The Ongoing Conflict In The Middle East

The ongoing conflict in the Middle East, and particularly the closure of the Strait of Hormuz, has set in train a cascade of events that may impede, delay, or prevent performance of many construction contracts across the region. The UAE is proactively monitoring and managing the situation though an element of uncertainty will remain until the hostilities cease.

Construction projects may face pressure from many directions: shortages of materials, potential shortages of staff and labour, increase in prices, and other legislative and administrative actions, to give only a few examples.

Many projects may experience difficulties that may not have been caused by the parties to the contract, where finding relief through either contract or law will be necessary to alleviate financial pressures.

We consider some of the main types of relief from performance under the FIDIC contract suite (given its prevalence in both the United Arab Emirates (the "UAE"), as well as relief under the Federal Law No. 5 of 1985 (the "UAE Civil Code").¹ Specifically, we will review the following options available to parties:

i. Variations or amendments to contracts;

ii. Force majeure;

iii. Extensions of time;

iv. Hardship and other remedies; and,

v. Termination.

Construction projects in the Middle East often deploy the vast suite of FIDIC contracts (the particular type of which depending on the nature of the project); however, we most commonly see the Fourth Edition of the Conditions of Contract for Works of Civil Engineering Construction 1987 ("FIDIC 1987") and the FIDIC Red and Yellow Book contracts of 1999 and 2017.

We will look at the ongoing conflict and its effects through the lens of the standard forms of these contracts but note that in practice, many contracts contain amendments that alter the operation of the relevant clauses.

I. Variations or amendments to contracts

The effects of the conflict are likely to continue to prevent or inhibit performance of contractual obligations in the immediate future. In general terms, negotiation between the parties is likely to produce the best commercial outcome that mitigates legal risks for both parties – though this may not always be readily achievable where the relationship is already strained. Before convening any meetings and heading for the negotiation table, parties should consider the non-exhaustive list below as part of its preparations:

i. What contractual obligations or aspects of performance are being affected, hindered, or prevented entirely by the ongoing conflict?

ii. Are the effects being documented in accordance with any obligations under the contract?

iii. What mitigation measures are available to reduce the harm or loss being suffered? Have these already been deployed to the maximum extent possible?

iv. Are all stakeholders affected (e.g. owners, engineers, subcontractors, or suppliers) and should they be involved in any discussions?

v. What are the continuing effects of the conflict based on the current situation? What effects are likely if the conflict worsens?

Failing to assess and plan is preparing to fail. Ensuring you properly understand both your position and your rights and obligations under the contract and at law will enable you to work effectively with the relevant stakeholders to achieve an agreeable and workable outcome. Whether variations or amendments to the contracts are enacted through the existing contractual mechanism or a separate agreement will likely depend on the nature of the changes being executed.

A. Variations or amendments to the contract under the FIDIC suite

Under the FIDIC 1987 and the Red and Yellow Book 1999 contracts, the right to vary the contract is set out in Sub-Clauses 55.1 and 13.1 respectively and resides with the engineer rather than the contractor. It is important to note that the Engineer does not have the authority to amend the contract and requires direct authorisation to do so from the employer. In practice and considering the specific issues arising from the ongoing conflict, variations are only likely to be instructed following discussion between the employer and contractor. This is why we commonly see major variations and amendments made in separate, ancillary agreements to the main contract.

B. Variations or amendments to the contract under UAE law

Under UAE law, Article 257 the UAE Civil Code embodies the Latin principle of pacta sunt servanda, namely the principle that the parties are free to agree on the terms of the contract, so long as the mandatory provisions of the UAE Civil Code are complied with. Consistent with this principle, the parties are therefore able to agree amendments to their contract, so long as these are made with mutual consent.

The general requirements for the formation of an ordinary contract are set out in Article 125 of the UAE Civil Code. Provided there is agreement between the parties (i.e. personnel authorised to act under the contract) as to the terms, an oral variation or amendment is likely to be enforceable.

Many construction contracts contain no oral modification clauses, which are therefore enforceable. To ensure enforceability and avoid unnecessary evidentiary issues, any variation or amendment to the contract should therefore be in writing and contain detailed particulars as to the scope and effect of the agreement.

Best practice dictates that parties ensure that any variations or amendments to the contract are captured in writing and set out in a separate agreement to later avoid unnecessary disputes.

II. Force Majeure

The potential remedy of force majeure is the topical question on the mind of everyone involved in the construction industry. Does the closure of the Strait of Hormuz constitute a force majeure event? What about the wider bombardment of the UAE with various projectiles? What if the UAE deems it necessary to act upon its right to defend itself?

The answer to these questions lies – as it always does – with a careful and detailed review of the relevant contract.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.