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Trowers & Hamlins' Construction Alert: Liquidated Damages in Construction Contracts in The Gulf - July 2016
Trowers & Hamlins' Construction Alert: Liquidated Damages in Construction Contracts in The Gulf - July 2016
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Construction
Trowers & Hamlins' Construction Alert: Liquidated
damages in construction contracts in the Gulf —— July
2016
The application of liquidated damages in construction contracts in the
Sultanate of Oman (and the UAE and Qatar)1
Increasingly we are being approached by construction clients, both employers and contractors, to
provide advice in relation to the levying of liquidated damages for a failure by a contractor to achieve
completion by the contractual dates for completion.
With this in mind, we provide the following timely update in relation to the application of liquidated
damages in the Sultanate of Oman.
Back to basics: Liquidated damages
In a construction context, delay liquidated damages (LDs) typically represent an agreed, fixed amount
(usually a daily or weekly rate) payable by a contractor to the employer in circumstances where the
contractor fails to complete the work under the contract by the date for completion specified in the
contract (being either the original date for completion, or where the date has been extended in
accordance with the contract, the extended date for completion).
It is not unusual for the total amount of LDs to be capped at a percentage of the contract price.
The following are commonly cited as a few of the benefits to the parties in agreeing a rate of LDs as
part of their contract:
l It quantifies the risk of late completion and permits a contractor to properly consider the risk at the
tender stage;
l It provides the parties with certainty; and
l It removes the need for the employer to prove the actual damage suffered.
At what point during the project can liquidated damages be levied / deducted?
Using the Oman Standard Documents for Building and Civil Engineering Works (fourth edition) as a
reference point, the relevant clause of that contract, clause 47, in essence provides that if the
contractor fails to complete the works by the date for completion (original or extended), then the
contractor shall pay to the employer LDs for every day between the date for completion and the date
completion is certified.2
The clause then provides that the employer may deduct the LDs from any monies due, or which may
become due, to the contractor.
The clause does not, however, appear to expressly provide at what point in time the LDs can be
deducted from the contractor.
Throughout our 50 years in the Gulf region, we have been approached by countless distressed
contractors who have had LDs deducted prior to completion being achieved querying whether an
employer is able to do so or whether the employer must wait until a project is completed before LDs
can be deducted.
Under the Oman standard contract, as soon as the time for completion has passed, and the
contractor has not completed the works, the employer will be entitled to deduct LDs from any amount
due (or which will become due) to the contractor.
An employer does not have to wait until the project is completed before deducting LDs from the
contractor.
Where the time for completion has passed, a typical example will see an employer each month
deduct LDs from any amounts determined to be owing to the contractor as part of the contractual
payment regime.
Application of the Omani Civil Code
Article 267(1) of the Omani Civil Code (Royal Decree No. 29 of 2013) (OCC) entitles parties to a
3
construction contract to agree a rate of LDs.
Article 267(2) of the OCC qualifies this entitlement by providing that in all cases, a court (or an
arbitrator applying Omani law) may, upon the application by either of the parties, amend the contract
such that the LDs payable by the contractor shall be equal to the actual loss or damage suffered by
the employer. Parties cannot contract out of this particular provision, and any attempt to do so shall
be void.4
In circumstances where an employer suffers no actual loss or damages, the court or arbitrator may
find that the employer is not entitled to insist on levying the LDs in the contract.
By way of a very basic example, consider the following hypothetical factual scenario:
l an unamended Oman standard form contract provides a rate of LDs of RO 100,000 for every day
the contractor is late in completing the project;
l being an Oman standard form contract, it provides:
¡ that the contract is governed by and construed in accordance with the laws of the Sultanate of
Oman; and
¡ ultimately the parties are to arbitrate any dispute arising out of the contract;
l the contractor completes the work 10 days late;
l the contractor is not entitled to any extensions of time; and
l in accordance with the contract the employer properly deducts from the contractor LDs in the
amount of RO 1 million.
In the above circumstances it is open to the contractor to dispute through the contract's dispute
resolution procedure (to arbitration if necessary), that the employer has not suffered actual loss or
damage equal to RO 1 million directly resulting from the contractor's failure to complete the works 10
days late, that the LDs are excessive and that accordingly, the contractor is only liable for a lesser
amount representing at most, the actual loss suffered.
Omani courts have expressly recognised LDs clauses as a term of the contract governing the
parties, but that the courts have a role to play in assessing the damages payable: "Liquidated
damages will be awarded in respect of actual and foreseeable loss ... The legal issue which the
courts must ascertain is whether or not the three conditions for contractual damages are met, ie
breach of contract, causational link and actual loss. Once these are established, the courts must
then assess the amount of compensation to be awarded for breach of contract".5
It is important to note, however, that a contractor who challenges the levying of LDs on this basis
risks a finding that the actual loss or damage suffered by the employer was in fact greater than the
amount of LDs levied against it.
Practical considerations
For contractors, the key is to ensure that it has given all requisite notices pertaining to any delay over
the course of the duration of the project, that it has submitted its claims for extensions of time in
accordance with the contract and otherwise that it has kept adequate records to ensure it has
captured all contemporaneous documentation, particularly in respect of any delays to the works.
It cannot be understated that extensions of time are a contractor's primary weapon against the levying
of LDs by employers.
Where, as many of our clients have experienced, a contractor's legitimate claims for extensions of
time are rejected (either wholly or in part), the contractor's recourse is through the dispute resolution
process, typically initiated by serving on the employer a notice of dispute.
For employers, it is imperative that they too engage appropriate measures to properly record any
losses on the project that they may later claim against the contractor or can rely upon if called upon to
do so in circumstances where a contractor ultimately challenges the quantum of LDs levied against
it. In circumstances where an employer incurs loss or damage greater than the amount of
recoverable LDs, the employer may consider arguing its compensation should be increased to
accord with the actual loss suffered.
Should you have any queries in respect of the matters set out above, please contact Christopher
Beem.
1
Although written primarily with Oman in mind, the general comments regarding LDs are applicable throughout the
Gulf region and the latter part of this update makes comparable references to the UAE and Qatar.
2
The intent of this clause is captured in the same, if not identical terms in the suite of contracts released by
Fédération Internationale des IngénieursConseils (FIDIC).
3
See also Article 390(1) of the UAE Civil Code (UCC) and Article 265 of the Qatari Civil Code (QCC) which espouse
the same principle.
4
See also Article 390(2) of the UCC and Article 266 of the QCC which are of the same effect.
5
Supreme Court case 98/2005 – Decision 155, issued 30 December 2005.
Key contacts
Michael O'Reilly Christopher Beem
Partner Senior Associate
t +971 4 302 5152 t +968 2468 2923
e moreilly@trowers.com e cbeem@trowers.com
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