Disputes in the construction industry or in the process of honoring roles in a construction contract are not uncommon in many countries, a good of example which would be the United Arab Emirates (UAE) wherein the construction industry has been in a stage of boom for the past several years . Some of the world’s Mega structures and other fascinating architectural works are located in this Middle Eastern country. It is one of the largest exporters of oil and petroleum products and this country’s largest city, Dubai, is home to a range of spectacular and grand architectural works. It is home to the tallest building in the world, the Burj Khalifa, with a height of approximately 829.8 meters, and was completed in 2010 . The country’s largest city is also the home of one of the most expensive luxury hotels which has been constructed atop a man-made island, the Burj Al Arab. Lastly, the UAE is also the home of the Palm Islands, a chain of two artificial palm leaf-shaped man-made islands in Dubai. The construction of the Palm Islands has been considered as one of the most expensive, challenging, and at the same time, ambitious construction projects of the 21st century . These three examples only show how blooming the construction industry in the UAE is. However, a blooming construction industry does not necessarily equate to an industry that does not have problems. UAE’s construction industry, just like that of any other country, has encountered a problem or two about the enforcement of its construction contracts .
The objective of this paper is to discuss my involvement in resolving a construction dispute in the United Arab Emirates wherein I was the judge, involving Dubai’s Main City Engineer—who will be addressed in the case as Mr. X for purposes of confidentiality, as the main contractor, the Sharjah General Construction Company as the subcontractor, the Dubai Police Department as the client. The name of the project was Roads in Dubai Police Head Quarter Complex at Al Awir, Dubai, a 20.5 million AED project.
This is a case of Mr. C, Dubai City’s Chief City Engineer and the plaintiff in the case Dubai City Engineer v. Dubai Police Department. As the city engineer, Mr. C is well used of receiving several contractual construction offers from different government departments. One of the projects he was ordered to work on as the City Engineer was the 20.5 million AED project of re-constructing roads inside the Dubai Police Head Quarter Complex at Al Awir, Dubai.
After visiting the DPD that same day to deliver the finished contract for final review, the DPD representative immediately signed the contract. The DPD authorities were aware how legal procedures with regards to managing a contract, especially one that involves a lot of work and some 20.5 million AED. After having the contract signed by both parties, it was then submitted to the court for final approval, after which the contract would already be enforceable and legally-binding. The DPD had been made aware of all the processes that occurred and their corresponding binds and effects.
Under the terms of the legal contract, the DCD (Dubai City Engineer) has been granted the permission to outsource the construction work by hiring only one subcontractor, which he did. Mr. C hired Sharjah General Construction Corporation as its sole subcontractor for the project. As stated in the FIDIC or the International Federation of Consulting Engineers, a subcontractor can be any person or organization named in the Contract as a subcontractor or any person or group appointed as a subcontractor, to do a part or portion of the total Works . Under the contract, the subcontractors are not allowed to outsource the work any longer.
According to the Day Work Schedule submitted in the court, the project should have been already launched by the first week of August 2012 with a deadline for the delivery on the first week of August 2013. Both of these deadlines have been met by Mr. C’s camp. The construction project launched earlier than the 1st week of August 2012 deadline and the project deliverables were also finished ahead of schedule on the 4th week of June 2013.
According to the terms of the contract, the DPD camp is not required to make any advanced or down payment for the construction project to commence, which was a privilege that Mr. C’s camp gave to the DPD camp considering that they are both under the same branch of government—the city of Dubai, under the condition that the total payment for the project in the amount of 20.5 million AED, be paid in full, and only in cash or check three months after the delivery of the project.
The current date is February 2014, approximately 6 months after the completion of the construction project. As far as Mr. C’s knowledge goes, no payment has been transferred yet. Mr. C attempted to contact the DPD’s camp to question the validity of the camp’s delay in payment although that may already be considered as an outright breach of the legally-binding contract submitted before the court prior to the commencement of the construction project. Upon talking to the authorities, Mr. C learned that the DPD did pay for the total project cost within the allotted period of 3 months after the completion of the project. What happened was that Mr. C was not duly informed of the financial transaction, which resulted to Mr. C, the main contractor, being unable to pay the Sharjah General Construction Corporation its share on the total contract price, which may well be considered as a breach of contract against the main contractor.
Now, according to the provisions of the construction Law in the UAE, there have been some violations that both Mr. C and the Dubai Police Department authorities violated.
Firstly, the employer, which in this case, is the DPD authorities, are required to make an advanced payment addressed to Mr. C or the company he is affiliated with, before the construction project can commence, regardless whether they are from the same branch of government or even colleagues. As per the provisions stated in Sub Clause 14.2 under Contract Price and Payments of the FIDIC 1999, “the employer shall make an advance payment, as an interest-free loan for mobilization, when the Contractor submits a guarantee in accordance with this sub-clause; the total advance payment, the number and timing of installments, if more than one, and the applicable currencies and proportions, shall be stated in the Appendix to Tender.” Also, under Sub Clause 14.7, “The Employer shall pay to the contractor (a) the first installment of the advance payment within 42 days after issuing the Letter of Acceptance or within 21 days after receiving the documents in accordance with Sub-Clause 4.2. and Sub-Clause 14.2, whichever is later; (b) the amount certified in each interim payment certificate within 56 days after the engineer receives the statement and supporting documents; and (c) the amount certified in the Final Payment Certificate within 56 days after the employer receives this Payment Certificate.”
In this case, no advance payment was made by the employer despite the fact that Mr. C was able to provide a Statement of Guarantee for the project. Under the same clause, it has been clearly stated that the employer shall make an advance payment after receiving a valid and enforceable Statement of Guarantee from the main contractor. However, the court may waive such provisions because it was stated in the contract that both parties agreed that the project could still commence despite the absence of any advance payment.
As mentioned in the case brief, the contract allowed that no advance payments be made under the condition that the total contract price be paid in full within the first three months after the completion and take-over of the project by the employer. The DPD authorities claimed that they were indeed able to pay the total contract price in full within the 90 day contract provision but they failed to inform the main contractor about the existence of such transaction. Now, there are two sub-clauses that may serve as an answer to this aspect of the issue. Under sub-clause 14.4 Schedule of Payments, “if the contract includes a schedule of payments specifying the installments in which the contract price will be paid, then unless otherwise stated in the schedule.” Also, under the Sub-Clause 14.8, if the contractor does not receive payment in accordance with Sub-Clause 14.7 (Payment), the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-Clause 14.7 (Payment) irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim Payment Certificate is issued; the Contractor shall be entitled to this payment without formal notice or certification and without prejudice to any other right or remedy.”
The dilemma in this case is the fact that the DPD claims that it indeed paid in full the total contract price within the allotted time frame as stated in the contract. The problem is that it failed to inform the Contractor, Mr. C about the carrying out of such process. Unfortunately, the law only has provisions for the issuance of Evidence of Payments by issuing a Payment Certificate for nominated Subcontractors. Meaning, the main contractors should secure the Evidence of Payment in the form of Payment Certificates they gave to their Subcontractors. Nothing was mentioned about the Employer being required to secure and submit neither Evidence of Payment nor Payment Certificates after transferring the funds to pay for the TCP in full.
When I acted as the judge in the case, I had to choose between two things: to consider DPD’s inability to inform the plaintiff that the payment, in full, has already been made and transferred as a form of non-payment because the DPD authorities, at some point, even though it was not clearly stated in the contract and the general provisions of the Conditions of Contract and Construction for Building and Engineering Works Designed by the Employer, have the moral obligation to inform their contractor and not wait until after another three months or until the contractor, which in the case was Mr. C, to discover that the full payment had already been made, before disclosing such information. Under that premise based on moral grounds, it can be considered that no payment was actually made even though technically there was. However, the problem with this course of action is that the defendant, the DPD, would claim that there were no provisions in the legal contract that an Evidence of Payment shall be made upon delivering the payment; and the same is also true in the general provisions for general and particular conditions in the Conditions of Contract for Construction (CCC) provided by the FIDIC. If at all, the provisions in the general conditions of CCC may only be applicable to the Subcontractor, the Sharjah General Construction Corporation, whom the Main Contractor failed to pay as a result of his lack of knowledge that the payment was already transferred to the City Engineer’s Office’s bank account. The other course of action is to classify the contract as a frustrated contract. A Frustrated Contract is basically a doctrine in the law enforcement industry which acts as a device to set aside contracts wherein an unforeseen event such as a natural disaster, or basically anything that the involved parties cannot control renders one or more parties in the contract unable to fulfill their obligations as stated in the contract. There are however grounds that need to be considered before a ruling based on a Frustrated Contract can be made. Examples of occurrences that can and in the past, have led to a ruling based on a Frustrated Contract are: destruction of the subject matter (in case any entity that has been expressly identified in the contract as essential has been destroyed without the fault of any of the involved parties); supervening illegality (in case an event or situation renders the enforcement of the contract illegal such as in the case of war or the dissolution of alliance agreements between two nations, and etc.); and incapacity or death (in case any one of the involved parties become impaired through illness or death, rendering him unavailable to perform his obligations in). There are however limitations to the provisions of this device. The most applicable limitation in this case would be the inducement of the frustrating event by the DPD. The frustrating event in this case would be its failure to inform the Main Contractor that the payment has already been transferred which led to a chain reaction making the Main Contractor also liable to other parties involved in the contract such as the Subcontractor.
These were the two courses of action that I focused on when I ruled the case in favor of Mr. C and the Dubai City’s Chief Engineer’s Office. The second course of action which would have turned the ruling in the opposite direction is simply not possible because one of the limitations of the contract frustration doctrine was committed. It was the DPD authorities’ fault why the Main Contractor perceived that no payment has been made, which is the factor that made him legally liable to the project’s Subcontractor. Under the provisions of the Frustration of Contract, no one from any of the parties involved in the contract should be at fault on the inducement of the frustrating event. There is also a similar provision stated in the general conditions provided by FIDIC that both the Contractor and the Employer may use as a reference. Under the Force Majeure Sub Clause 19.1 “In this Clause, Force Majeure means an exceptional event or circumstance (a) which is beyond a Party’s control, (b) which such Party could not reasonably have provided against before entering into the Contract, (c) which, having arisen, such Party could not reasonably have avoided or overcome, and (d) which is not substantially attributable to the other party.” In this case however, the failure to inform the concerned party about the payment of the full total contract price was substantially attributable to the DPD. Under the Sub Clause 19.2, in an event that “a Party or is will be prevented from performing any of its obligations under the Contract by Force Majeure, then it shall give notice to the other Party of the event or circumstances constituting the Force Majeure and shall specify the obligations, the performance of which is or will be prevented. The notice shall be given within 14 days after the Party became aware or should have become aware, of the relevant event or circumstance constituting Force Majeure.” Clearly, no notice, neither in oral nor in written form, was given to the City Engineer’s Office about the transfer of the full payment.
The question here is not whether the DPD was able to pay for the full contract price or not. This case was more a question of formality or at some point morality. As the judge during the court proceedings between the Dubai Police Department and the Chief Engineer’s Office which was represented by Mr. C, I announced the ruling in favor of the Chief Engineer’s Office under ethical and moral grounds. Sure, it was not stated in the legal contract between the two parties in which a road network shall be constructed within the DPD complex, which was delivered on time and in good and acceptable condition, that the Employer should notify orally or in wiring, or both, after the payment has already been transferred in full to the City Engineer’s Office. No provisions were also given in the general conditions for Construction Contracts provided by the FIDIC. Even so, out of courtesy, and regard for business ethics, DPD should have made sure that the Main Contractor was made aware that the payments have already been transferred to his office. Additionally the DPD’s failure to inform the City Engineer’s Office of the payment transaction has led to legal consequences against the latter since it also has the obligation to pay for the services rendered by the Subcontractors. In summary, the Court, as represented by me as the Judge, deems that the Dubai Police Department was unable to accomplish all the procedures involved in a payment transaction as evidenced by its payment in full of the total contract price within the deadline given but its failure to inform the concerned party that the payment has already been transferred.
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