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InSite – Construction issues for the Middle EastSeptember 2015 – Issue No. 9

Design and Build Contracts: How to deal with design changes?

Who is responsible for what?

The contract between the parties will state the Contractor has overall design responsibility, however, the Employerwill usually provide a document at the outset which sets out its requirements for the Project, generally referenced as the Master Plan, a FEED (Front End Engineering Design) or more prosaically, Employer’s Requirements (“ERs”).

The Architect or Engineer usually plays a significant role in the preparation of the ERs pre-tender whilst engaged by the Employer. However, it is common in the Design and Build context for the Employer to novate the Architect’s engagement to the Contractor when the Contractor takes over responsibility for the further design stages under the contract. The Employer normally ensures that the contract expressly states that the Contractor has received, checked and endorsed the ERs and that the Employer is not liable for any “errors, omissions, deficiencies, inaccuracies, ambiguities” that it contains. Further, to the extent that the Contractor has not drawn the Employer’s attention to any errors or omissions, it shall not be entitled to a Variation under the contract or cost relief. An example is clause 5.1 of the FIDIC Silver Book which states that the Contractor is ‘deemed’ to have scrutinised the ERs and is responsible for design and for the accuracy of the ERs, subject to certain specified information which remains the Employer’s responsibility. It is referred to in this article as the “Contractor’s Endorsement”.

Changing scope of the Works

At the outset of a construction project both parties may feel reasonably comfortable that their views are aligned as to what is actually to be built, however, once the Project gets underway unforeseen difficulties may arise. Variation requests may be refused and time and cost overruns may result. Often the Contractor feels under commercial pressure not to complain about the amount and scope of Employer instigated change, or the Employer will contend that its desired changes are merely design development or enhancement (for which the Contractor is responsible) and not due to deficiencies in the original ERs. By the end of the Project contractors may discover they have constructed a far greater gross floor area, or a much more complicated structure, than they originally bargained for. Alternatively, the Contractor may simply have been delayed or suffered disruption because, as they see it, “the Employer changed its mind” about what it actually required to be built.

In such circumstances the Employer may have refused any entitlement to a Variation contending that the extra work is design development and falls within the lump sum price under the contract. To the extent the Contractor

contends the ERs were deficient or inadequate, the Employer will rely on the Contractor’s Endorsement to rebut this argument and any claim for time or money.

So how can a Contractor best frame its claim under UAE and Qatari law to secure the best possible level of recovery?

Claim for a Variation

The starting point under UAE and Qatari law, as in most jurisdictions, is the contract. A Contractor will normally be best advised to put its claim as a formal Variation under the contract, although bear in mind that (as is generally the case with construction contracts in the Middle East) there may be onerous notice provisions to comply with. The likelihood of success depends on the precise wording of the contract. Often the Variations clause is relatively widely drafted. For example, if the contract refers to Variations being allowable where there have been acts of “prevention” by the Employer, the Contractor may be able to rely on this, as well as some of the general principles under UAE and Qatari law, for example preventing a party from benefiting from its own wrongdoing, to argue that deficiencies, inaccuracies or changes to or in the ERs entitle it to a Variation.

Some contracts allow for an “equitable adjustment” to the contract price where a Variation occurs. This language may be relied upon to argue for different rates to those set out in the contract for valuing the Variation where it can be shown that the original rates are no longer applicable because of the extent or amount of the Employer’s changes.

An increasingly large number of construction contracts in the Middle East are being let on a Design and Build basis for a fixed lump sum price. Such contracts are also known as EPC (Engineer, Procure and Construct) and a fairly commonplace form used in the Gulf is the FIDIC Silver Book. Unlike a traditional construction contract arrangement, the Contractor takes on responsibility for the design portion of the works.

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Design enhancement v design deficienc

The Employer may argue that the changes instructed were merely design development for which the Contractor is responsible. The line between a “design enhancement” as opposed to a “design deficiency” is often difficult to draw and may require expert input. To successfully argue that changes were not mere design development will depend on the precise design steps outlined in the contract, who is detailed as a design party, the nature of the change and the technical knowledge and ability of the parties. If the Contractor faces difficulties in this regard, what alternatives are open to the Contractor?

Implied warranty of authority

The Contractor may argue that there is an implied warranty of authority as to the correctness of the ERs given by the Employer. In making this argument a Contractor will usually emphasise the state of knowledge of the parties – for example, only the Employer could know what they truly wanted and due to the technical nature of the Project, they were in the unique position of knowing whether or not the ERs contained inaccuracies or deficiencies.

However, in our experience it is difficult to imply terms into a contract under UAE or Qatari law, and to imply a warranty in a commercial context may prove even harder. A Contractor can attempt to rely on Article 246 of the UAE Civil Code which makes clear that the parties’ obligations extend beyond the express terms of the contract and are supplemented by law and custom. There is a similar provision in Article 172 of the Qatar Civil Code. However, it may prove challenging to override the contractual terms by implied terms save where necessary, for example, because they are considered unfair (which is a high threshold to satisfy) or unlawful.

Cardinal change

The Contractor may claim that it is entitled to an award of a “quantum meruit” or reasonable sum based on an extra-contractual argument that the Employer’s actions constituted a “cardinal change” or “variation of scope” which so changed the nature of the contract that the contract price no longer applies and the contract should be re-priced on the basis of a reasonable sum.

This is an area of law that has developed in various jurisdictions, such as the US and the UK, to deal with claims by contractors where the number and extent of changes to the works cannot be adequately redressed by the terms or mechanics of the contract.

As regards UAE or Qatari law, whether or not multiple changes to a contract constitute a ground for the contract price to be frustrated will depend on the facts and on the Contractor being able to show that the quantity, variety and scope of the Employer’s interference is such that it has altered the substance and identity of the original agreement. Again, in our experience this is a difficult argument to make out on the facts. If such an argument succeeds, the right to compensation is found in Article 888 of the UAE Civil Code which states, “If the consideration for the work is not specified in a contract, the contractor shall be entitled to fair remuneration, together with the value of the materials he has provided as required by the work.” The Qatar Civil Code includes a similar provision in Article 263, which includes compensation for lost profit provided this is a natural result of the non-performance or delay in performance.

An alternative way to succeed?

In our experience if a Contractor can persuade a Tribunal that it has a good case on the merits, it has a significant opportunity for recovery even when faced with an onerous contract. An alternative way of framing the claim may be not to dwell on alleged inefficiencies or inaccuracies in the ERs which may be caught by the Contractor’s Endorsement, but instead to submit that the ERs did not reflect what the Employer actually required. This is of course an extra-contractual argument that will need to be persuasively argued and supported by evidence, but it may allow the Contractor to persuade the Tribunal that it should be compensated outside of the terms of the Variation clause and either under general principles of UAE or Qatari law, or Article 888 of the UAE Code or Article 263 of the Qatar Civil Code.

Precisely how the claim is put will depend on the facts in each case and will be bolstered if the Contractor can demonstrate that the Employer required the Contractor’s assistance in establishing precisely what the Employer’s actual requirements were, for example through the unplanned and piecemeal nature of the finalisation of the design.

In our experience such arguments may well persuade a Tribunal applying UAE or Qatari law that an award of compensation should be made. Alternatively, such an approach may be sufficient to start a settlement dialogue which may produce a beneficial outcome for the Contractor. The challenging nature of these arguments reinforces the importance of monitoring change closely throughout the life of a project and where possible taking full advantage of contractual rights as they arise to avoid more difficult arguments at a later date.

‘An alternative way to frame the claim is not to dwell on alleged inaccuracies in the ERs, but instead to submit that the ERs did not reflect what the Employer actually required.’Nick Tolley, Consultant

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