Project contracts: measure risks not just rewards

In broad terms, in the UAE, parties to engineering and construction projects are free to contract on the terms they agree upon. For many years the most common form of contract has been the general conditions published by the Federation International des Ingeneurs-Conseils (Fidic). Historically, the 1987 version of the Fidic Conditions (commonly known as the “Red Book”) is the most common form – now updated to the 1992 version of that contract.

Additionally, for those companies looking to contract with government departments in Abu Dhabi in particular, it is critical that they have a thorough understanding of the now mandated form of Fidic 1999.

Most will be aware that by Executive Council Decision No1 of 2007 (following Law No21 of 2006) the forms of contract to be used for building works for government departments in Abu Dhabi were mandated and set out in schedules to the resolution. One is for contracts where the contractor does not undertake design work (schedule 1) and the other (schedule 2) is for circumstances where the contractor does undertake design work, in addition to building works.

There are a variety of views as to the risk allocation that was determined by the Abu Dhabi Government and as set out in these particular forms of contract. Whatever might be the scope of that debate, in broad terms, the two forms of contract seek to strike a fair balance between the interests of the contracting community and the certainty of outcome and post-completion performance that the buyer – the employer – requires in return for his financial outlay.

It is important to also note that these declared forms of contract seek to resolve disputes via formation for the project of a dispute adjudication board for the project. If issues are not resolved at that level then, again favouring local solutions, the dispute is to be finally resolved through the ADCCI’s Conciliation and Arbitration Centre.

Again, certain employers in Abu Dhabi have been known to favour removal of this “interim” DAB step, in favour perhaps of a more “final” determination via arbitration. In practice, however, the interim step, of participating in a dispute board process quite often produces an early and valuable settlement, for all parties.

At the start of 2010, the UAE is also looking to the project finance and construction market for PPP/PFI – style of delivery systems (public-private partnerships in which the contractor entity also finances the project, in return for agreed annual payments over a period such as 30 years-plus).

Whatever form of contract is chosen, it has the primary role of identifying and allocating project risks to the relevant party. It is critical that all parties to contracts for major projects fully understand the allocation of risks inherent in the chosen form of agreement. For example, in the 1992 Fidic edition, clause 20.4 lists certain specific “risks” relating to the project which are reserved for the owner/employer. But that is not the end of it as, within the conditions of the ’92 contract, there are many other “risks” allocated to both employer and contractor.

Overlaying these party-party agreements are the broad but no less important requirements of Part III (Chapter 1) of the Civil Code of the UAE (Federal Law No5 of 1985). Part III (Articles 872 to 896 inclusive) covers “muqawala” contracts – contracts for work or services.

These articles stipulate what might be seen as the “minimum” framework of rights and responsibilities of employer, contractor and consultant, all in the context of a contract for works or services. Finally, in all matters concerning building work and design and construction supervision services, individual governments and municipalities will have their own, more specific requirements and procedures. For example, Dubai Government departments or authorities cannot contract under Fidic conditions further to Law No6 of 1997.

In summary, the principle of freedom to contract (pacta sunt servanda) is, especially for engineering and construction work, or services, in the UAE constrained and controlled by federal and local laws, but more by way of a “safety-net” of rights than by the imposition of requirements.

 - The author is partner at Abu Dhabi Habib Al Mulla & Company. The views expressed are his own