Pinsent Masons MPillay wins Construction Law Firm of the Year at the ALB SE Asia Law Awards 2020
Out-Law Guide | 14 Apr 2016 | 2:12 pm | 18 min. read
This guide was last updated in April 2016
However, there are some differences between the provisions of FIDIC and Qatar's Civil Code that have to be taken into consideration when preparing contracts, so contracts should be adapted to ensure the desired outcome.
The laws of Qatar
Qatar is an Islamic country with codified legislation based on written statutes.
Qatar's new laws are published monthly in Arabic in the Ministry of Justice's Official Gazette and are not officially available in English. Although English versions are frequently published on media platforms, a degree of caution must be exercised when relying on these sources as sometimes the 'intention' of the original Arabic language can be lost in translation.
While judicial case reports are intermittently published in Arabic and English, there is no system of judicial precedent in Qatar. Reference is however often made to landmark decisions of senior courts both in Qatar and other Middle Eastern jurisdictions, including Egypt, to support submissions regarding the Civil Code.
The Civil Code is the central piece of legislation governing contracts in Qatar, and governs the relationship between parties to a contract. Within this there are three key provisions that are particularly important and that underpin contract interpretation:
These general principles apply to construction contracts in Qatar and how they are interpreted by the local courts and arbitral tribunals.
There is not yet any commentary on the Qatari Civil Code, unlike for example the UAE which published a Ministry of Justice Commentary on its Civil Code in 2010, and Egypt which has Dr Abdulrazzak Al Sanhouri's Commentary on the New Egyptian Civil Code.
Differences between FIDIC and Qatar's Civil Code
Payment of sub-contractors
Under FIDIC if an employer wants a specific sub-contractor to be used it can 'nominate' that sub-contractor by name in the contract itself or tell the contractor to employ that subcontractor during the course of the works.
The contractor is required to pay the nominated sub-contractor the amount due according to the sub-contract. The employer can ask the contractor to provide reasonable evidence that the sub-contractor has received all of the amounts due. If this evidence is not provided, or the contractor fails to demonstrate it is entitled to withhold the sub-contractor's payment, the employer may, at its discretion, pay the sub-contractor directly.
In Qatar, the Civil Code entitles sub-contractors and labourers working for a main contractor to directly demand the employer to pay any sums due. In other words, the sub-contractor and its employees have the same right to overdue payment against the main contractor and the employer. To obtain payment from the employer, however, the sub-contractor will have to commence court proceedings.
If the project is located in Qatar, the Qatari courts may accept jurisdiction to hear the proceedings irrespective of the governing law stated in main contract and the relevant sub-contract.
If the court then issues a judgment in favour of the sub-contractor, the employer will have to pay the sub-contractor before making any further payments to the main contractor, in accordance with the Civil Code.
If the employer is notified of a claim by the sub-contractor, therefore, the employer is likely to want to withhold further payments to the contractor for an amount equivalent to the subcontractor's claim until the final amount due is decided by the court. The employer should therefore include a clause in the contract's particular conditions, allowing it to pay the sub-contractor directly and deduct these amounts from payments that become due to the contractor.
FIDIC imposes liability on the contractor for an agreed rate of damages for each day that elapses between the agreed time for completion and the date given in the taking-over certificate.
This contractual mechanism, known as 'liquidated' or 'delay' damages, lets the employer pre-determine and offset the risk of loss due to delays caused by the contractor. Since this liability is contractually agreed, the employer only has to demonstrate that the contractor has breached the contract to claim the damages, rather than having to prove how much the delay has cost.
The FIDIC Red Book users' guide, which covers building and engineering works designed by the employer, suggests the daily rate of damages should be a "reasonable estimate of the employer's losses or foregone benefits".
This reflects the English law position in relation to delay damages, which requires the sum stated in the contract to be a genuine pre-estimate of the loss which will be suffered if the project is delayed. The rationale is that a breach of contract entitles a party to compensation for the actual loss suffered, which must be commercially justifiable.
The position in Qatar is not entirely dissimilar. The Civil Code permits parties to agree a contractual rate of damages for breach of contract. A judge in a 2013 Qatari court judgment described this rule as follows: "the creditor and the debtor may beforehand agree in the contract upon the compensation due to the creditor if the debtor fails to perform or is delayed in performing his obligation, and the debtor's failure to perform his obligation gives rise to compensation. By such agreement, the damage shall be deemed to have occurred as assessed by the contracting parties, and the creditor is not required to prove the same."
The Civil Code imposes a limitation on the damages a party can recover against a defaulting party. It says: "No agreed indemnity shall be payable if the obligor proves that the obligee has suffered no damages. The court may decrease the agreed amount of indemnity if the obligor proves that the calculation is exaggerated or if the obligation has been performed in part. Any agreement to the contrary shall be invalid."
This allows the court to reduce the agreed rate of damages if it is shown that the agreed rate does not reflect the actual loss suffered, it is grossly exaggerated or the obligation has been partially performed. This is a mandatory provision of the Civil Code and parties cannot, therefore contract out of it.
Unlike the UAE Civil Code, in Qatar the pre-agreed damages cannot be increased to reflect the actual loss, unless there has been gross negligence or fraud; the courts may only reduce the damages.
In practice, the main difficulty for contractors in this situation is in proving that the employer has suffered no damages, or that the rate of damages stated in the contract is too high. There are very few, if any, public sources of financial information on companies in Qatar. Unlike other jurisdictions where published accounts records are available, proving the actual loss suffered by an employer is challenging.
This aspect of FIDIC does not contravene Qatar's Civil Code and therefore does not need to be amended. However, since exaggerated pre-agreed contractual damages can be challenged in Qatar, the rate should reflect the likely losses an employer would suffer to avoid the possibility of judicial intervention.
There is a further limitation placed on governmental bodies, public institutions, public authorities and ministries in Qatar. The law regulating tenders and bids provides that the total amount of pre-agreed damages must not exceed 10% of the value of the contract. Therefore a contractor's liability for delay damages will, if the employer is a Qatari public entity, be limited to 10% of the contract price.
Taking over and acceptance of the works
FIDIC describes the process by which the employer takes over and accepts the works when a contractor reaches completion. In summary, once the engineer has issued a 'taking-over certificate' the period for rectifying any defects begins. In FIDIC this is known as the 'defects notification period' and is a fixed period of time. Unless the parties have stated that a different period is to apply, the default is 365 days.
During this period the contractor must complete any outstanding work and remedy any defects identified in the taking-over certificate or notified to the contractor by, or on behalf of, the employer. If the defect the contractor's fault, either by its design, plant, materials or workmanship not being in accordance with the contract or a failure by the contractor to comply with any other obligation, then the contractor must fix the defect at its own cost. If the defect is attributable to any other cause, the contractor must still fix it but is paid the additional cost of doing so.
A performance certificate is issued within 28 days of the expiration of the defects notification period and signifies final acceptance of the works by the employer.
FIDIC gives the contractor the right to correct defects during the defect notification period instead of letting the employer hire other contractors to carry out the remedial works and recover the costs from the contractor. It is only when the contractor fails to fix a defect, having been notified of it by the employer, that the employer can employ another contractor to do so and recover the associated costs from the contractor.
The Civil Code provides similar redress for employers if a defect is identified in the works following completion and handover. Once the works are handed over to the employer, liability for patent, or visible, defects ends. However, the employer can still notify the contractor of latent, or invisible, defects that it becomes aware of and allow the contractor time to fix them itself. If the employer does not notify the contractor of latent defects, it is deemed to have accepted the work and risks losing the right to claim.
This, however, is not a mandatory provision of the Civil Code, and it will not apply if the parties have agreed something different in the contract.
The employer's right to notify the contractor of latent defects commences after the employer has taken over the work, but the Code does not, however, state when the employer's right to notify latent defects ends. Although FIDIC's defects notification period ends after a fixed period of time, it is permissible for an employer to notify the contractor of latent defects beyond this date. If the contract does not state when the defects notification period has ended, then the courts would follow the Civil Code.
It is unclear how long the employer has to notify the contractor from the moment it notices a latent defect, after the defects notification period has ended. One view is that the employer has the entire statutory period, which is 10 years. As the statutory 'limitation' or 'prescription' period cannot be altered by the parties in their contract under the Civil Code, it is feasible that a court might find an employer's claim for latent defects to be valid even after the expiry of the defect notification period and following the issuance of the performance certificate.
To offset this risk, the contract should clearly specify the parties' rights and obligations as regards latent defects and the process that must be followed for the employer to recover the cost of fixing latent defects if they appear after the expiry of the defect notification period.
If a latent defect threatens the structural integrity of a building or causes its total or partial collapse, the Civil Code imposes a mandatory, strict form of liability jointly on the contractor and the designer. Like the French principle of 'decennial liability', the Civil Code says that contractors and designers must guarantee against such circumstances arising for a period of 10 years following handover of the project.
In theory, this liability could last for just short of 13 years as decennial liability claims have a separate notification period of three years that runs from the time of the collapse or the discovery of the defect giving rise to decennial liability.
FIDIC cannot be amended to adjust this risk, because decennial liability is mandatory and will apply regardless of the contract terms. It is also not possible to avoid liability by choosing an alternative governing law, since decennial liability applies to any construction or installation located in Qatar regardless of the substantive or procedural law governing the contract.
While it is possible to purchase various forms of insurance in Qatar to cover construction risks, such as professional indemnity and contractors all risk insurance, these policies are unlikely to offer protection and indemnify a contractor for any loss arising from decennial liability. Contractors should seek advice from an insurance broker and obtain a specific policy to protect against this risk.
Limitation of liability
FIDIC excludes parties' liability for "loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other party".
The total financial liability of the contractor to the employer, other than in limited cases, is capped at an amount stated in the particular conditions. If no amount is stated, the contractor's total financial liability is limited to the accepted contract amount.
The expression "indirect or consequential loss or damage" does not have the same legal meaning in Qatar as it might have in a common law jurisdiction. In Qatar, a different test will apply to a party's ability to recover loss or damage caused by another party's breach of contract and the extent of the damages recoverable.
The Civil Code says that damages compensating a party for beach of contract may include loss of anticipated profit, provided the loss or damage is a natural consequence of the failure or delay of the other party to perform the obligation, and was reasonably foreseeable or within the contemplation of the parties at the time the contract was concluded.
The Civil Code does not limit liability in any case of "fraud, deliberate default or reckless misconduct by the defaulting party", and also prohibits parties from limiting their liability as a result of fraud, or from excluding liability for 'gross negligence'. The contract wording should therefore be changed to include the words 'gross negligence' as well as any decennial liability to be compliant with the Civil Code. As explained above, decennial liability cannot be excluded or limited between the parties and the contract should make it clear that it does not limit the contractor's liability for decennial liability.
The recovery of financing charges, or interest, is permitted under FIDIC for delayed payment.
The Qatari Civil Code recognises that claims for interest are permissible. In particular:
Therefore, if a party delays the performance of an obligation or fails to carry it out, damages are recoverable by the other party for any losses incurred as a result. Similarly, if an employer does not pay an amount of money that it is obliged to pay to the contractor on the agreed date, the contractor is entitled to compensation that might include financing charges it has incurred as a result of the employer's failure to pay.
The compensation can take two forms: either a lump sum, under which the contractor claims an amount of compensation for recovery of the damages sustained as a result of the employer's breach; or an interest rate applied to the debt until the full amount is recovered. It is up to the court or arbitral tribunal's discretion which form of compensation to award.
Termination for convenience
'Termination for convenience' refers to a situation where one party brings a contract to an end without the other party being at fault or in breach.
FIDIC allows the employer to terminate the contract by giving notice to the contractor, provided it does not do so in order to execute the works itself. The contractor is then entitled to payment for work carried out, the cost of plant and materials ordered, any other cost or liability reasonably incurred by the contractor in the expectation of completing the works, the cost of removing temporary works from the site and repatriation costs for the contractor's staff and labour.
The contractor is not, however, able to recover the loss of future profit it would have made had it completed the works.
The Qatari Civil Code also allows parties to terminate for convenience, but entitles the contractor to profit it could have made had the work been completed. It says:
"The employer may withdraw from the contract and stop the work at any time prior to its completion, provided that the contractor shall be indemnified for all expenses incurred, all works completed, and any profit he could have made had the work been completed."
The Civil Code, however, potentially limits the amount of compensation recoverable as it allows the court to "reduce the indemnity payable for the profit missed by the contractor if the circumstances make such reduction fair". This may happen when, for example, the contractor has saved costs due to the withdrawal from the contract by the employer, or makes profits by taking up other work.
Therefore, if the contract has been terminated by the employer for convenience there is a risk that a Qatari court would apply the Civil Code and use this as a basis to calculate and award compensation. It is therefore recommended that the contract states that the compensation to be paid by the employer to the contractor under FIDIC rules is the contractor's sole and exclusive remedy and the employer has no further or additional liability under the contract or at law.
Termination for default
Unlike termination for convenience, termination for default refers to a situation where one party has breached the contract and the other unilaterally brings the contract to an end.
FIDIC describes circumstances that entitle the employer and contractor to terminate the contract for default. Under these circumstances the employer or contractor can terminate the contract with 14 days written notice, unless the event relates to bankruptcy or bribes, in which case notification is not required.
The Qatari Civil Code permits a party to serve notice and demand dissolution of the contract and damages by filing an action in court. However, if the contract expressly states that a court order is not required, the Code allows a party to exercise that right without a judicial ruling.
It is essential for the contractual language to be explicit and unambiguous to be confident of a contractual termination provision without a court order. The Civil Code says that the contract will not limit the authority of the judge to terminate the contract unless the wording of the contract expressly indicates that this is the parties' mutual intention.
If the contract does not contain such language, and a party terminates without a court order, the other party could begin proceedings to have the termination declared unlawful.
Where a court order is sought, the court has the power to reject an application for termination if the obligation that has not been performed forms only a small part of the obligations under the contract. The court can then grant the defaulting party a grace period to find a solution.
It is therefore important that very clear language is used to demonstrate that the parties have agreed the construction contract can be terminated by either party as a result of a default without a court order. A new sub-clause could be included in the particular conditions, stating that the parties acknowledge and agree that termination will be automatic and will take effect in accordance with the relevant notice and shall not require any order or other approval of any court in order to be effective.
The term 'force majeure' originates from the French Napoleonic Code, from which Qatar's Civil Code is ultimately derived, and is generally taken to mean an extraordinary event or circumstance beyond a party's control that could not have been avoided and that is not attributable to the other party.
Force majeure events include war, riot and natural catastrophes. When such an event occurs, a force majeure clause exempts a party from performance.
FIDIC defines force majeure broadly and gives a list of the sort of events or circumstances that may constitute force majeure. If a party is prevented from performing any of its contractual obligations because of force majeure, and gives notice to the other party within 14 days of the force majeure event arising, it will be excused from performing the affected obligation for as long as the event continues. If the force majeure event affects the execution of most of the works for a continuous period of 84 days, either party can give notice of termination.
FIDIC includes fall-back provision, however. Parties will be released from performance and the contractor entitled to specific payment if an event outside the control of the parties, including but not limited to force majeure, arises which makes it impossible or unlawful. The same applies if the governing law of the contract allows the party to be released from further performance.
Under the Civil Code, some situations may allow parties to be released from their obligations, or allow those obligations to be reduced to a more reasonable level. These include:
The contract may, however, include an agreement that one or both parties will be liable despite unforeseen or force majeure events.
The Civil Code can be used to release parties on this basis, as a sub-clause in FIDIC defers to the law governing the contract on this aspect.
While the Civil Code does not define the type of event that will qualify as "exceptional", the commentary of jurist Al Sanhouri on the Civil Code of Egypt, from which Qatar's Civil Code derives, states that a change of circumstances which unexpectedly and unforeseeably alters the financial circumstances on which the contract was based is required.
Al Sanhouri clarifies that traders should expect losses and profits in all of their commercial transactions and therefore a normal financial loss is not sufficient to qualify as an exceptional event for these purposes.
This a mandatory provision of the Civil Code, so any attempt by the parties to exclude its application will be invalid.
Where disputes cannot be resolved by parties in Qatar, they are generally referred to court or arbitration.
FIDIC states that unless disputes are settled amicably, they shall be settled by arbitration under the Rules of Arbitration of the International Chamber of Commerce (the ICC Rules) by three arbitrators. The law and language of the arbitration is defined in the appendix to tender.
Arbitration is increasingly recognised in Qatar due to the amount of construction in the region. The regulations governing arbitration in Qatar are covered in the country's Code of Civil and Commercial Procedure.
It is important to note that the 'winning' party in an arbitration must lodge the arbitration award, whether foreign or domestic, at court within 15 days of the award being rendered and ask the court to enforce the award. Provided there are no challenges or procedural issues preventing enforcement, the court will order a writ of execution enforcing the award.
There are two grounds on which an arbitral award may not be enforceable. First, arbitral awards, like court judgments, can be appealed. An appeal must be lodged within 15 days of the arbitral award being submitted to court.
Second, a party can ask the court to set the arbitral award aside due to a procedural irregularity. The grounds for setting an award aside include where there are no terms of reference, where the award transcends the scope of the issues included in the arbitration agreement, or the lack of capacity of the arbitrators.
Importantly, one of the procedural grounds for an award not to be enforced is if the signatory to the arbitration agreement was not legally appointed with a valid power of attorney that expressly grants the signatory power to enter into an arbitration agreement on behalf of the company.
This requirement is significant in Qatar because of the effect an arbitration agreement has on a company's ability to have disputes resolved through the Qatari courts. Where an arbitration agreement exists, the parties are deemed to have waived their right to have the matter resolved in local courts.
Signatories to any contract for use in Qatar that contains an agreement to resolve disputes through arbitration, such as FIDIC, should therefore ensure they have a valid power of attorney in place.
Pinsent Masons MPillay wins Construction Law Firm of the Year at the ALB SE Asia Law Awards 2020