If your employer's payment is way overdue when do you know if it is time to suspend or terminate a project? Legal experts Drew Baiter and Dr. Chandana Jayalath offer advice.
In today's market, cash is a precious commodity. Many contractors and consultants in the UAE have overdue certified payment certificates and some have not been paid since last year. So what do you do when payment from the employer is well overdue? (writes Drew Baiter)
How long must you fund a project before suspending or terminating your work? Can and should you terminate your contract? These are questions that many in the construction industry are facing today. Understanding your contract's suspension and termination provisions and relevant UAE law is paramount to protecting yourself from exposure to liability and preserving your rights to pursue claims for the money you are due.
It is always advisable to attempt to negotiate an acceptable payment plan with the employer before resorting to suspending or terminating a construction or consultancy contract. Suspension and termination strain relationships create legal risks and uncertainty, and often lead to formal legal proceedings.
If all else fails, however, suspension or termination may be the only remaining option. Sometimes the mere act of serving a notice of intention to suspend or terminate is enough to prompt a resolution, and it never hurts to approach your client one last time before terminating.
Be aware of risks
You should consult your legal advisors before deciding on either course of action. If you do not follow the contract procedures carefully or otherwise suspend or terminate your contract improperly, you may be held responsible for delaying the project and exposing yourself to significant damages. Read your contract in full and follow the procedures in the suspension or termination provisions exactly.
Be certain that your notices are sent to the proper representatives designated in the contract. Always keep proof of delivery of your notices. If you end up in legal proceedings, you will need evidence that you complied with the contract requirements. Also, be aware of life safety issues and the protection of the works when winding down your site operation. As you demobilise, make every effort to minimise costs to yourself and the employer, and to cause minimal disruption to the project.
The Civil Code
So what does UAE law say about suspending or terminating a consultancy or construction contract? The Civil Code does not directly address a party's right to suspend work, but it does provide that a party to a contract may refuse to perform its obligations, if the other contracting party does not perform its own obligations. The Civil Code does directly address the termination of a contract.
It states that construction contracts shall terminate upon the completion of the work agreed or upon the cancellation of the contract by consent or by order of the court. As a result, some may argue that a party to a construction contract may not unilaterally terminate the contract. Another article of the code, however, permits parties to agree to a mechanism for termination when a party is in default, whereby one party may terminate its obligations without a judicial order upon the failure of the other party to perform its obligations.
The code further provides that if one party does not do what it is obliged to do, the other party may cancel after giving notice.
Suspension, and especially termination, should not be taken lightly, but sometimes they are necessary when you are not receiving payment and the prospect of future payment is uncertain. If done properly, you will have "stopped the bleeding" and won't be incurring additional costs performing work, for which you are not being paid. In addition, you will have preserved your claims for payment.The author is a senior associate for Kilpatric Stockton. Is there such a thing as solving construction disputes in a gentlemanly way? Dr Chandana Jayalath talks of a speedy process to minimise legal expenses
Construction contracts often include ‘keep working provisions' for the parties to perform their obligations, despite the existence of a dispute. The contract may expressly forbid the contractor's right to suspend work or terminate the contract, although inconsistent with the local law.
For example, under English law, there is a statutory right to suspend work for non-payment, which can not be excluded by contract.
o, the employer may have the right to require a contractor to proceed with variations despite the time and cost consequences, not having been agreed in advance. In a fixed lump sum contract, the contractor may lodge a claim for variation, but the employer might deny it upfront on the basis of ‘lump sum' or pay half of the cost pending evaluation at a later stage.
The engineer may ask the contractor to go ahead with the rates he deems suitable whenever the contractor has no option, because of his obligation to complete works on time.
Although the contractor is supposedly responsible for quantity errors, in any typical lump sum contract where the quantities are said to be actual and correct, he will purposely keep silent in a windfall such as overestimations that bring money for nothing.
Although the contract expressly says no re-measurement is possible, the losing party may bring out this case and attempt to interpret the function of re-measurement as the ‘standard practice'.
There is usually a term implied to the effect that the client will not prevent the contractor from carrying out work in accordance with the terms of the contract, which is sometimes referred to as the prevention principle. In the UK case of Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970), some defective work was discovered before practical completion had been achieved.
The client was responsible for long delays owing to failure to approve a scheme of remedial works. A dispute arose concerning the contractor's entitlement to an extension of time. Unfortunately, there was no specific provision for an extension of time when the contractor is delayed by the client, which is a fatal shortcoming in the contract.
Another aspect is that many contracts do not have a mechanism to compensate the loss behind unprecedented price escalation in the Gulf region. This is where swift solutions are required to minimise potential losses suffered by parties, instead of allowing ‘loss to prevail where it lies', particularly when contracts are silent.
Perhaps some claims are indeed necessary and the provision for making claims is essential in order to accommodate unavoidable changes, for example by granting justifiable extensions without invalidating the contract.
However, problems arise when the provision is abused, for example by contractors who allegedly tender at low prices with the objective of profiting from their claims. For example, the government sector has now been bombarded by claims more than ever before.
Claims specialists have been busy with compiling claims for work suspended in recession. On the other hand, clients who attempt to aggressively suppress legitimate claims may provoke exaggerated, unjustified or even frivolous claims with the help of their in-house experts.
Needless to say, the vicious circles generated by such exaggerated actions and reactions definitely add to the avoidable costs of construction.
The author therefore strongly believes in a speedy, flexible and a fair process, indeed a gentlemanly way to resolve disputes between gentlemen, as Alexis Mourre says, rather than too formal court lawyering.
The author is a senior contracts specialist for the Public Works Authority in Qatar.For all the latest construction news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.