Muqawala contract or construction contract is in its general nature, governed by the general liability rules stipulated in the Federal Civil Transactions Law No. (5) of 1985 as amended by the law No. (1) of 1987. In particular, the specific articles regulating the relationship between the employer, the main contractor and subcontractors are mentioned in articles (873) to (896) of the same law.
This series will address one of the most popular and most widely used construction contract types in the world: the FIDIC contract. FIDIC stands for Fédération Internationale Des Ingénieurs-Conseils. The three main parties to the FIDIC construction contract are: the owner, the contractor and consultant appointed by the owner to oversee the construction project implementation. Another party which may be added to the FIDIC contract is the Nominated Sub-Contractor, in case the parties nominate him in advance.
It is not uncommon for construction projects to have some form of dispute, whether it is over materials, site conditions, progress, or even the construction process itself. This article will focus on the Dispute Adjudication Board clause. The Dispute Adjudication Board (also referred to as the Dispute Review Board) is an independent and impartial panel of Adjudictors that is empowered to deliver binding recommendations on the contracting parties in construction dispute situations. The DAB clause is an extremely important clause, since it provides for the dispute process. In particular, the main binding procedure and pre-requisite conditions which the parties to the contract are required to follow in order to reach an amicable settlement.
There are many court or arbitral proceedings regarding construction disputes, which have been dismissed on the grounds that they have been prematurely filed, and therefore failed to comply with the pre-requisite conditions of the DAB clause. Poor phrasing and/or specifics of these requirements, especially with regard to the appointments of the Adjudicators, can cause unnecessary complication when disputes arise, and may even be impossible to fulfil in practice. As such, the creditor – interested in forming the DAB – will find himself in a vicious circle, in a situation where the debtor refuses to take action as to the forming of the Board. Furthermore, the creditor party cannot resort to the court or arbitration prior to the setup of the DAB, and therefore is completely denied the consideration of the Courts or Arbitration.
Having reviewed various clauses in FIDIC construction contracts in relation to the construction disputes and the formation of DAB, we found that many clauses provide for relatively complicated procedures that the parties will find difficult to implement in practice. In particular, these procedures will require the creditor to put in a great deal of time and effort. By way of example, one contract provides for:
“The DAB shall comprise three Persons. Each Party shall nominate one Member for approval by the other Party. The Parties shall also consult those two members and agree to appoint a third member who shall act as chairperson. In case the panel fails to agree on a third member, the person designated by Dubai Courts shall be the last member.“
It would be impossible to carry out the procedures mentioned in the above clause in case one party (the debtor) refuses to nominate his member, or in case the debtor does not agree on the member nominated by the creditor party. This goes against the requirements of logic and justice since it is in the interest of the debtor that DAB is not to be established, because the DAB may confirm that the debt in dispute is due and payable by the debtor to the creditor. As this would enable the creditor to resort to the court or arbitration.
Noteworthy, the jurisdiction of the Dubai Courts, though provided for in the above-mentioned clause, cannot be exercised to establish the entire DAB. Rather, the jurisdiction is vested on the Dubai Courts only in one case when the parties disagree on the appointment of the third member after each party has appointed his own member and the other party agreed on that member. At this case only, the Dubai Court shall be competent only to designate the third member, the chairperson of the DAB.
Our solution is to ensure that the DAB clause, or a separate clause, shall expressly state that each party shall appoints his member of the DAB and notify the other party of this appointment, and to grant the other party a time limit to appoint his own member. In case of the other parties failure to do so, our party shall, upon the expiry of the specified time limit, be deemed to have waived off this procedure. Then, our party shall have the right to resort to court or arbitration as agreed in the contract.
In summary, it is necessary to emphasize the need of carefully reading and phrasing the DAB clause in a practical and logical manner to clarify the procedures of setting up the DAB, as well as the consequences resulting from the failure by one party to form the DAB. Fichte & Co can assist with reviewing your FIDIC construction contracts, and specifically the DAB clause, to ensure that it will withstand close scrutiny and wider construction disputes situations, and therefore is an effective contract.
In subsequent articles, we will discuss further terms and conditions of the FIDIC construction contract including; Retention, Variation, Prolongation, etc., Such clauses include Termination, Applicable Law, Dispute Adjudication Board (“DAB”) and Jurisdiction and/or Arbitration. Therefore please sign up to our newsletter to receive immediate notification of the publication of our upcoming articles.