Construction Claims and ADR

Overview

This practice guide deals with common construction claims arising in the MENA region and more specifically in the Kingdom of Bahrain. It also considers alternative dispute resolution mechanisms commonly adopted for the resolution of construction disputes.

Although litigation remains the primary route for dispute resolution within the Kingdom, arbitration continues to be an increasingly utilised alternative. Given the popularity of FIDIC standard form contracts and Bahrain’s enhanced legislative framework governing arbitration, it comes as no surprise that medium to large sized contractors are increasingly more inclined to include ADR provisions in their contracts.

The primary source of law governing construction disputes in the Kingdom remains Bahrain Decree-Law No. 19/2001 On the Issuance of the Civil Law which contains articles specific to the interpretation of muqawala (construction) contracts.

Definitions

• BCDR: Bahrain Chamber for Dispute Resolution.
• DAB: Dispute Adjudication Board.
• FFP: Fit for purpose.
• FIDIC: Fédération Internationale des Ingénieurs-Conseil.
• GCCCAC: Gulf Cooperation Council Commercial Arbitration Centre.
• ICC: International Chamber of Commerce Arbitration Centre.
• LCIA: London Court of International Arbitration
• MOJ: The Ministry of Justice.
• UNCITRAL: United Nations Commission on International Trade Law.

Practical Guidance

Common construction claims

Typical claims forming the subject of construction disputes include:

• Prolongation claims for delay, disruption and associated costs;
• Variations;
• Unforeseen site conditions;
• Poor workmanship or defective works; and
• Liquidated damages for delay.

Common issues in construction claims

Penalties and liquidated damages

Most standard forms of construction contracts commonly used in Bahrain provide for liquidated damages payable in the event of late completion of the works. For example, sub-clause 8.7 of the 1999 FIDIC Red Book and sub clause 8.8 of the 2017 FIDIC Red Book. Whilst parties are free to include such provisions in their contracts, the enforceability of liquidated damages may be subject to challenge (often by contractors) before Bahrain courts.

In accordance with Article 226 of Bahrain Decree-Law No. 19/2001, Bahraini courts have discretionary powers to modify the amount of the liquidated damages pre-agreed, where the value of actual damage suffered is deemed to be grossly disproportionate to the value of liquidated damages prescribed under the contract or where it is established that a substantial part of the contractor’s obligations have been performed. In both cases, the courts are guided by the overriding principle that a harm must be suffered for compensatory damages to be justified, which stems from Sharia law.

Naturally, this is often a cause for concern for employers expecting to recover 100% of the liquidated damages prescribed in their contracts for late delivery of works. However, this is not to say that the courts exercise such discretion frequently. On the contrary, Bahraini courts are only inclined to adjust the value of liquidated damages in circumstances where the difference between the value of liquidated damages and the actual harm suffered is considerable.

Moreover, the burden of proof lies with the debtor (i.e., contractor) to prove that the harm actually sustained by the claimant, is grossly disproportionate. Obtaining such evidence can be tricky, particularly for private companies that are not obliged to publish their financials each year.

Time bars

The courts have the discretionary power to consider the application of time bar provisions on a case-by-case basis.

Where a party having legitimate claims is prejudiced by a strict interpretation of a time bar provision, or is limited to recovering its substantiated entitlements, the contractor could turn to the following provisions of Bahrain Decree-Law No. 19/2001, namely:

• Article 28(c) of Bahrain Decree-Law No. 19/2001, which provides that the exercise of rights is unlawful where the benefit of the rights is disproportionate to the harm caused to another party;
• Article 182-183 of Bahrain Decree-Law No. 19/2001, concerning unjust enrichments; and
• Article 129 of Bahrain Decree-Law No. 19/2001, requiring parties to execute their contracts in accordance with the principle of good faith.

In practice, an employer may be prevented from relying on a contractual time bar provision to avoid making payment to the contractor if:

• The sole breach is the untimely submission of the contractor’s claim;
• The employer was made aware of the contractor’s intention to raise such a claim despite the contractor’s failure to meet the contractual time bar deadline; or
• Submission of the claim was delayed for reasons attributable to the other party.

Such an approach is intended to preserve the interests of natural justice by protecting parties with legitimate claims from suffering loss solely as a result of procedural irregularities. For this reason, if claims are referred to courts within the prescription periods afforded under law, the court will be inclined to permit the advancement of such claims notwithstanding any failure to comply with time bar provisions.

The approach adopted in the FIDIC Red Book 2017 edition (specifically sub-clause 20.2.5) is similar to the extent that the Engineer is afforded discretion to waive a failure to adhere to a time bar condition, taking into consideration certain points including:

• Whether the other party would be prejudiced by acceptance of the late submission; and
• Whether the other party had prior knowledge of the event in question or basis of claim.

Concurrent delay

Under Bahraini law, ‘concurrency’ is not a defined term, however the concept is recognised by local courts. Courts and tribunals are often required to determine whether liability for any particular delay event should be allocated to one party exclusively or apportioned between both parties fairly. In doing so, the courts are guided by the principle of contributory negligence and afforded wide discretion when allocating liability.

In particular, Article 166 of Bahrain Decree-Law No. 19/2001 provides that “where a wrongful act of a person contributes with the fault of the aggrieved person in causing the injury, he shall not be liable to make reparation except to the extent of his wrongdoing to the occurrence of the injury in proportion to the fault of the injured person.”

Accordingly, Article 217 of Bahrain Decree-Law No. 19/2001 empowers the court or tribunal to reduce the amount of damages payable if the party seeking damages is deemed to have contributed to the harm by way of its own negligence or otherwise. Although concurrency is a recognised principle before Bahrain’s judiciary, the apportionment of liability is often determined
by court appointed experts, whereas in arbitration such matters are typically dealt with by the tribunals.

Unlike English courts, the judiciary in Bahrain is not bound by prescriptive principles such as the prevention principle or the “but for” test. Arguably, the less restrictive approach taken by local courts in Bahrain could produce positive results for parties incurring 100% of the liability for damages in circumstances where liability should not be allocated exclusively to one party.

Suspension and termination

A party’s right to suspend performance of its obligations (as afforded under sub-clause 16.1 of the FIDIC Suites) is a statutory remedy prescribed under Article 150 of Bahrain Decree-Law No. 19/2001 that may be exercised unilaterally, even where the contract does not provide for conditions necessitating suspension. Unlike termination, suspension is by definition a temporary measure and as such should not be treated as some form of cancellation of a contract.

Absent any contractual provisions for suspension, the lawfulness of a party’s decision to suspend performance is often the subject of disputes. Courts will consider, among other points, whether suspension was an appropriate and proportionate measure to be taken under the circumstances and whether such rights were exercised in good faith. The most common cause
for suspension is the non-performance of mutual obligations, e.g., non-payment of the contractor’s entitlements.

If suspension is deemed to be a reasonable and proportionate course of action, then the suspending party will not be liable for any costs incurred by the non-suspending party due to the suspension.

The right of termination is treated differently by the courts. Termination of a contract may occur by way of:

• Mutual agreement by the parties;
• Upon complete performance of each parties obligations;
• Expiry of the agreed term of the contract;
• Recission of the contract;
• Termination for breach; or
• Termination for convenience.

If termination is not agreed by the parties, which is typically the case if one party is deemed to have committed a material breach of its obligations, then the party considering termination of the contract must notify the other party and afford them reasonable time to remedy the breach (if possible) before exercising such right. Even if the terms of the contract dictate the conditions under which termination may occur, parties are required to seek approval of courts to enforce their right of termination.

As per Article 140 of Bahrain Decree-Law No. 19/2001, “In bilateral binding contracts if one of the parties does not perform his obligation, the other party may, after serving a formal summons on the other party, demand from the judge the performance or dissolution of the contract, with damages, if due in either case, unless the party demanding dissolution does not also perform his obligation. The judge may grant additional time to the debtor if it is necessary as a result of the circumstances. The judge may also reject an application for dissolution when the part of the contract which the party has failed to perform is of little importance in comparison with the obligation in its entirety.”

Where specific performance of an obligation is no longer possible, then the non-defaulting party may seek recission of the contract in accordance with Article 140 of Bahrain Decree-Law No. 19/2001 and claim damages that arise as a natural result of the breach. The result would be to put the parties in the position they were in prior to entering contract.

Article 140 of Bahrain Decree-Law No. 19/2001 also grants the courts power to afford the party in default a period of time to remedy the breach. Alternatively, the court may reject the claimant’s application if the breach is deemed to be immaterial thus rendering termination a disproportionate measure taking into account the overall performance under the contract.

When deciding whether an application for termination (or dissolution) of a contract should be granted, the courts will consider several factors:

• Have the parties have complied with the terms and conditions of the contract, particularly any provisions related to termination?
• Does the nature and severity of the breach warrant termination? In both cases of material and immaterial breaches, the courts will always consider whether such breach may be remedied by means of an order for specific performance. If remedy of the breach is not possible, then compensation may be granted to the party seeking termination.
• Have the parties complied with notice requirements? Parties seeking termination are required to give notice of any breach warranting termination and afford the defaulting party reasonable time to remedy the breach if possible.
• Overall performance of each parties’ obligations and whether any failure to perform has contributed to the need for termination. Where contracts impose mutual obligations on the parties, the non-performance of either party’s obligations may be caused by a corresponding failure or refusal to perform by the counter party. In such cases, termination may be avoided if specific performance of each party’s obligations is possible.
• Have the parties conducted themselves in good faith? Is the party seeking termination doing so in good faith.
• Is it in the public interest to grant or deny such application?

In light of the above, parties are advised to exercise caution when exercising their termination rights, not least because the consequences of unlawful termination are serious. By way of example, if termination is the subject of a dispute between parties, and the right to terminate is exercised unilaterally by one party and subsequently challenged before the courts on the basis of unlawful termination, then the challenging party may recover damages for any losses suffered as a result of the termination if the court deems the termination unlawful. The damages may comprise both direct and indirect losses including loss of profit, costs and any other losses resulting from the termination.

Defects correction and liabilities

Liability for defective works or materials in the context of construction disputes is both a matter of contract and law. As per Article 586 of Bahrain Decree-Law No. 19/2001, parties undertaking the supply of materials must ensure that such materials conform with the agreed specifications. If such specifications are omitted from their contract, then parties must ensure that such materials are suitable for the intended purpose of the works.

Whilst the industry term “fit for purpose” is not well defined within Bahraini law, it is a concept that is well recognised by the judiciary. Courts will first look to the conditions of the contract to determine whether specific requirements or specifications were met. Absent any contractual provisions defining these requirements or specifications, courts will consider whether the
works are fit for purpose in the context of reasonable, ordinary and customary use or function.

If a court or tribunal is required to examine claims for works deemed to be defective as a result of an alleged failure to satisfy FFP conditions agreed under contract, difficulties tend to arise when parties fail to adequately specify the required result in their FFP provisions. As per Article 596 of Bahrain Decree-Law No. 19/2001, an employer may refuse to take delivery of works if defects render such works not fit for the intended purpose. If the intended purpose of the works is achieved notwithstanding the existence of some defect(s), the employer may demand a proportionate reduction in the contract price or oblige the contractor to rectify the defect within a reasonable time.

Having regard to the wording adopted in Article 586 and 596 of Bahrain Decree-Law No. 19/2001, it is recommended that parties specify with as much detail as possible, the performance objectives and/or intended purpose of works within their contracts. That said, even where the contract in question omits these particulars, contractors may nonetheless be held liable to ensure that the works are reasonably fit for purpose.

The design and construction of buildings is also subject to statutory provisions of law that impose strict liability known as decennial liability. Pursuant to Article 615(a) of Bahrain Decree-Law No. 19/2001, contractors and engineers are jointly and severally liable for any collapse or defect, either in whole or in part, of buildings or fixed structures constructed by them, for a period of ten years from the delivery of the works. As per Article 615(b) of Bahrain Decree-Law No. 19/2001, if the intention of the parties is for the building or construction to last for less than ten years, the contractors and/or engineers shall remain liable for such period as agreed by the parties.

The allocation of liability between contractors and architects or engineers is subject to the specific circumstances of each case including the nature of the defect, the extent of each party’s involvement in the project and the conditions of contract as parties may agree to a specific allocation of liability. In practice, however, the apportionment of liability can be technically difficult, particularly in more complex projects which could have a number of factors contributing to the overall structural integrity of a building.

The scope of this decennial liability covers defects that threaten the structural integrity or safety of the works which is a matter of public interest. Accordingly, this form of strict liability may not be avoided by agreement of the parties.

Claims issued on the grounds of decennial liability must be heard within three years from the date of the collapse of the works or discovery of the defect. In very exceptional cases, this period may be extended as necessary at the court’s discretion.

Alternative dispute resolution

For construction disputes, the most popular alternative dispute resolution mechanisms are arbitration and mediation.

Arbitration

In July 2015, Bahrain Law No. 9/2015 On the Issuance of the Arbitration Law was issued. Bahrain Law No. 9/2015 adopts the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”) (in its entirety which aims to provide businesses and individuals’ autonomy to make use of arbitral proceedings pursuant to internationally accepted best practice in arbitration.

Bahrain Law No. 9/2015 applies to:

• All arbitrations in Bahrain, whether domestic or international.
• Non-Bahraini lawyers representing parties in arbitrations in Bahrain.

The most popular arbitral institutions used for construction disputes in or concerning Bahrain remain the BCDR and GCCCAC (situated within Bahrain), ICC and LCIA.

The highest courts of Bahrain foster the legitimacy of arbitration and enforcement of arbitral awards treating them as final and binding except where:

• The matter cannot be settled by way of arbitration (e.g., family and inheritance matters);
• The award contradicts morality or public policy;
• There are procedural irregularities (e.g., the tribunal or the procedure was not constituted as required under the arbitration agreement or Bahraini law); and
• There is a lack of a valid arbitration agreement.

The High Court has the power to set aside arbitral awards in such circumstances.

Actions involving criminal activity or public policy are reserved exclusively for national courts and may not be subject to arbitration.

Mediation

In keeping with the culture and history of Bahrain as well as the GCC region, parties are increasingly more amenable to including mediation procedures in their multi-tiered dispute resolution clauses.

Prior to 2019, parties looked to Bahrain Decree-Law No. 12/1971 On the Issuance of the Civil and Commercial Procedures Law as the legal framework for mediation. Formal mediation procedures are most commonly conducted before the Bahrain Chamber of Dispute Resolution (BCDR) which has its own set of mediation rules and procedures found in the BCDR Rules.

Since 2019, the government of Bahrain has issued a number of laws regulating mediation and the enforcement of mediated settlement agreements including Bahrain Decree-Law No. 22/2019 On Mediation for Dispute Settlement and Bahrain Decision No. 126/2019 On the Issuance of the Implementing Regulation of Bahrain Decree-Law No. 22/2019 on Mediation for Dispute Settlement.

Bahrain Decree-Law No. 22/2019 provides for the recognition and enforcement of mediated settlement agreements which are treated as binding and enforceable court judgments. Parties already engaged in court proceedings may request that such proceedings are suspended during the mediation process. Courts are generally content to afford parties as much time as reasonably needed to mediate, whilst upholding the enforceability of mediated settlement agreements.

Bahrain Decree-Law No. 22/2019 applies to all types of civil and commercial disputes including those related to contracts, tort and property. Bahrain Decree-Law No. 22/2019 also sets out qualifications and requirements for mediators registered with the MOJ including education, training and experience. Parties are free to appoint their own mediator or alternatively appoint a certified mediator. In the event of disagreement, the parties may refer to the president of the High Civil Court to appoint a certified mediator at the MOJ.

Parties are required to execute mediation agreements in writing before commencing procedures. Such agreements should set out the terms and conditions of the mediation, including the role of the mediator and confidentiality of the process. Bahrain Decree-Law No. 22/2019 imposes strict confidentiality requirements, prohibiting mediators from disclosing any information obtained during the process.

Despite the positive steps taken by the government to develop the mediation practice in Bahrain, the construction industry is yet to embrace mediation in the way it has embraced arbitration. For some, mediation as a non-binding procedure is viewed as an ineffective option compared to litigation or arbitration where decisions are enforceable as final. Nevertheless, the introduction of Bahrain Decree-Law No. 22/2019 is a promising development that the construction industry will benefit from on some level.

Adjudication enforcement

Unlike the UK (and other common law jurisdictions), adjudication as a form of alternative dispute resolution for construction disputes is not commonly practiced in the region.

We often see parties delete provisions found in FIDIC standard form contracts relating to the appointment of DABs. Adjudication clauses typically provide that the decision of the appointed adjudicator or adjudication board is final and binding unless or until such decision is revised by a court judgment or arbitral award. Construction industry professionals based in the region have historically demonstrated a reluctance to appoint DABs on account of the fact that their decisions may be subject to further challenge and the costs of obtaining a DAB decision may prove substantial depending on the complexity of the dispute.

This is not to say that adjudication cannot be embraced in the same spirit parties approach mediation or procedures for issuance of expert determinations. After all, adjudication is well suited to the construction industry as it provides a platform for the relatively quick resolution of disputes without having to engage in more formal and costly procedures such as arbitration. From a legislative standpoint, Bahrain does not have a definitive legal framework to support adjudication as we have seen with mediation.

Consequently, parties looking to enforce adjudication decisions may face difficulty obtaining recognition and ratification from domestic courts, even where the parties have agreed for such decisions to be final and binding in their contracts. That said, parties entering litigation may rely on adjudication decisions as evidence of the merits of their case and domestic courts may be inclined to consider such evidence without being bound by it, even where the services of court appointed experts are employed.

Although Bahrain Law No. 9/2015 allows the tribunal to render interim or partial awards which are enforceable before domestic courts, DAB decisions do not clearly fall within the same category. For this reason, it is not likely that such decisions would be upheld and enforced pending final determination by a court or tribunal. Given the developments achieved in respect of arbitration and mediation, we may expect similar legislative support to be directed towards adjudication.

Related Content

Legislation

• Bahrain Decree-Law No. 19/2001 On the Issuance of the Civil Law
• Bahrain Law No. 9/2015 On the Issuance of the Arbitration Law
• Bahrain Decree-Law No. 22/2019 On Mediation for Dispute Settlement
• Bahrain Decision No. 126/2019 On the Issuance of the Implementing
• Regulation of Bahrain Decree-Law No. 22/2019 on Mediation for Dispute Settlement
• Bahrain Decree-Law No. 12/1971 On the Issuance of the Civil and Commercial Procedures Law

Regulations

UNCITRAL Model Law on International Commercial Arbitration

This article was first published on LexisNexis