Reed Smith Client Alerts

Type: Client Alerts

With the upcoming finalisation and the approval process of the Master Planning for Dubai Expo 2020, the early site activities are set to commence in the initial part of 2015 to ensure that the event is well on track for the planned completion in October 2019.

In keeping with the Expo’s “Connecting minds, creating future” theme, the waves created by the Expo 2020 are reaching far and wide, well beyond the event itself. As well as the preparation of the Expo area itself with its surrounding residential, hospitality and logistics zones, Dubai and Abu Dhabi construction sectors are already gearing up on a much wider level to provide additional residential and commercial facilities across the two emirates.

As the trust between contractors and developers (and all the other players in the construction chain) slowly returns following the colossal impact of the financial crisis, so is the possibility of rushed contractual arrangements being put in place as the parties become eager to move on with the projects, potentially at the expense of contractual due diligence.

The risk and financial management on a construction project starts with the contract itself. Time and time again Reed Smith comes across instances where works are executed to various degrees, or indeed completed, solely on the basis of the developer’s Letter of Intent (LOI) with a lot of details left to be desired. The parties would be well advised to treat LOIs in the spirit they were meant to, and that is to allow the contractor to commence mobilisation and procurement while a formal contract is put in place. LOIs rarely, if ever, provide an adequate substitute for a meaningfully negotiated and executed contract, but instead leave the door wide open to disputes. Many LOIs also limit the contractor’s monetary entitlements well below the full contractual sums and therefore below the value of the works that in practice get executed, exposing the contractor to unnecessary worries relating to the recovery of the remainder over and above the value of the LOI.

Tendering generally amounts to a fine art for contractors, to stay competitive and emerge successful at the end of the process. However, that should not distract from the importance of raising any contract related objections and requests for clarification during the bidding process and not after the contract has been concluded. Admittedly, such contractual fine-tuning can lead to some tension while the parties seek to agree on the key allocation of liabilities, including for future changes in regulations and requirements of authorities, substantial material price escalations and the other usual suspects. But left unattended such matters can have a major impact on the financial feasibility of the contractor’s entire engagement with inevitable disagreements further down the line.

Agreeing sensible internal claims and dispute management procedures will also go a long way in ensuring that claims are effectively resolved between the parties without escalating to the point of having to be referred to an external dispute resolution process such as a court or arbitration. A time limit of just four days for notifying additional cost claims and delay events on a major construction project will probably prove unworkable, as will an arbitration clause which nominates one arbitration centre to fulfill the role of the appointing authority and, by reference, incorporates another. From a subcontractor’s point of view, agreeing to be bound by the terms of the main contract which nobody in the subcontractor’s organisation has seen, is not a far sighted strategy, particularly because the terms of the subcontract itself are likely to expressly state that the main contract has been made available and is incorporated on a “back to back” basis. These are all true stories.

Addenda and other intended post contract amendments is another trap for the unwary. It is not enough for the same parties to sign a document which refers to the same project and typically contains some form of a departure from the originally agreed scope of the works. Unless the addendum clearly references the original contract, uncertainty will remain as to whether this new document is binding to amend the original contract or amounts to a new contract in its own right. If each contract covers a distinct portion of the works, this may very well work. However, generally the scope covered by the two documents is so intertwined that it is impossible to separate the two in a meaningful way, creating a lot of uncertainty for both parties.

Matters concerning improperly incorporated addenda can become particularly detrimental if the two contracts are subject to different dispute resolution mechanisms, which is quite likely as the original contract would typically contain an arbitration clause but the addendum (being intended to be an add-on to the original contract) does not have a dispute resolution clause at all, making it subject to the jurisdiction of the courts (the dispute resolution options will be further analysed in our next client alert in the Expo 2020 series).

Disentangling insufficiently thought through contractual arrangements and piecing together the rights and obligations from various unsigned or improperly incorporated documents have much wider implications than just escalating the legal costs. Significant management time, attention and resources can be required to manage the ensuing dispute process, which in this context would be much better spent on the success of the company and enjoying the Expo.

Client Alert 2014-296