Keywords: construction, engineering,
IN THIS ISSUE
Welcome to issue 65.
Brics are not as popular as they were, The rising stars of the global economy, Brazil, Russia, India and China, are not shining as brightly on the economic front as they were and in this issue we take a look at the implications of doing business elsewhere. Raid Abu-Manneh is our guide to Bahrain, Iraq and Qatar and, with Wisam Sirham, to Saudi Arabia, Kwadwo Sarkodie and Doye Balogun take us to Mozambique and Kevin Owen and Ben Thompson explore the waking economy of Myanmar, or Burma.
On the home front, Amber Chew and Richard Craven fish beneath the contract surface for implied terms, Wisam Sirhan and Richard Craven examine the mechanics of repudiation and there are the usual contract, regulation and case law updates.
We hope you enjoy the contents.
FOCUS ON THE MIDDLE EAST
BAHRAIN
'Land of the two seas' – and construction opportunities
By Raid Abu-Manneh
Bahrain, ancient site of the immortal land of Dilmun, a pure and sacred place, the 'Pearl of the Arabian Gulf '. On a more mundane level, it's also a place with opportunities for UK construction.
The opportunities?
Bahrain may occupy just 277 square miles, with a population around 1.2 million but it is the UK's fastest growing market in the Gulf, with exports up by about 25% in 2012. Linked by the King Fahd Causeway to the key Eastern Province and GDP powerhouse of Saudi Arabia, it remains, despite keen competition from Dubai, a major financial and logistical centre and is the Gulf leader in Islamic finance. A skilled workforce, zero taxation for private companies, few indirect taxes for private enterprises and individuals, free movement of capital and the first GCC nation to permit 100% foreign ownership of business assets and real estate in most sectors of the economy combine to make a strong business case.
Infrastructure projects feature in its plans, road schemes, a rail link to Saudi Arabia and an upgrade for Bahrain International Airport plus a government housing strategy to build over 50,000 houses by 2017, not to mention 1.5 billion Bahraini dinar (say £2.5 billion) to be spent on sanitary projects between now and 2030. And Bahrain likes British companies, with nearly 100 already doing business there.
It ranks 42nd out of 185 countries in the 2013 World Bank ease of doing business tables and jumps to a dizzy 7th place in the tables for construction permits. Its Civil Code is based on the Egyptian Code, in line with other Gulf states, so the legal framework for construction contracts will look familiar to contractors who work in the region, but not identical. For instance, the expected decennial (literally ten year) liability is just five years in Bahrain (Article 615) so local legal advice is, as usual, a must.
Enforcing contracts through the Bahraini courts is inevitably a great deal slower than obtaining a construction permit (with a World Bank ranking of 113 out of 185) but Bahrain has a positive and modern approach to arbitration. International commercial high value (more then 500,000 Bahraini dinar, say £850,000) claims and those involving a party licensed by the Central Bank of Bahrain that would otherwise go to the Bahrain courts are, by law, referred to 'statutory arbitration' in the Bahrain Centre for Dispute Resolution. The BCDR was established in 2009 in partnership with the American Arbitration Association, whose Rules have been adopted, with little change, by the BCDR, and the BCDR is said to be the world's first 'Free Arbitration Zone', which means that a Bahraini arbitration award cannot be challenged in Bahrain, so long as it is not being enforced in Bahrain and the parties have agreed in writing that Bahraini law does not apply and that any challenge will be before a competent tribunal in another state.
International arbitrations can also choose to use the BCDR, in the knowledge that Bahrain has signed up to the New York Convention and that its arbitration law is based on the UNCITRAL Model Law. Since 1995 the kingdom has also hosted the Gulf Co-operation Council Commercial Arbitration Centre.
And the risks?
You don't need to be a Formula One motor racing fan to have seen the press reports headlining the anti-government protests and unrest that spring from the ongoing political debate as to the need for reform and the tensions with the Shia community and opposition.
But Bahrain has a plan, the 2030 plan, a 'comprehensive economic vision', to shift its economy away from oil (13% of GDP) to a more diverse economy, to look to the private rather than the public sector to stimulate growth and to provide better services, jobs, training and skills development and quality of life for all Bahrainis. And, significantly, Bahrain's continued stability is important to its powerful neighbour, Saudi Arabia.
In the Transparency International corruption tables Bahrain ranks 53rd out of 176 but the 2030 plan talks of rooting out corruption.
Ultimately the construction business is, of course, all about risk and, as the British Ambassador has recently said: "...if you don't go for the business, your competitors will."
This article first appeared in a slightly different form in Building.
IRAQ
Doing business in Iraq – tread carefully
By Raid Abu-Manneh
A decade after the invasion of Iraq there are opportunities for UK firms in the country's infrastructure sector. But they must be aware of the legal framework they will be working in.
Oil, security, infrastructure, corruption, getting paid - all of these are factors to be weighed in the scales when deciding whether to do business in Iraq. Ten years after the 2003 invasion, where is the country now, in terms of opportunity, risk and law for the UK construction industry?
UK investment?
In 2010, according to a report of the National Investment Commission, in association with UK Trade and Investment, published by Allurentis, the value of the UK's commercial activity in Iraq was $1,215m (£794m), 2.8% of foreign commercial activity by value.
Way out ahead of the UK was Turkey – with its obvious geographical advantage – at 34.9%. Another seven countries also sit in front of the UK, including, in descending order, Italy, France, South Korea and the US.
What are the opportunities?
Iraq has massive oil reserves. It has budgeted for exporting 2.9 million barrels a day this year and its aim of producing 12 million barrels a day by 2017 would make it a very major player among producers. But getting to this target requires infrastructure.
The oil will have to pay for this infrastructure - dams, railways, bridges, airports, hotels, and millions of homes (200,000 units each year for a decade), plus roads, sewers and services to support them. It amounts to a lot of work that should last for years.
The risks?
Security is an obvious risk, as we are constantly reminded by the press headlines. Corruption is another. Iraq was ranked 169 out of 176 countries in the Transparency International 2012 Corruption Perceptions Index. And Iraq was ranked 165 out of 185 in the World Bank 2013 ease of doing business tables. Time, energy and patience are required to make progress through the bureaucracy.
And the legal framework?
Investment is governed by Investment Law 13 of 2006 as amended by law No. 2 of 2010 and foreigners can take a 100% stake in an Iraq company. For those used to doing business in the Middle East, the law in Iraq will look familiar. The Iraq Civil Code, influenced, like other Arab codes, by the Egyptian Civil Code, takes precedence over, for instance, Shari'a. Iraq cannot compete, however, with the more advanced approach of Dubai and its International Financial Centre, to dispute resolution.
Foreign arbitration is the usual contract dispute resolution route that sidesteps any concerns about the speed, expertise or impartiality of local courts and the Iraqi courts have recently adopted a welcome hands-off approach to foreign arbitrations.
But even if an arbitration award is obtained, there remains the important question of enforcement. Iraq is not yet a signatory to the New York Convention (although this may change before too long). A possible alternative is enforcement of an award in Iraq under the Riyadh Convention, perhaps through the courts in Jordan.
All of which makes it important to take local legal advice in getting over legal and administrative obstacles.
What about contracts?
Provisions relating to construction contracts appear in Articles 864-890 of the Iraqi Civil Code. These provide a framework for the main requirements for contracts of works. There are three key obligations:
- work should be in accordance with the provisions of the construction contract between the parties;
- the contractor should deliver the works on completion;
- the contractor is liable for complete or partial collapse of the building.
This is a joint liability imposed on the contractor and designer for certain building defects, known as decennial liability. This is similar to strict liability but is applied to construction projects. This joint liability lasts for 10 years from completion and means contractor and designer are jointly and severally liable for structural defects in the works.
The next decade in Iraq for UK construction companies?
Pass the crystal ball. As risks lessen, or are successfully managed, the opportunities presented by Iraq become more attractive, but not, of course, just to the UK industry.
Less risk is likely to mean more competition. So - swings and roundabouts. But perhaps it is also worth remembering the phrase " fortune favours the brave".
This article first appeared in a slightly different form in Building.
QATAR
To boldly go...where Boris has gone before?
By Raid Abu-Manneh
Once upon a time Qatar was a poor Gulf state, known for its pearl fishing. But nothing stays the same and the discovery of vast oil and gas reserves has made it very wealthy, with one of the highest rates of GDP per capita in the world. Owner of Harrods, investor in the Shard, the Stock Exchange and Sainsburys and home of the Al-Jazeera news network, it punches above its weight in world politics and in nine years time the global focus will be on picking footballs, rather than pearls, out of the net. So what are the commercial and legal prospects for doing construction business there?
Opportunities?
It has, despite the Arab Spring, a stable government and economy and, since June, a new Emir, the youthful, 33 year-old Sheikh Tamim bin Hamad Al-Thani. His father, Sheikh Hamad bin Khalifa Al-Thani, has stepped down, as has Prime Minister Sheikh Hamad bin Jassim bin Jaber Al-Thani, who was also the Foreign Minister and influential chief executive of the sovereign wealth fund, the Qatari Investment Authority.
Plans for Qatar's future are already in place. The Qatar National Vision 2030 points the way and the National Development Strategy 2011–2016 provides a route map to a sustainable economy less dependent on its oil and gas riches. And, as an incentive, Qatar is, of course, expecting a lot of visitors in 2022, for the football World Cup. There are 12 climate-controlled, carbon-neutral football stadiums on the to-do list, not to mention 24 team hotels, 48 training sites and 80,000 hotel rooms.
The National Vision talks of Qatar investing in world class infrastructure and it is. There is $36 billion to be spent on a high quality, integrated public transport system, $20 billion for roads, a new Doha International Airport to handle 50 million passengers a year, the new Port project and the Msheireb urban regeneration in Doha. It is said that the total shopping bill for infrastructure over the decade could hit the $100 billion mark. And all this with a population of less than two million, of which expatriate workers may make up as much as 80%.
Difficulties?
The World Bank Group 2013 ease of doing business table ranks Qatar at 40 overall, out of 185, and at 18 for obtaining construction permits, and Qatar is at 27, out of 176, equal with the UAE, in the 2012 Transparency International Corruptions Perception Index.
Qatar likes joint ventures. Qatar's Investment Law No. (13) of 2000 generally makes foreign investment conditional on having a Qatari partner with no less than 51% of the capital.
Qatari law will be familiar to contractors who work elsewhere in the Gulf because it is based on the Egyptian Civil Code and well developed so, for instance, the concepts of decennial liability and good faith make their customary appearance.
Enforcement of contract entitlements through the local courts is likely to be slow and lacking the necessary expertise in particularly large, complex infrastructure disputes, so arbitration is the way forward. Currently dealt with in the Civil and Commercial Procedure Law No. (13) of 1990, Qatar's arbitration law could do with modernisation, but the Qatar International Center for Conciliation and Arbitration, set up in 2006, has its own arbitration and conciliation rules, issued last year and modelled on the UNCITRAL 2010 rules. A choice of Qatari law, and arbitration under modern rules, with the seat of the arbitration in Qatar, could be a practical solution in selecting contract dispute resolution machinery.
Further support for arbitration is to be found in Qatar's signature of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and also the ICSID Convention.
To go boldly?
Competition for construction work in Qatar is inevitably fierce but the UK is one of Qatar's key trading partners. Qatar has significant investments in the UK and the planned heavyweight infrastructure spending could offer significant construction opportunities for those prepared to invest the necessary time, research and patience, where London 2012 Olympic experience might just be key for World Cup projects. Prince Charles and Boris Johnson have both made trips to Qatar this year to fly the flag; Qatar could also be an important destination for the UK construction industry.
This article first appeared in a slightly different form in Building.
SAUDI ARABIA
Doing business and the big legal question
By Raid Abu-Manneh and Wisam Sirhan
The Kingdom of Saudi Arabia has big plans for the future. Billions are being spent on infrastructure and that can mean significant opportunities for UK construction and engineering companies. But there's a legal question to think about. Modernisation is being carried out against the background of a legal system that is, commercially, fundamentally different not only from those of its neighbours but also from any Western concept of what commercial law should be. So what might this mean for those doing business there?
Opportunity?
Saudi Arabia is the world's largest oil producer and exporter and has the largest known oil reserves. With GDP increasing by some 6% a year, it is in the middle of a massive development programme, building new industrial cities and developing its infrastructure to meet the needs of the 21st century. A key driver of this activity is its growing young population, currently some 28 million, with 80% of its citizens under 40 and 35% under 15, and predicted to grow to 33 million over the next 12 years; add to that its plan to diversify its economy away from dependence on oil and gas and it becomes clear why the Kingdom intends to spend more than US$367 billion over the next 10 years on infrastructure; new roads, railways and urban transport systems, airport expansion, investments in water, sewerage, electricity plants, telecoms and the IT sector and four million new homes.
The good news is that the Kingdom is the UK's largest trading partner in the Middle East and North Africa region and ranks 22nd out of 185 in the World Bank ease of doing business tables. Inevitably, however, foreign businesses embarking on construction in Saudi Arabia need to clear regulatory hurdles, including obtaining a foreign investment licence from the Saudi Arabian General Investment Authority, meeting relevant investment conditions, registration with the Ministry of Commerce and Industry and setting up as a limited liability company or a joint stock company, not to mention complying with Nitaqat, 'Saudisation', prioritisation of the employment of Saudi workers.
But what about contract law?
The law is based on Islamic or Shari'a law, a comprehensive code of behaviour that embraces both ethical standards and legal laws. Commercial contract principles in Saudi Arabia, unlike its neighbours, are mainly to be found in Shari'a, which aims for justice and equity in contracts, for example through a requirement of good faith in commercial transactions. And even government regulations must comply with the overriding principles of Shari'a.
But, despite its importance, Shar'ia in the Kingdom is not codified as with the laws in other Arab countries and the legal system and the Shari'a courts have no system of binding precedent. Justice and equity therefore come at a price, that of predictability and certainty.
The obvious dispute resolution solution for those considering legal remedies in their international commercial arrangements is arbitration, avoiding any issues as to lack of expertise or speed in the local courts. Arbitration in Saudi Arabia has in fact taken a significant step forward with the launch, last year, of its new Arbitration Law. Broadly in line with the UNCITRAL Model Law, it brings Saudi Arabia into line with other countries in the region. Saudi Arabia is also a signatory to the New York, ICSID, Riyadh and GCC Conventions.
But one thing that the new Arbitration Law, and the enforcement regulations enacted earlier this year, do not change is the fact that an award, or part of it, which conflicts with Shari'a law, will not be enforced in the Kingdom.
Interpreting Shari'a principles to suit today's commercial world and its desire for predictability and certainty is a challenge for Saudi Arabia. It is also a reason for potential investors to be mindful of a different legal landscape in a country which, at the same time, offers huge opportunities.
This article first appeared in a slightly different form in Building.
EXTRAS
CONTRACTS AND PROCUREMENT
IChemE revise the contract formula
In February the IChemE launched new editions of its forms of contract, the Red Book, Green Book, Brown Book, Burgundy Book and Yellow Book. The IChemE says that the forms have been extensively revised and updated to reflect best practice in project delivery and the latest developments in law and project implementation.
A new NEC3 edition...
In April the NEC3 unveiled an updated edition of the NEC3 contracts which includes the new Professional Services Short Contract, developed with the Association for Project Management, and seven guides, including a guide to using BIM with NEC3 Contracts.
See: http://www.neccontract.com/news/article.asp?NEWS_ID=840
And a new CIOB complex projects contract
And there is also a new Chartered Institute of Building contract - for complex projects. The contract is said to be suitable for works of high value or complexity, engineering, infrastructure and major real estate projects but less suitable for simpler or short duration works, construction management/EPCM without amendment and inexperienced clients/contractors.
Accompanying the 8 page contract agreement, 83 page conditions and appendices are 81 pages of user notes (plus time-line and flow charts) and a cross-referencing general index.
See: http://www.ciob.org.uk/CPC
Government code to crack PPP savings plus PF2 management unit
The Government now has a 'best practice' guide, a voluntary code that sets out how the public and private sector can work together to make savings from Public Private Partnership contracts.
Not intended to be legally binding, the code has eight commitments for each of the private and public sector parties and also contains new guidelines on transparency, including updating on consumables and energy costs and ownership changes.
There is also a new Treasury unit to represent the public sector on the boards of new PF2 projects and to manage its future minority stake in public infrastructure including schools and hospitals.
And
The Treasury has an antidote for optimism
The Treasury has issued Green Book supplementary guidance on how to counter the risk of over-optimism in estimating project costs, benefits and duration. The guidance recommends that estimates should be based on data from past or similar projects, and adjusted for the unique characteristics of the project in hand.
The guidance provides cost and time uplift percentages for generic project categories which should be used in the absence of more robust primary data. There is separate supplementary guidance for transport infrastructure projects.
See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/191507/Optimism_bias.pdf
Government dos and don'ts for procurement
The government has produced a leaflet that sets out a checklist of tips for those involved in public sector procurement.
Top tips are to be clear about what is wanted, signal demand early, talk to the market early, be open to new ideas and use the Lean sourcing process. Highlighted key mistakes to avoid include the use of extensive selection criteria through a PQQ, assuming that larger firms are better to do business with, large scale requirements and long contract durations, sole reliance on financial assessment criteria at the selection stage and insistence on onerous insurance requirements.
See: https://www.gov.uk/government/publications/procurement-for-growth
Government contract tax checks
The government plan for tax compliance self-certification on UK central government above-threshold contracts started on 1 April. The government's Action Note 06/13 of 25 July 2013 sets out the scope and background of the new policy, advises on how to take account of it in procurement documentation and provides further detailed guidance on how Departments should assess suppliers' responses and the inclusion of new clauses in contract terms.
See: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225407/PPN_2_TAX.pdf
Late payment law given EU update
Contracts entered into on or after 16 March 2013 are subject to the updated late payment regulations, following the EU Late Payment Directive, which say that:
- the payment period set in business to business contracts should be no more than 60 days, unless otherwise agreed, and provided the terms are not "grossly unfair";
- public authorities must pay suppliers under commercial contracts within 30 calendar days of receipt of an undisputed invoice (matching UK government standard public sector practice);
- the acceptance and verification period for public authorities is set at no more than 30 days, unless otherwise agreed, and again provided the terms are not "grossly unfair";
The EU Directive fixes minimum compensation at €40 but the amended UK legislation retains the current three tier charge scale and additional reasonable debt recovery costs may also be claimed.
But parliamentary inquiry recommendations target late payment
A cross-party inquiry into late payment to small and medium sized enterprises has come up with eleven recommendations for action, which include:
- establishing a Construction Code of Conduct, with contractually agreed payments held in an independent trust and an independent adjudicator for mediation; legislation would be required for this; (in the Government's Construction 2025 plans, the Institute of Credit Management is to develop a construction supply chain payment charter.)
- a Retentions Monies Bill with retained money held in a trust;
- all new Government contracts to include Pre Qualification Questions on past payment performance, with consideration of payment history as part of the bidding process;
- making fair payment a contractual requirement in new Government contracts, with Tier 1 contractors paid within 14 days, Tier 2 within 19 days and Tier 3 within 23 days.
New government construction project portal
A new government online portal, the Government Construction Pipeline, now provides information on proposed Government construction projects, updated to 2020 and beyond.
An updated National Infrastructure Plan is scheduled to be published at the time of the Autumn Statement and will include a more comprehensive update of the infrastructure investment pipeline.
Supply chain payment on the agenda in SME public procurement consultation
The government has consulted on proposed reforms to create an SME-friendly 'single market' for public procurement. The government proposals include:
- eliminating pre-qualification questionnaires for low value contracts;
- a mandatory core PQQ with standard questions for high value contracts;
- allowing suppliers to provide PQQ data only once;
- all new contract opportunities and awards over £10,000 to be advertised online;
- public sector reporting of its performance on spend with SMEs and on centrally negotiated deals;
- the standard payment terms that public bodies offer prime contractors to be passed all the way down the supply chain;
- consideration of whether performance bonds can be an unnecessary barrier for SMEs; and
- encouraging the use of e-invoicing in the public sector.
To read this Legal Update in full, please click here.
Originally published 30 October 2013
Learn more about our Construction & Engineering
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2013. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
