be constructed. The new forms are divided on the basis of who designs
the project. Whilst the 1999 Red, Yellow and Silver books are similar in many areas,
they are in fact three separate and distinct forms of contract, which my study will
focus on them variably.
14
2.3 Issues
Parties to international projects are also concerned with the clarity of local
laws and the interpretation of the contracts in the same jurisdiction.
The fact that the contract language will solely govern the parties will make it
more convenient to be interpreted differently by different people looking at the same
contract because we all look at the world through our specific culture and historic
perspective. Thus, FIDIC 1999 suite introduces a uniformed “international language”
to be greeted favourably.
However, there are still linguistic issues which can confidently be predicted
to cause problem to many contracts, whichever version of the suite to be used. For
example, “Act of prevention” might mean to some people, the act which has or can
prevent (something), but under the English law it has a specific meaning, “equating
to an act or omission, or series of acts or omissions by the employer or attributable
to him, which have the effect of preventing the contractor from completing the
project within the contractually specified time for completion”. 6 For that reason, the
FIDIC contract can be subjected to any law yet the English law has to be examined
5
Powel-Smith, V. (1989). Some Building Contract Problems, BSP professional books, London.
6
Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1971) 69 L.G.R 1 (English C.A)
15
properly to construe the phrases in the contract by deriving their legal definition from
the English law.7
Until now FIDIC forms of contract have been almost exclusively discussed
in the English language. The main and most important source for commentaries on
FIDIC Conditions is still The International Construction Law Review. English
speaking authors, e.g. engineers and lawyers, still have the greatest authority on the
construction of FIDIC Conditions based on English law. On the other hand, there is
an increasing need for translations of the FIDIC Conditions. The reasons are that
state authorities and courts often refuse to use a foreign language contract (for
example Arabic in Saudi Arabia) and that sometimes English is either simply not
welcome or not even spoken.
Even though, the ruling language of the contract is defined in the appendix
to tender or not, ambiguity in the FIDIC contract’s particular and special conditions
as well as the contract documents will occur in the consideration of untranslated
documentation where common language translations are not provided.
7
Knutson, R. (2005). FIDIC: An Analysis Of International Construction Contracts, Kluwer Law, Netherland.
16
activities of the works;8 or obtains expert local law advice prior to entering into
contracts in the Middle East
Thus the federartion has not yet published its own translations of the FIDIC
Red and Yellow and silver Books in Arabic. For FIDIC especially the availability of
Arabic and other languages translations of the 1999 FIDIC works contracts is a key
issue. In order to avoid misunderstandings arising from translations it might therefore
be interesting to disclose some of the problems of a translator of FIDIC Conditions.
8
Owen, G. (2003, June). THE WORKING OF THE DISPUTEADJUDICATION BOARD (DAB) UNDER
NEW FIDIC 1999 (NEW RED BOOK). www.gwynowen.com. Retrieved Febrauary 11, 2014, from
http://www.gwynowen.com/DAB.pdf.
9
Arabic Translation of FIDIC Contracts Available. (2014). Retrieved February 6, 2014, from
http://fidic.org/node/1716#activities3
10
Thomas, R. (2001). Construction Contract Claims 2nd edition, Palgrave, New York.
11
Husein, Amgad T. (2013, July). Construction and projects in Saudi Arabia:
overview. Retrieved January 11, 2014, from http://uk.practicallaw.com/resource/2-534-0319
17
2.3.2 Choice of Law related Issues
The FIDIC suite of contracts, as is well known, was originally derived from
the English ICE fourth edition of engineering contract, which was conceived and
developed for many years in the English common law context of the early 20 th
century
The question which would naturally arises – what happen when FIDIC is
taken out of the English context and subjected to different national law?
Therefore, the FIDIC suite 1999 requires the parties to state the governing
law in the appendix. Which could be the law under which the parties’ rights and
obligations are determined may be one of many. It could be the law of the country
where the contract is made or where the project is constructed; the law of the
domicile of one of the parties to the contract; the law of the state where a significant
part of the contract works are manufactured; the law of the country where the
contract is financed or simply the law which the parties regard as well-suited to
govern the particular contractual relationship.
Conflicts and arguments always arise between parties to the contract either
the governing law is stated in the contract or not. When not stated or there is no
certainty the argument will be about the law which is applicable. In that case, it
would have to be selected in accordance with the principles of law known as ‘private
international law’ or ‘the conflict of laws’. This is a body of principles which
18
attempts to provide answers as to which law is the most suitable to implement and
which forum is right dispute resolution with an international aspect.12 and when
stated the clarity of the chosen law will be questioned. A whole host of complex
issues could arise especially, when the governing law of the contract is different from
the procedural law.13
This is the law which governs the interpretation and construction of the
contractual provisions and how they are to be applied. It is important to establish any
hindrance to foreign laws which cannot be enforced in the county in which the
contract is made.
14
In general, the choice of law specified in the contract will be upheld unless:
12
Bunni, Nael G.(2005). The FIDIC forms of contract, 3rd edition, Blackwell, UK.
13
Knutson, R. (2005). FIDIC: An Analysis Of International Construction Contracts, Kluwer Law, Netherland.
14
Thomas, R. (2001). Construction Contract Claims 2nd edition, Palgrave, New York.
19
The need to co-ordinate the contract with the applicable law is particularly
important in the Middle Eastern countries, especially United Arab Emirates (Civil
law) and Saudi Arabia (Shariah law) which are making extensive use of the FIDIC
contracts, generally have detailed laws that govern all the construction in that
country, the full list of requirements varies from one country to another, but some
typical examples are:
the need for the design to be approved before construction can start
on site, which causes additional problems with the use of design and
build contracts;
the power to give the contractor possession of the site may lie with
the authority rather than the employer;
the need for the contractor to keep a ‘site diary’ – this is a legal
document in which any authorized person or authority can make an
entry;
certain authorities may have the power to issue instruction to the
contractor, and that causes conflict with the FIDIC procedure under
which only the Engineer can issue instruction to the contractor;
legal restrictions on the power of any non-government employee to
authorize instructions and payment to the contractor for a
government-financed contract, which may also affect the variations
and the measurement of quantities.
The following in this research, tends to create awareness about the significant
differences in law in various parts of the world. There are three main categories of
law:
20
2.3.2.1 Common law
In Mason v. United States, 136 U.S. 581 (1890), Chief Justice Hannah of the
Supreme Court of Arkansas wrote:
"The common law is judicially created law that is developed on a case by
case basis,"
Common law is a future binding decisions. For instance, when the parties
encounter conflicts on what the law is, a common law court refers to previous case
law decisions of relevant courts. If a similar case has been resolved in the past, the
court is usually bound to justifiably follow the reasoning used in the prior case. If,
however, the court finds that the current dispute is fundamentally distinct from all
previous cases, judges have the authority and duty to make law by creating
precedent. Thereafter, the new decision becomes precedent, and will bind future
courts.
15
Common law. (2014). Retrieved February 26, 2014, from
http://en.wikipedia.org/wiki/Common_law#cite_note-1
21
Sources of common law:
a) judicial decisions,
b) equity,
Equity is the set of legal principles that supplement strict rules of law where
their application would operate harshly. it mitigate the rigid of common law by
allowing courts to use their discretion and apply justice in accordance with natural
law fairness. common law regards penalties as inequitable, it will not therefore be
bound by a description, such as ‘liquidated damages’, if in truth the sum specified is
a penalty. Although equitable remedies are discretionary and are viewed as an
expression of fairness, the rule of precedent does apply nowadays to matters of
equity. ;
The third most important source of law is legislation. Besides developing the
law in a certain area, legislation has an important role in altering an existing
inconsistent legal rule or restating a legal principle which had been developed
through precedent in the courts. In doing so, legislation can overrule common law.
Legislation is divided into two forms: primary and subordinate. Primary legislation
are those Acts issued by Parliament, sometimes called a statutes. Subordinate
legislation refers to rules, regulations or bylaws and are matters of detail relevant to a
parent Act.
22
2.3.2.2 Civil law
The civil law was established with reference to a community of culture and
endeavour by various universities. This work was led by the Universities in Europe
such as Montpellier and Toulouse in France where law was considered as a means
for bringing about social organisation and justice. A number of law books were
written at that time by famous authors. The legal writing and work done by the
universities gave way to enacted law and thus a change evolved from compilation of
the law to its codification, fusing the theoretical and practical aspects of the law of
the time.
Codification became a success in France after the release of The French Code
of 1804 which established the newly adopted ideas of justice, freedom and dignity of
the individual. The codification is the most prevalent feature, core principles in the
law system and serves as the primary source of law. It was adopted later by the
French former colonies. Several countries have developed their own Civil Codes
using the French Civil Codes as a model.
In the Middle East, Egypt was the first country to accept a codified legal
system based on the French Codes. Although, many parts of the Egyptian Civil Code
are similar to the French Civil Code, the Egyptian Civil Code, expressly recognised
Shari’a as a source of law (Article 1(2)). The influence of Shari’a distinguishes the
Arab civil codes from other civil codes in the West. The Egyptian draftsman of the
Codes also drafted the Kuwait Civil Codes and, whilst there have been changes from
the original French versions in both adaptations, in many respects Egyptian and
Kuwaiti law follows French law. United Arab Emirates and Qatar joined the trend
afterwards.16
16
Thomas, R. (2001). Construction Contract Claims 2nd edition, Palgrave, New York.
23
Sources of civil law:
a) Legislation
Nearly all the countries within the civil law group have written constitutions
alongside their codes. The written constitution is held at the highest point of
authority. All legislation is subordinate to the constitution, where it exists.
A statute, on the one hand, is intended to be an expression of the intention of the
legislature; and to be a guide in determining what the law is within its field.
The judge has the widest power of logical interpretation of the codified law.
Thus, written reasons must be included in the judgments. Two styles of formulating
the decision exist in the civil law countries: the first is the French style which is very
concise and formulated on the basis of a series of conclusions, one following the
other. The second style is practised in other countries and is based on a dissertation
which sometimes includes references to previous decisions and legal doctrine.
The codes, in the civil law, does not attempt to provide rules that are
immediately applicable to every conceivable concrete case, but rather an organised
system of general rules from which a solution for any given problem may be easily
deduced by as simple a process as possible. Unlike the common law, the rule must be
general enough to cover a series of cases rather than merely apply to some particular
situation as does a judicial decision. Judicial decision is not used as a precedent for
another in civil law jurisdictions. In fact, most codes prohibit judges from laying
down general and regulatory rules, as provided, for example, in Article 5 of the
French Code Civil. Therefore, there are fewer actual rules of law the civil law than in
the common law.
24
Accordingly, where construction contracts are concerned, it is generally
surprising to a practitioner from the civil law group of countries to find that general
conditions of contract, like those in the Fourth Edition of the Red Book, are in such
detail. For example, he would be surprised to find that, despite the fact that clause 5
does specify the applicable law of the contract, the conditions continue to specify the
rights and obligations of the parties, which is in effect a repetition of the provisions
of the specified law.
25
Terms Common Law Civil Law
work at the date of
conclusion of the contract'
Consideration Is an essential element of a Does not require
contract (with certain consideration as an
exceptions). essential element of a
contract. A contract can be
made without any
consideration.
Time for acceptance of an offer can be withdrawn Offers are kept open for a
offers at any time before specified period and
acceptance cannot be withdrawn
before the period has
expired. Obligations of
honesty and good faith are
recognised
Letters of intent Is a statement to the effect Is an 'Agreement in
that the employer intended Principle'. All of the terms
to enter into a contract at may not have been agreed
some later stage and the but the principle of an
letter imposed no agreement has. The parties
obligations on the are required to negotiate in
Construction Contract good faith and conclude a
Claims contract in due course.
Liquidated damages and A penalty clause cannot be Recognises penalty
penalties enforced. parties are free clauses
to commercially agree and they can be enforced.
rates of liquidated Sometimes the law
damages and the courts includes the powers given
will enforce whatever is to the Court to modify a
agreed provided that it is penalty if the amount shall
loosely a genuine pre- be considered
estimate of the loss Excessive or derisory, so
26
Terms Common Law Civil Law
suffered. as to accurately reflect the
true extent of any loss or
harm suffered.
Good Faith doubtful legal meaning it is an important codified
principle in Middle
Eastern civil codes and
courts have the power
(which they frequently
use) to prohibit conduct
they consider falls short of
the standards imposed by
this far-reaching principle
of law.
Sharia law or Islamic law. drawn from the Holy Qur'an (the divine revelation
to the Prophet Mohammed) and the Sunnah (a record of the sayings and actions of
the Prophet Mohammed), laying down both secular and religious aspects for all
Muslims to abide. The term Sharia means "the way" or " the path"; it is the religion
that governs the way of life - including specific details such as private and public
hygiene-; that regulated ethics the legal framework within which the public and some
private aspects of life are regulated for those living in a legal system based on Islam.
Unlike the civil and common laws which are always evolving through
legislation and case law respectively, There is no a strictly codified uniform set of
laws that can be called Sharia. neither there is Shariah case law reports as precedents.
Hence, the processes for reaching a judgment in any specific matter are driven by
methodologies distinct from those understood in civil code jurisdictions.
27
In regards to construction contracts under the shari’a law principles, it is very
important to understand two very complex and related equitable doctrines at the very
heart of Islamic law, Riba and Gharar.17
Riba means interest, usury, illicit gain or unjustified profit and enrichment.
The Shari’ah allows for transactions where both counter-values are transacted at the
time of the dealing or one counter-value now and one in the future, however, not
both counter-values in the future as this creates gharar (uncertainty) about the
fulfillment of the contract. However, this is allowed where the benefit outweighs the
harm. Since in interest financing, one counter-value is certain, the interest on the
loan, and one counter-value is uncertain, the yield from investing the loan by the
creditor, interest-finance is in fact an extreme case of gharar (uncertainty) and is
prohibited under the Shari’ah as the harm outweighs the benefit. There is also a
warning in the Qur’an in the following terms:
"O you who have believed, fear Allah and give up what remains [due to you] of
interest, if you should be believers.2.278 And if you do not, then be informed of a war
[against you] from Allah and His Messenger. But if you repent, you may have your
principal - [thus] you do no wrong, nor are you wronged.2.279 And if someone is in
hardship, then [let there be] postponement until [a time of] ease. But if you give
[from your right as] charity, then it is better for you, if you only knew.2.280"
Derived from the Arabic verb of gharra, which means to deceive. The basic
fundamental of gharar (uncertainty) is pure speculation where the outcome depends
on chance or gambling, uncertain outcome where the counter-value is uncertain or
17
Paldi, C. (2013, June). Understanding Riba (Interest) and Gharar (Uncertainty) in Islamic Finance.
http://www.academia.edu. Retrieved on March 06, 2014, from
http://www.academia.edu/2468903/Understanding_Riba_Interest_and_Gharar_Uncertainty_in_Islami
c_Finance_Presented_at_the_2013_International_Symposium_for_Business_and_Management_in_Ki
takyushu_Japan_
28
not realized, inexactitude of object, and unknown future of object. Therefore, all
transactions be devoid of Gharar. Gharar can be related to risks arising from lack of
knowledge about the contract (object, price, time of delivery), uncertainty about the
existence and delivery of the object, and /or uncertainty of the outcome. Commercial
insurance is given as an example of this, since either the insured pays a premium and
receives no counter-value, or the insurer pays out much more on a claim than was
received by way of premium. as apparent in many verses of the Qur’an, some of
which were interpreted to imply gharar. One of the verses is quoted as follows:
“O you who have believed, do not consume one another's wealth unjustly but only
[in lawful] business by mutual consent. And do not kill yourselves [or one another].
Indeed, Allah is to you ever Merciful. 4:29”
“And do not consume one another's wealth unjustly or send it [in bribery] to the
rulers in order that [they might aid] you [to] consume a portion of the wealth of the
people in sin, while you know [it is unlawful]. 2.188”
18
[2004] 2 Lloyd's Rep 1
29
The judge held that "English law was the governing law because there could
not be two separate systems of law governing the contracts." The words used were
intended to reflect the Islamic religious principles according to which S held itself
out as doing business according to Islamic principles, rather than a system of law, At
English common law and under the Contracts (Applicable Law) Act 1990, the
“proper” law of a contract is English law or the law of another country, and not a
“non-national system of law, such as lex mercatoria, or ‘general principles of law’, or
the law of Sharia’a[h]" Principles of Sharia, it was pointed out, are not simply
principles of law but relate to other aspects of life and behaviour and, in any event,
are susceptible to differing interpretation depending upon the strictness with which
they are interpreted or applied.
Furthermore, it was said that it was highly unlikely that the parties had
intended that English Court should determine any dispute as to the nature or
application of religious principles. English Courts, in other words, determine disputes
on the basis of English law (although there may be occasions where they also accept
expert evidence of foreign law, this will be the law of a country and not religious
law).
Some view claims as they are the symptoms of a problem that arouse the
emotions of the employer along with his professional advisers, and as ploys indulged
by unscrupulous contractors. It is mooted that some contractors price their tenders
low deliberately so as to secure the work, with the intention of making good their
losses and making a profit by way of claims. This could be true in some situation but
it is not the general case because it is incredibly risky, the opportunity of making
such claims are unpredictable unless the contract administrator (Architect or
Engineer) is incompetent. Whilst others view them as a defence mechanism against
shortcomings (real or imagined) of the employer and his (inhuman) professional
30
advisers i.e. Architects, Engineers and Quantity Surveyors, or fate in the shape of
unexpected circumstances. This view is as untrue as the previous view. 19
Claims always occur in construction during and/or after the projects. Very
difficult to avoid, particularize or quantify. Claims became an accepted norm rather
than exception, causing budgetary difficulties and financial embarrassment to the
employers. They cause cash-flow restriction, loss of liquidity or even worse to the
contractors. It is simply as defined in the oxford dictionary of law "demand for a
remedy or assertion of a right" under the terms of a contract or under law. Usually,
comes down to either a right to additional time to complete the work or to additional
payment and very often a combination of both. Possibly, developing to a long and
drown-out affair (dispute) involving many people and parties with varying degrees of
skills and experience in such matters. 20
Claims can arise from the unanticipated site conditions; late approval by
authorities; change in the statutory requirements; site possession; lack of information
in the contract documents specially drawings necessary for the construction work
being continually amended and many discrepancies found; problems in possessing
specific materials; late delivery of employer's supplied materials; suspension of all or
part of the work; change in the program and sequence; late or inconsistent decision
by contract administrator; disagreement of measures of quantities; large changes in
quantities; variation and extra works; late payment; delays caused by weather
conditions; requirements to accelerate; and interpretation of contractual provisions. 21
The provision of claims in the FIDIC contracts is arguably the most important
part of the contract and the most frequently used clauses. 22 The FIDIC conditions
include provisions for the submission, consideration and resolution of claims and
disputes in different clauses. Whilst clause 20 is titled ‘Claims, Disputes and
Arbitration’, there are also many clauses the provide procedures to be followed and
complied with by the Employers, Contractors and the Engineer for the submission
19
Hughes, G. A. (1983). building and civil engineering claims in perspective, Construction Press,
London and New York.
20
Hewitt, A. (2011). Construction Claims and Responses effective writing and presentation. Wiley-
Blackwell , London.
21
Rajoo, S. & Singh. H. K. S. (2011). Construction Law in Malaysia. Sweet & Maxwell Asia,
Malaysia.
22
Totterdill, B. W. (2006). FIDIC users’ guide a practical guide to 1999 red and yellow books.
Thomas Telford, London.
31
and responses to claims. It is important to co-ordinate between different clauses and
list those clauses which include similar procedures.
Following is a full listing of clauses of the contract that entitles the contractor
to make a claim:
32
Sub-Clause Title Money Time
supplied by Employer)
19.4 Consequences of Force Majeure x x
19.6 Optional Payment Termination x -
20.1 Contractor’s Claims (Procedural) x x
NOTE: in most cases Contractor claim cost and reasonable profit. However, in
some cases he can only claim ‘cost’, those are marked (c).
33
Sub-Clause Title
indemnified by contractor)
18.1 General requirements for insurances (Employer makes claim if the
Contractor fails to insure)
18.2 Insurance for works and Contractor’s Equipment (Employer can
claim refund if Contractor is unable to insure in accordance with
Contract)
If the Contractor fails to give notice of a claim within such period of 28 days,
the Time for Completion shall not be extended, the Contractor shall not be entitled to
additional payment, and the Employer shall be discharged from all liability in
connection with the claim. Otherwise, the following provisions of this Sub-Clause
shall apply.”
34
In UAE Civil Code, Sub Clause 20.1 is void and not enforceable.
Construction contracts governed by UAE law which is subject to the UAE Civil
Code, whereby all the contract terms should not contradict with any mandatory term
in this code or other public policies. Article 473 of the Civil Code states that “A right
shall not expire by the passage of time but no claim shall be heard if denied after the
lapse of fifteen years without lawful excuse, but having regard to any special
provisions relating thereto”. This article is a binding provision in the Civil Code.
The law clearly mentions the time bar for any civil claim is 15 years therefore; the
right cannot be barred before this period, unless it’s mentioned otherwise in a
specific provision in other related law. As sub clause 20.1 is a conditional term in
construction contracts it should not oppose the civil law under any circumstances. 23
Until last year, for public sector projects, FIDIC’s clause 20, which provides
for dispute resolution through a Dispute Adjudication Board (DAB), and then
through a binding arbitration under the rules of arbitration of the International
Chamber of Commerce (ICC Arbitration), presented a problem being contrary to
Saudi Law. Public sector Employers were obliged to refer disputes to a body known
as Board Of Grievances (BOG). It is a separate and independent body from the
Sharia’ Court, which sits a panel of three judges, and the decision of this panel
cannot be challenged or appealed unless to the King directly. 24
The latest dispute resolution for those considering legal remedies in Saudi
Arabia for their international contractual dispute is arbitration, avoiding any issues as
to lack of expertise or speed in the local courts. Arbitration in Saudi Arabia has in
fact taken a significant step forward with the launch, last year, of its new Arbitration
Law. Broadly in line with the UNCITRAL Model Law, it brings Saudi Arabia into
23
AlJallaf, E. (2013). The Enforceability of FIDIC Sub Clause 20.1: Contractor’s Claims in the
Legal Systems (Common Law and UAE Federal Law). www.uaesocietyofengineers.com. Retrieved
April 1, 2014, from
http://www.uaesocietyofengineers.com/(S(4e4xxlugryg33wzkgkrlllqe))/magazineCurrentIssuemore.as
px?id=122
24
Knutson, R. (2005). FIDIC: An Analysis Of International Construction Contracts, Kluwer Law, Netherland
35
line with other countries in the region. Saudi Arabia is also a signatory to the New
York, ICSID, Riyadh and GCC (Gulf Cooperation Council) Conventions. 25
But the new Arbitration Law, and the enforcement regulations enacted earlier
this year, do not change is the fact that an award, or part of it, which conflicts with
Shari’a law26, will not be enforced in the Kingdom. Interpreting Shari’a principles to
suit today’s commercial world and its desire for predictability and certainty is a
challenge for Saudi Arabia. It is also a reason for potential investors to be mindful of
a different legal landscape in a country which, at the same time, offers huge
opportunities.
2.3.4 Variation
Due to the inherent nature of construction, the precise scope of work the
needs to be executed by the contractor may not be capable of being ascertained prior
to the award of the contract and therefore no provision is included in the contract
concerned. there may be a further necessity for extra or different type of work to be
undertaken by the contractor during the construction. Most of the times, the designer
27
or contract administrator is the initiator of such changes. To avoid disputes, a
viable and mutually acceptable option would be to agree on a contractual mechanism
that allows both parties to practice their rights to changes the scope of work
reasonably following the procedure provided in the mechanism normally called
“Variation”.
36
In FIDIC contracts, the employer is permitted to make such changes and this is
usually administered by his appointed agents such as the engineer whom can
contemplate variation, under the FIDIC sub-clause 13.1 “Right to Vary”, by
following the variation procedure in sub-clause 13.3.; or instruct variation.
28
Jaeger, A. and Hok, G (2010). FIDIC - A Guide for Practitioners, Springer, Germany.
29
See discussion 2.2.3
30
Knutson, R. (2005). FIDIC: An Analysis Of International Construction Contracts, Kluwer Law, Netherland
37
2.3.5 Delayed Payment
If the Contractor does not receive payment from the Employer when due, in
accordance with Sub-Clause 14.8 he is entitled to receive financing charges
compounded monthly on the unpaid amount. This entitlement is irrespective of any
claim the Employer may have against the Contractor. These financing charges shall
be calculated based on an interest rate three percentage points above the discount rate
of the central bank in the country of the currency of payment and shall be paid in
such currency. 31
Typically the Contractor will have elected to be paid in both local and foreign
currencies. Due to a lack of foreign currency, the delayed payment is most likely to
occur with the foreign currency portion of the Contractor’s payment entitlement.
This sub-clause does not provide for the Contractor to claim an extension of
time arising as a consequence of delayed payment.
38
billion ($26.7 billion) and the money outstanding represents around 30% of the total
volume of government projects.
FIDIC sets out the principles of balanced (red and yellow books) risk
allocation in connection with ground conditions and outlines the procedure when the
risk of unforeseeable physical obstructions or physical conditions eventuates. Risk
might be allocated differently in different types of project using different FIDIC
Books, Red, Yellow, or Silver Book.
In red and yellow books, the contractor usually bears the risk of delay and
additional cost, if he is able to control the relevant events. For example, where
physical conditions cause delay or additional cost, the contractor will bear the risk of
both if the conditions were reasonably foreseeable; however, if the physical
conditions (including ground conditions) were not reasonably foreseeable then the
contractor will be entitled (subject to complying with the requirements for making a
33
Godwin, W. (2013). International Construction Contracts: A Handbook, Wiley-blackwell, UK.
39
contractor’s claim under clause 20.1) to additional time and cost resulting from the
unforeseeable conditions (clause 4.12).34
Where damage or delay to the works results from war or civil commotion, on
the other hand, under the Red and Yellow Books the employer bears the risk of delay
to the contract and additional costs to the contractor, by clause 17.3/4. The contractor
is entitled to recover his costs incurred in rectifying damage resulting from war or
civil disorder, and to an extension of time if delay has resulted to the contract works.
He will not, however, be entitled to any profit on the costs incurred. 35
In the Silver Book, the contractor bears the risk of design and unforeseen
difficulties unless this is otherwise stated in the contract. The risk borne by the
contractor here is therefore total.
The silver form impose on the Contractor the obligation to ‘design execute
and complete the works in accordance with the Contract’ so that, when complete, the
Works will be ‘fit for the purposes for which [they] are intended as defined in the
Contract’ (clause 4.1). the contractor is responsible even where the Employer’s
Requirements or provided information and data contain errors, even where the
contractor could not reasonably have been expected to detect them. By clause 4.12 in
the silver book, unless the contract states otherwise:
the contractor is to be taken to have obtained all necessary information as to
risks, contingencies and other circumstances which may influence or affect
the works;
by signing the contract the contractor accepts total responsibility for having
foreseen all difficulties and costs of successfully completing the works; and
the contract price is not to be adjusted to take account of any unforeseen
difficulties or costs.
34
Robinson, M. D. (2011). A Contractor’s Guide to the FIDIC Conditi ons of Contract, Wiley-
blackwell, UK.
35
Robinson, M. D. (2013). An Employer's and Engineer's Guide to the FIDIC Conditi ons of Contract,
Wiley-blackwell, UK.
40
The concept of responsibility and liability of both the employer and the
contractor towards each other and towards third parties is based on the sharing of the
risks in accordance with the obligations allocated to them under the contract.
Sub-Clause 17.1 sets out the indemnities required by the employer and the
contractor towards each other in respect of:
a) death or injury to any person; or
b) loss of or damage to any property (other than the works) and against all
claims, proceedings, damages, costs, charges and expenses whatsoever in
respect thereof or in relation thereto.
In summary, under clause 17.1 the Contractor must indemnify the Employer
for the injury or damage arising out of his design, execution and completion of the
works, unless the injury or damage is due to the negligence, wilful act or breach of
contract of the Employer or the Employer’s personnel or agents, the Employer must
indemnify the Contractor.
Sub-Clause 17.2 is placing the responsibility for care of the works, material
and plant for incorporation in the works with the contractor. This responsibility
continues until the date of issue of the taking-over certificate for the whole of the
works. The contractor’s obligation to rectify such loss or damage when caused by
either the risks allocated to him or to the employer.
Sub-Clause 17.6 is a very important provision in the FIDIC Books that covers
both the scope and the extent of the parties’ liabilities to each other in general. The
first limitation of liability, is that neither party is to be liable to the other for ‘indirect’
or ‘consequential’ loss or damage. Such as ‘loss of use of any Works, loss of profit,
loss of any contract’.
41
total liability of the Contractor to the Employer in connection with the contract is not
to exceed the sum stated in the Particular Conditions or, if no sum is stated, the
Contract Price (if Silver Book) or Accepted Contract Amount (if Yellow).
In Saudi Arabia
The Shari’a law does not recognize vicarious liability. The actions of an
employee, whether of employer or contractor, may not be imputed to his employer
and the employee is responsible for loss or damages arising out of his act or failure to
act. As the prophet Mohammed said “no person may be made to answer the deed of
another person”.36
36
Knutson, R. (2005). FIDIC: An Analysis Of International Construction Contracts, Kluwer Law, Netherland
37
Husein, Amgad T. (2013, July). Construction and projects in Saudi Arabia:
overview. Retrieved January 11, 2014, from http://uk.practicallaw.com/resource/2-534-0319
42
In United Arab Emirates
Risks are usually allocated as set by FIDIC. However, the terms of the
contract used by major employers often include amendments from the standard
FIDIC position to shift additional risk onto the contractor. For example, it is common
for a contractor to have:
More onerous claim notification provisions.
More restrictive suspension and termination rights.
Entitlement to certain time-related costs removed.
A greater risk of unforeseeable site conditions and errors in design
document.38
Decennial Liability
In Saudi Arabia and United Arab Emirates, the so-called decennial liability is
post-contract liability comprises a very strict form of liability for structural works
and structural design.39 The laws in these countries provides a strict liability for
structural elements over a period of 10 years, as a warranty period after the
completion and hand-over the facilities, for partial or total failure or collapse.
Contractors, architects and engineers will be held liable (in the absence of any
evidence of breach of contract or negligence) to compensate an owner or employer in
the event of defective works, therefore, must provide insurance cover for the whole
period. Insurance coverage available for inherent defects and decennial liability is
generally limited and, where available, would be expensive as a result of the need for
insurers’ heavy involvement in monitoring the design and construction process. 40
38
Kerr, M. and Ryburn, D. and McLaren, B. and Zehra (2013). Construction and projects in United
Arab Emirates: overview. www.practicallaw.com. Retrieved January 19, 2014, from
http://www.practicallaw.com/1-519-3663
39
Jaeger, A. and Hok, G (2010). FIDIC - A Guide for Practitioners, Springer, Germany.
40
Cowling, B. and Hudson, D. (2013). Construction in Saudi Arabia: Decennial liability.
www.clydeco.com. Retrieved April 9, 2014, from
http://www.clydeco.com/insight/updates/construction-in-saudi-arabia-decennial-liability
43
2.3.7 Delay Damages (Liquidated Damages v. Penalty)
If the contractor fails to comply with the time for completion, then he shall
pay ‘delay damages’ to the employer. These are to be paid at a rate stated in the
contract's Appendix to Tender, and are meant to compensate the employer for being
kept out of his plant or other facility for longer than he should have been, by reason
of the contractor’s default in not completing on time.
FIDIC provides that the Delay Damages shall be the only damages due from
the Contractor as a consequence of the default. The Employer cannot claim his actual
costs, but equally does not have to demonstrate his actual loss. The FIDIC Contracts
Guide explains that ‘the Contractor cannot prevent the imposition of Delay Damages
by submitting claims for extension of time. However, the Employer may lose his
entitlement to claim delay damages if he prevents extensions of time being agreed or
determined in accordance with Sub-Clause 20.1’ 41
Should he wish to claim Delay Damages, the Employer must give a notice of
his claim to the contractor, and the engineer. It should be noted that requires the
Engineer to consult with each Party before making a ‘fair determination’.
The rate of delay damages needs to be agreed with some care. In some legal
systems, a distinction is drawn between ‘liquidated damages’ (an agreed daily rate to
compensate the employer for the loss which is likely to result to him from delay to
the works) and ‘penalties’(a sum of money that might far exceeds the amount of
damages that would be sustained). In civil law jurisdictions the doctrine of penalty
prevails. In contrast, Common law courts permanently hold that penalty clauses are
not equitable and therefore void.42
41
Robinson, M. D. (2011). A Contractor’s Guide to the FIDIC Conditi ons of Contract, Wiley-
blackwell, UK.
42
Jaeger, A. and Hok, G (2010). FIDIC - A Guide for Practitioners, Springer, Germany.
44
In Saudi Arabia
The Emirates Code for Civil Transactions Code allows courts broad powers
and the discretion to vary or to change the level (upward or downwards) of liquidated
and ascertained damages the parties have agreed to under the contract to equal the
actual loss suffered. Article 390 of the Civil Code provides:
“(1) The contracting parties may fix the amount of damages by expressly
stating it in the contract or in the subsequent agreement without prejudice to the
provision of the law.
45
(2) The Judge may in all cases, upon the request of one of the parties, amend this
agreement in order to adjust the amount of compensation to the harm incurred. Any
agreement to the contrary shall be null and void.”43
Saudi Arabia and Qatar have led the regional boom since the downturn, both
their construction sectors have grown at an average of 10% in 2010-13, in both
countries, public-sector spending has led the way as they implement ambitious plans
to develop their infrastructure and expand their cities. MEED (Middle East
Economic Digest) Projects estimates that around US$200bn will be spent on
megaprojects in Qatar in the run-up to the 2022 football World Cup, That Makes
Qatar a focal point for many of the infrastructure projects that must be complete in
time.
The UAE, especially Dubai, was the epicenter of the previous construction
boom, and the most unfavorably influenced when the global economic crisis burst a
bubble in the real estate sector. 45 This was in light of the fact that a significant part
43
Savage, D. (2012). The top 10 things you need to know about FIDIC. www.charlesrussell.co.uk.
Retrieved January 15, 2014, from
http://www.charlesrussell.co.uk/userfiles/file/pdf/Bahrain/FIDIC.pdf
44
MIDDLE EAST CONSTRUCTION HANDBOOK. (2013). Retrieved March 11, 2014, from
http://www.aecom.com/deployedfiles/Internet/Geographies/Middle%20East/2013%20ME%20Handb
ook_9%20June%202013%20FINAL%20w%20cover.pdf
45
Bueno, J. C. (1989). The Projects and construction review. Law Business research ltd, London.
46
of the construction was being undertaken by the private sector or by state-owned
developers that were intensely leveraged with debt, as opposed to being to a great
extent funded by the oil revenues, as in Saudi Arabia. The recent revival in the Dubai
real estate market has raised expectations of a broader pick up in the private sector
sentiment across the region and a gradual resumption of hindered projects.
2.4.1.1 Introduction
Saudi Arabia has one quarter of the world’s oil reserves which makes it the
largest producer and exporter of oil in the world. As a result, the Saudi economy is
constantly on the rise, with GDP increasing by some 6% a year, and the construction
industry specifically has seen significant increases in activity. Saudi Arabia has a
rapidly-growing population; government has always been actively concerned with
the expansion or replacement of the infrastructure to meet the needs of the 21st
century. In addition to that, the Saudi government plans to diversify its economy
away from dependence on oil and gas and it becomes clear why the Kingdom intends
to spend more than US$367 billion over the next 10 years on infrastructure; new
roads, railways and urban transport systems, airport expansion, investments in water,
sewerage, electricity plants, telecoms and the IT sector and four million new
homes.46
Indications show that this concern will remain at the forefront of Saudi
decision making. 47 Contradictorily, most recently, severe restrictions have been
placed by the government specifically on foreign entities and labors seeking to
46
Brown, M. (2013). Saudi Arabia. Construction & Engineering London Legal Update. Construction
& Engineering Group. 65, 10-11.
47
Knutson, R. (2005). FIDIC: An Analysis Of International Construction Contracts, Kluwer Law, Netherland.
47
engage in construction activities in Saudi Arabia, which impacted the progress of the
construction industry negatively.
Saudi Arabia needs to make several billion dollars for the investment in
construction. Majority of the required projects investments will come from project
financing48, Sharia-complaint 49, which FIDIC silver book 50
(engineering,
procurement, and construction i.e. EPC agreements) is well-suited because of its risk
allocation scheme. For at least two reasons the government prefer the project
financing system. Firstly, the need for capital is so large that it is likely to exceed the
borrowing capability of the institution involved. Secondly, enables the harnessing of
the of the global capital market to assist in assuring that the huge amount of capital
required is most efficiently assigned to true deserving projects.
Within the public sector, however, the FIDIC book is usually amended to
give greater control to the employer for the administration of the contract. All public
work contracts are subject to the Saudi Government Tendering and Procurement
Regulations, as issued by Royal Decree M/58 dated 4.7.1427 AH.
48
Project financing is a form of dept finance provided for the development of project where the
lender relies upon its assessment of the project technical, financial and commercial viability by
considering the cash flow of the project and if necessary the assets of the project for the repayment of
the debt and intrest.
49
See sub-heading 2.2.2.3
50
See sub-heading 2.1.3
51
See sub-heading 2.2.2.3
48
2.4.1.3 Restrictions on International Contractors and Labors
It is clear that, recent move aimed at tightening labor laws is having an impact
on the construction industry in the country. A visa amnesty which ended in early
November last year has led to an estimated one million expats leaving the Kingdom
– many of whom worked in construction. This has simultaneously led to a slowdown
in projects and a rapid growth in labor costs, directly impacting on contract price.
The Saudi contracting market does offer opportunities but the recent visa crackdown
and Saudisation (Saudi policy strongly favours the hiring of local workers over
expatriates) policies is making life more difficult for contractors. Work permits and
visas are considered a nightmare to them. 53
52
Husein, A. T (2013). Construction and projects in Saudi Arabia: overview. www.practicallaw.com.
Retrieved January 17, 2014, from http://www.practicallaw.com/2-534-0319
53
Fahy, M. (2014). Analysis: Saudi Arabia's contracting market. www.constructionweekonline.com.
Retrieved February 27, 2014, from http://www.constructionweekonline.com/article-26698-analysis-
saudi-arabias-contracting-market/3/#.UzxVK6iSzRg
49
2.4.2 United Arab Emirates
2.4.2.1 Introduction
54
Gorgenl, V. (2011). A Strategic Analysis of the Construction Industry in the United Arab Emirates:
Opportunities and Threats in the Construction Business, Diplomica Verlag.
50
2.4.2.2 Procurement
There are no conditions of contract prescribed for use by all Dubai Government
departments. However, many government departments, including the Roads and
Transport Authority (RTA) and the Dubai Municipality (DM), have their own
conditions of contract. The RTA and DM conditions of contract are both based on
55
See sub-heading 2.1.1
56
See sub-heading 2.1.2
57
See sub-heading 2.1.3
51
the 1987 FIDIC Red Book with amendments to impose additional risks and
obligations on the Contractor.58
58
Kerr, M. and Ryburn, D. and McLaren, B. and Zehra (2013). Construction and projects in United
Arab Emirates: overview. www.practicallaw.com. Retrieved January 19, 2014, from
http://www.practicallaw.com/1-519-3663
52
CHAPTER 3
3 DATA CO LLECTIO N
3.1 Introduction
This chapter encompasses on how the study has been carried out. It is an
overview on the methodology of this study and the medium used in order to achive
and fulfill the objectives of the study.
53
3.2 Questionnaire survey
Part one, involved general information about the respondent; the location of
the project intended to be the reference of the respondent to fill in the questionnaire;
the law chosen to govern the contract and the procedure of DAB / Arbitration and/or
Litigation. Lastly in part one is the procurement method in relation to the selected
book of FIDIC.
Part two, is the core of the survey, using the cross tabulation, for respondents,
to indicate the occurrence of the issues and the magnitude of the relationship between
the contractual issues and their root causation, either caused by language or FIDIC
and the governing law or both. These listed issues and their possible causations were
sourced from a wide range of litrature including books, journal papers, and
WebPages on contractual issues of international projects in general and FIDIC
practices in the Middle East.
Part three, contains nine questions that give an insight of issues specifically
occur from practicing in the two countries in focus i.e Saudi Arabia and UAE.
54
1) construct the questionnaire online and distribute for open access
2) E-mailed to selected companies who performed in those two
countries
3) Face-to-face meetings with a Director, General Managers, and
Project Managers who were directly involved in projects in these
countries, to fill in the survey and to obtain additional commentaries
on the subject matter.
3.3 Respondents
Participants are from a range of company sizes, as well as being from both the
public and private companies. A full range of professions took part, including
Architects, Legal Professionals, Quantity Surveyors, and Civil Engineers.
55
CHAPTER 4
4 DATA ANALYSIS
4.1 Introduction
In this chapter, all the results collected from the questionnaire distribution
have been analyzed in SPSS for more accuracy, and the results been extracted in the
form of graphs and tables. Based on the results collected, the objectives of the study
can be achieved and verified as fulfillment of the objectives is the requirement
needed.
56
4.2 Overall results of questionnaire distribution
57
1. The Project was performed at:
3. Was the governing law of the contract same as the DAB and arbitration
procedural law?
Yes 6 75%
No 2 25%
58
4. The language stated in the appendix of the contract as the ruling language
Arabic 0 0%
English 8 100%
Other 0 0%
59
4.2.2 Part 2: Issues and causing factors
Part 2 of the questionnaire is the core part which serves the purpose of better
examining the issues arising from FIDIC contracts, extracted from FIDIC provisions
of claims and events which entitle contractors to claim, and the potential causation of
these issues. This part uses Cross tabulation which is a statistical process that
summarizes categorical data to create a contingency table. It provides a basic picture
of the interrelation between two variables i.e. issues and causes, and can help find
interactions between them.
Method of calculation
The table (4.4) is calculated by merging all respondents’ answers in one table.
Whereby, each tick () is converted to 1, and if 2 respondents ticked in the same slot
or cell it will be counted as 2. Total numbers are summed vertically and horizontally.
Horizontally, the percentage is calculated with regards to the total number of
respondents = 8. Vertically, percentage is calculated using total number of issues =
25.
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LANGUAGE Governing law Application of FIDIC
Insufficient communication
Poor implementation of
particular conditions
the relevant country
Frequency (%)
Lack of clarity of
CAUSES
law provisions
governing law
TOTAL
contract
contract
ISSUES
6 Delayed payment 1 1 2 1 1 6 75 25 50
8 Delay damages 1 3 1 1 6 75 25 50
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LANGUAGE Governing law Application of FIDIC
Insufficient communication
Poor implementation of
particular conditions
the relevant country
Frequency (%)
Lack of clarity of
CAUSES
law provisions
governing law
TOTAL
contract
contract
ISSUES
22 Requirements to accelerate 1 1 2 1 1 6 75 0 75
TOTAL 2 4 32 7 0 31 43 9 20
Frequency (%) 8 16 132 28 0 124 172 36 80
Average (%) 52 50.67 96
TABLE 4. 4: RESULT OF PART 2 OF THE QUESTIONNAIRE DESCRIBING THE RELATIONSHIP BETWEEN ISSUES AND CAUSING FACTOR
62
4.2.3 Part 3: Extras (optional)
Even though this part of the questionnaire is optional, yet all the respondents
participated have answered. This part is meant to give insight of selected issues to
support the study to better evaluate the issues by expressing facts and opinions
related to their practice in UAE and Saudi Arabia.
1. FIDIC provisions are usually amended, such as notice of claims, was there
any amendment to FIDIC claim provisions?
No 25
Yes 75
- The period of notice on the delay in event and the submission of claims for the
purpose of progressing the claims.
- Clause 17.3 – Employer’s risk – paragraph 1 delete sub-paragraph (e) and (h)
- Progress payment clauses was amended.
- Notification to employer when we become aware not ought to be aware
63
2. Dispute avoidance mechanism was applied because
Others 25
4. For projects in Saudi Arabia only, completed before 2012, How disputes
were resolved?
Others 25
64
5. The provision of interest entitlement, when payment is delayed, was
amended to suite the Employer’s requirement and\or to comply with the
governing law provision
Strongly disagree 0
Disagree 12.5
Neutral 12.5
Agree 50
Strongly agree 25
Others 0
7. Who’s liable for death and \ or injury of construction worker(s) during the
construction work?
65
8. Decennial liability (10 years warranty to compensate owner for total or
parial collaps) for my company is
both 12.5
66
4.3 Causes of issues
Government restrictions
CAUSES
provisions
contract
country
Frequency (%) 8 16 132 28 0 124 172 36 80
The contractual issues are caused by the application of FIDIC, language and
legal system governing the contract with the average of 96%, 52% and 50.6%
respectively. Poor implementation FIDIC, insufficient communication and
differences between Malaysian legal practice in those two countries i.e. Saudi Arabia
and UAE, are the main factors that are causing issues to the contract with results
extended beyond expectations.
4.3.1 FIDIC
The data shown in the graph and the table of figure 6, reflect that all FIDIC
books are used according to the type of procurement chosen by the employer.
However, the red book is used the most with percentage of 37.5% then design-build
25%, the turnkey silver book with 12.5%. And, last is other, modified version of
FIDIC 25%.
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The variety of choices of procurement methods used in Saudi Arabia obtained
from the result of the study, contradicts with the theory from the literature review
which author of the article is convinced that the most preferred book of FIDIC in
Saudi Arabia is the silver book i.e. turnkey procurement system.
Although FIDIC was drawn up in the nineteenth century, and much of the
construction law that is relied upon in the courts and in arbitration has been made as
a result of cases that took place in the industrial revolution. But FIDIC became
popular in the Middle East more recently as a result of the economical booms in
these countries due to oil prices.
Therefore, table 4.4, shows that application of FIDIC is the major causation
of problems in these countries with the average of 96%. The results shows that poor
implementation of the contract ranked at the top of the list of the-issue-causing-
factors with the frequency of more than 100%. then comes the discrepancies found in
the particular conditions against the general conditions of FIDIC with 80%, which
explains that drafting the particular conditions was done poorly. However, FIDIC is
proven to be the best international standard form of construction contract, even in
this study, due its possibility to be easily implemented in any legal system of any
country, as the result of discrepancies between FIDIC and governing law is merely
36% according to contractors' opinions.
4.3.2 Language
All the respondents, figure 5, confirmed that English is the language they
used (100%) throughout the project, including discussions and the production of
documents. With reference to table 4.5, translation of documents and interpretation
of contract merely caused 8% and 16% respectively. On the other hand, sufficiency
of communication, including meetings, notification letters, circulated memos ect.,
68
have a major impact on project's performance, with more than 100% of assurance
that the language in communication needs to be improved to minimize claims.
All projects performed in Saudi Arabia using Saudi law to govern the
contract, as well as projects located in UAE using the UAE law to govern the
contract (Figure 2 and 3). Parties to the contract did not exercise their discretion
carefully to choose an appropriate system of law as the governing law of the contract.
The choice of the applicable/governing law of the contract is, apparently, made by
the promoter of the project or the ‘employer’.
Overall, figure 4, 75% confirmed that the procedural law (the law of the
jurisdiction in which the arbitration proceedings are held – the place of arbitration –
which is technically referred to as the Seat of arbitration) is the chosen governing
law.
Those two respondents forming 25%, who answered NO, for the procedural
law not being same as governing law, performed in Saudi. They claimed that the
choice of procedural law was not made by the parties at the time of the formation of
the contract, mainly, because the employer removed the arbitration clause. When
dispute occurred the contractor took the dispute to the International Court of the
International Chamber of Commerce (ICC) then the court had chosen the procedural
law on the basis of its neutrality and as a place other than that to which either of the
parties is connected.
69
many issues arose has been caused by unawareness of the differences between the
legal practice in Malaysia and the countries they are performing in (results more than
100%).
Based on table 4.4, Issues are categorized based on the calculated total
percentage rating the significance of the issues, into:
The issues in the table below are ranked high, because 7 – 8 respondents
(maximum 8 respondents) faced them during their work in these two countries.
70
The issues in the table below are ranked high, because 6 out of 8 respondents
faced them during their work in these two countries.
The issues in the table below are ranked high, because 4 - 5 out of 8
respondents faced them during their work in these two countries.
71
4.5 Important key issues to the unwary
According to the results obtained from the survey, particularly from Figure 7,
75% of the respondents have had witnessed the amendment of FIDIC contracts.
Some of them noted the significant amendment in thier contract, Apperently, three
out of the four notes goes in line with Totterdill’s finding. Below is the respondents’
answers which complies with the list above.
o The period of notice on the delay in event and the submission of claims for
the purpose of progressing the claims.
o Clause 17.3 – Employer’s risk – paragraph 1 delete sub-paragraph (e) and (h)
o Notification to employer when we become aware not ought to be aware
Except the fourth one who noted that the amendment was made to the progress
payment clauses.
With reference to Figure 9, the notice of claims in UAE, regarding the duration of
which the notice should be submitted, is not amended although FIDIC provides that
submission should not be later than 28 days and the law in UAE provides that
contractor can submit the claim anytimes before 15 years from the day of the event.
59
Totterdill, B. W. (2006). FIDIC users’ guide a practical guide to 1999 red and yellow books.
Thomas Telford, London.
72
4.5.2 Disputes resolution
Dispute resolution clauses in any construction contract are the most important
clauses, especially in FIDIC which, usually, bind parties from different jurisdictions
and different backgrounds.
The result from the survey shows that, Figure 8, 75% percent of the
respondents avoided disputes because the employer was powerful and they did not
expect fair hearing from arbitration because, as in figure 4, 75% the seat of
arbitration is in the country whereby the project is performed. 12.5% avoided
disputes because the procedure is expensive. 12.5% preferred to maintain good
relationship for future projects. 25% specified that they had to escalate their dispute,
which was impossible to avoid, to international arbitration under international
chamber of commerce (ICC).
It appears that 50% (Figure 10) of the respondents, who performed in Saudi,
would rather Compromise even if the dispute cause unbearable difficulties to the
contractor. Meanwhile 25% used alternative dispute resolution. And other 25% used
international arbitation to resolve.
73
4.5.4 Risk and liability
74
4.5.5 Delay damages
Figure 15, shows that the common law principle of liquidated damages is highly used
in the Sharia and civil law jurisdictions with 75%. Other 12.5% applied penalty while
12.5% agreed to a contract which apply both liquidated damages and penalty.
75
CHAPTER 5
4.0 Conclusion
5.1 Introduction
This Chapter represents the findings and conclusion for this study.
Recommendations are suggested for contractors working or willing to work in Saudi
Arabia or United Arab Emirates, they are also presented for further research in this
area to enhance the level of understanding of the legal/contractual issues faced by
Malaysian contractor using FIDIC in the Middle East generally and Saudi Arabia or
United Arab Emirates specifically.
76
5.2 Conclusion
This study shows that the problems/issues are mainly those of which may
cause claims and/or disputes and harmful ending to any construction projects. These
issues listed below are expected to occur several times during the course of
construction. According to the level of significance, they are categorized as follows:
77
III. Low significance issues
This study determined the measure of the effect of these factors causing the
contractual issue on the international construction projects in the Middle East
generally, and in UAE and Saudi Arabia specifically.
78
3) Key issues
This study, also, shows some of the critical issues. Awareness of these issues
is necessary to prevent damages, by being prepared for, with more attention to them,
as may seem fit the parties of the contract.
Amendment to FIDIC
Dispute resolutions
Delayed payment
Risk and liabilities
Delay damages
5.3 Recommendations
1. Discard negative local mindset, and not to export local culture that has been
a practice here in Malaysia. For example, according to one of the
respondents, Malaysian contractors are always taken advantage of because
they practice the culture of negotiation and discussion before sending a
notice of claim. Unlike contractors from Europe or America who fully
practice their contractual rights without any compromise;
2. Comprehend the legal system applied in the country they wish to expand to
by knowing the similarities and differences between the practice in Malaysia
and the host country. Appropriate knowledge of the interpretation of the
79
contract in accordance with legal rules of interpretation of country is
required.
3. Conduct workshops and forums prior to formation of the contract to clarify
all foreseeable issues; to account for all the risks and their management
techniques; to decide the methods to be used to resolve potential issues and
which law will be the preferred procedural law.
4. Employ a competent member(s) to the team with ability to communicate
fluently in the local language used in the country where the project is
located.
5. Ensure the competency of the consultants appointed by the employer, by
studying their profiles and assessing their abilities to manage the project.
Though, consultants from other countries may be professionally qualified by
lower standards than the Malaysian.
6. Further research on the topic to be conducted in the future.
80
REFERENCES
Bueno, J. C. (1989). The Projects and construction review. Law Business research
ltd, London.
Bunni, N. G. (2005). The FIDIC forms of contract : the fourth edition of the Red
Book, 1992, the 1996 Supplement, the 1999 Red Book, the 1999 Yellow Book, the
1999 Silver Book, Blackwell, UK.
Bunni, Nael G.(2005). The FIDIC forms of contract, 3rd edition, Blackwell, UK.
Clark, H., and Ip, A. (1999). The Peifan-Lucky Star—A car for China. Design
Manage. J., Fall, 21–28.
81
Godwin, W. (2013). International Construction Contracts: A Handbook, Wiley-
blackwell, UK.
Kerr, M. and Ryburn, D. and McLaren, B. and Zehra (2013). Construction and
projects in United Arab Emirates: overview. www.practicallaw.com. Retrieved
January 19, 2014, from http://www.practicallaw.com/1-519-3663
KSA government owes contractors over $26bn - FIDIC. (2013). Retrieved Aughust
19, 2013, from http://www.constructionweekonline.com/article-23855-ksa-
government-owes-contractors-over-26bn--fidic/#.U0LJ06iSzRg
82
Rajoo, S. & Singh. H. K. S. (2011). Construction Law in Malaysia. Sweet &
Maxwell Asia, Malaysia.
Savage, D. (2012). The top 10 things you need to know about FIDIC.
www.charlesrussell.co.uk. Retrieved January 15, 2014, from
http://www.charlesrussell.co.uk/userfiles/file/pdf/Bahrain/FIDIC.pdf
Thomas, R. (2001). Construction Contract Claims 2nd edition, Palgrave, New York.
Totterdill, B. W. (2006). FIDIC users’ guide a practical guide to 1999 red and
yellow books. Thomas Telford, London.
83
APPENDIX
Questionnaire
84
[Please tick ( √ ) where applicable]
Company stamp:
Saudi Arabia.
United Arab Emirates.
Other. (please specify): ..................................
Saudi Law
UAE Law
Malaysian Law
Others (kindly specify): .............................................................
Was the governing law of the contract same as the DAB and arbitration law?
Yes No
If No, please specify the law chosen to govern DAB and arbitration:
.....................................................
3. The language stated in the appendix of the contract as the ruling language is:
Arabic.
English.
Other. (please specify): ..................................
85
PART 2: ISSUES AND CAUSING FACTORS
Instruction: Please tick ( √ ) in the appropriate box. With each one of the issues given
against its cause(s):
Government restrictions
Causes of the
provisions
issues
Contractual issues
1 Procedure of claims
3 Variation order
6 Delayed payment
7 Extension of time
86
Language Governing law and FIDIC
Government restrictions
Causes of the
provisions
issues
Contractual issues
22 Requirements to accelerate
23 Unnecessary testing
87
PART 3: EXTRAS (OPTIONAL)
1. FIDIC provisions are usually amended, was there a significant amendment to FIDIC
provisions?
Yes No
..................................................................................................................................................
..................................................................................................................................................
..................................................................................................................................................
..................................................................................................................................................
3. For projects in UAE only, regarding FIDIC sub-clause 20.1(Notice of Claims) was
4. For projects in Saudi Arabia only, completed before 2012, How disputes were resolved?
5. The provision of interest entitlement, when payment is delayed, was amended to suite the
Employer’s requirement and\or to comply with the governing law provision
Strongly agree
Agree
Neutral
Disagree
Strongly disagree
88
6. Examples of additional risks
7. Who’s liable for death and \ or injury of construction worker(s) during the construction
work?
Employer
Contract administrator
Contractor
subcontractor
Depends on Court to judge
8. Decennial liability (10 years warranty to compensate owner for total or parial collaps) for my
company is
Liquidated damages. (daily rate to compensate the employer for the loss which is likely to
result to him from delay to the works)
Penalty (a sum of money that might far exceeds the amount of damages that would be
sustained)
both
89