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Sat 12 Dec 2009 04:00 AM

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Economic Hardship Claims: Contractor’s sword or developer’s shield – Part 2

James Bremen, in the second of a two part series, compares the civil law concept of economic hardships in different jurisdictions and how they may apply in those respective areas.

Set out below are examples of the doctrine of economic hardship as it applies under the civil codes of some Middle Eastern jurisdictions.

Egypt , UAE and Qatar

In the civil law jurisdictions of the Middle East, given their common origin, the articles embodying the doctrine have similar wording. Article 147 of the Egyptian Civil Code, states: "The contract makes the law of the parties. It can be revoked or altered only by mutual consent of the parties or for reasons provided for by the law.

"When, however, as a result of exceptional and unpredictable events of a general character, the performance of the contractual obligation, without becoming impossible, becomes excessively onerous in such a way as to threaten the debtor with exorbitant loss, the judge may, according to the circumstances, and after taking into consideration the interests of both parties, reduce to reasonable limits, the obligation that has become excessive."

This article, and its equivalents in the UAE (article 249 of the UAE Civil Code) and Qatar (article 171 of the Qatar Civil Code), cannot be excluded under the contract.

Previous cases suggest Egyptian court practice is to apportion the ‘abnormal' loss equally between the parties, although there is no prescribed formula. It is likely this approach will be reflected in other Middle East jurisdictions.

Key elements of economic hardship

With respect to the civil law jurisdictions of the Middle East, a number of key elements can be identified. These include: the event in question be exceptional and unforeseeable; the event be of a general or public character; the contract be long term, which makes the performance of the obligation exhausting; the event has occurred after signature of the contract (and during its performance); the event makes continued performance of the contract unduly onerous for one of the contracting parties, so as to threaten that party with a grave loss.

How does economic hardship apply?

In the context of construction projects, the doctrine can apply in a number of scenarios. Infrastructure and energy projects usually take years to complete and carry substantial risks, which make them particularly vulnerable to changing conditions.

While the legal framework for claims due to economic hardship is clearly in place, a contractor may have difficulty in succeeding with such a claim.

Firstly, it must be remembered that the contract is the law of the parties. A party will not be granted relief simply for entering into a bad bargain.

Secondly, although the economic circumstances over the period 2004 - 2007 were exceptional, they may not have been unforeseeable. Contractors were well aware of the inflating costs of construction, or the potential for costs to inflate, during and before the economic boom and this may prove fatal to many claims. Where these claims succeed, developers may argue that the doctrine ought to also apply to them, with the result that a contractor's claim could be reduced immediately by 50%.

But, where a decision or act of government distorts the market in favour of a particular sector, thereby exacerbating the loss for the contractor, that public event may be regarded as unforeseeable. Where the developer is a government entity this may also deprive the government entity of the opportunity to raise the defence of economic hardship.

A clearer picture will develop over the coming year as more claims for economic hardship are likely to be tested.

James Bremen is a partner in King & Spalding's London office and a member of the Global Transactions Practice Group.  Bremen has practised exclusively in construction law for more than a decade.  He has significant experience in project development and dispute resolution both in the UK and internationally.

The opinions expressed in this column are of the author and not of the publisher.

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