Infra.Law

Common Claims in the Construction Industry (part 2)

By Mazin Al Mardhi & Dana Marshad

Common employer claims

1. Delay liquidated damages claim

Overview

Such damages are designed to reflect the pre-estimated or ascertained cost to be incurred by the employer in the event of untimely completion of the project. Such damages are reasonably anticipated to arise as a result of the employer not having access or beneficial use of the works by the time for completion. Therefore, the primary purpose of liquidated damages is to compensate for loss where specific performance is no longer possible.

Parties will normally pre-agree the liquidated damages to be levied in the event of untimely completion. Typically, provisions for liquidated damages impose a fixed penalty payable by the contractor for each day of delay incurred following the agreed time for completion up to the point of completion of the works (normally upon issuance of the taking-over certificate). Such damages can also be capped at a maximum percentage of the final Contract Price.

Typical evidentiary challenges

Parties failing to agree the baseline programme prior to the execution of the works and repeatedly modify the same during the course of the project.
Failing to identify causes of delay caused by the contractor versus those caused by external factors beyond the contractor’s control. Delay damages will not be recoverable if delays are caused by external factors like unforeseen site conditions.
Failing to establish entitlement to damages. This will require a detailed account of the of costs incurred as a result of the delay and any additional costs required to complete the project.

Failing to determine the quantum of damages. Typical challenges include the respondent challenging the claimant’s methodology or assumptions of the cost assessment of the delay.
Record keeping with explanation why the the amount of the delay damages was capped at the recorded rate, and why it represents a reasonable and proportionate protection of the parties’ legitimate commercial interests.

Legislative framework

As a starting point, article 216 of Bahrain Decree-Law No. 19/2001 provides that where specific performance by the contractor is no longer possible or they are late in the performance of their obligations, the contractor is liable to pay compensation for damages caused to the employer for such failure. Such compensation will not be payable by the contractor insofar as it may be established that the impossibility of performance or late performance arose for reasons beyond the contractor’s control. Whilst parties are free to fix the value of such damages, article 223 of Bahrain Decree-Law No. 19/2001 protects contractors by ensuring that the level of compensation fixed as liquidated damages is not greater than that which could have reasonably been foreseen at the time of entering into the contract.

Article 217 of Bahrain Decree-Law No. 19/2001 provides that the court may reduce the amount of damages if the employer, by their own fault, contributed to the cause of loss together with the contractor. Such provision demonstrates the court’s interest in apportioning liability fairly. Article 226 of Bahrain Decree-Law No. 19/2001 goes a step further by granting the court discretionary power to amend a liquidated damages clause to reflect the actual loss incurred by the party seeking to enforce such provision. The courts are only willing to exercise such power in circumstances where the actual damage suffered is grossly disproportionate to the liquidated damages prescribed by contract. Liquidated damages provisions are generally agreed on the basis of pre-estimated damages that are reasonably anticipated, having regard to any revenue generating mechanisms specific to the project, if one party does not gain access or beneficial use of the Works by the agreed time for completion. As a result of this presumption of loss, article 226 prescribes that the burden of proof lies with the contractor to establish that there was no loss or that the agreed damages exceed the actual loss, as opposed to the employer proving the extent of damage or loss incurred.

2. Fitness for purpose claims

Overview

A fitness for purpose (FFP) claim is commonly advanced by an employer where the works (inclusive of design) is not fit for purpose i.e., does not meet the employer’s requirements as prescribed under the contract.

Fitness for purpose claims under FIDIC

Application of FFP provisions is a matter prescribed by contract. Under the FIDIC suite of contracts, sub-clause 4.1 of the Yellow Book (Design and Build) and Silver Book (EPC / Turnkey Projects), it specifically provides that on completing the works, the works will be fit for the purpose(s) for which they are intended as defined in the employer’s requirements.

Typical evidentiary challenges

Depending on the extent of the employer’s requirements, the exact ‘purpose’ may be difficult to identify or show to the tribunal/court.
Depending on the contractual drafting, it may be difficult to distinguish a FFP obligation from one imposing reasonable skill and care on a contractor.
Careful drafting so as to avoid obligations which meet subjective requirements as these can be grounds for a dispute.

Proving liability is appropriately passed down the contractual chain, whether to design consultant or subcontractors. It is important to reflect clearly defined purposes in the documents appended to the design and build contracts and subcontracts. Merely stating that works should be fit for purposes may not be sufficient to a court or arbitrator.

Legislative framework

Typically, the application of FFP provisions in Bahrain (and across the GCC) is determined as a matter of contract and assessed by courts on a case-by-case basis. Save for matters of strict liability such as decennial liability imposed on contractors, architects and engineers for the structural integrity and safety of buildings, the extent to which parties are deemed to have complied with FFP provisions is determined by reference to the specific requirements prescribed within the contract in question. The minimum level of duty of care prescribed by statute under article 241 of Bahrain Decree-Law No. 19/2001 may not necessarily relieve a contractor from their obligations to meet any FFP obligations set in the contract. Given that article 241 of Bahrain Decree-Law No. 19/2001 recognises the parties right to contract out of the minimum level of duty of care, contractors should be cautious to accept ambiguous FFP provisions.

Where the wording of the FFP provisions is clear, the court is unlikely to depart from the meaning of the terms by way of interpretation (article 125 of Bahrain Decree-Law No. 19/2001). Accordingly, the courts will likely uphold the FFP provisions without considering whether the contractor exercised reasonable skill and care. Where a contract is silent on a FFP obligation or to the extent the terms are ambiguous, courts will consider the intention of the parties as deduced from the contract itself, the transaction at hand, custom and practice and the view that agreements are based on the principle of good faith.

Infra.Law

Common Claims in the Construction Industry (part 2)

Common employer claims

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