Legally Bound

Jordan ... a positive step.

Jordan ... a positive step.

Non-payment issues revisited

Swift redress for non-payment is not generally available in the region, however Fidic’s Second Edition and a recent circular issued by Abu Dhabi are steps in the right direction, says STUART JORDAN*.

February 2020

We have looked at the problem of non-payment in Gulf Construction’s July 2018 issue. At that time, I took the view that the Gulf region suffered from widespread instances of main contractors and subcontractors not getting paid on time and in full.

This is not about claims or disputes – it is simply about owners not meeting their payment obligations and, in turn, main contractors not paying subcontractors.

That view was based on my direct interactions with projects, plus anecdotal reports from others in the industry. Today, I don’t know whether the situation is better or worse (it might be both, depending on the location) but the problem does persist. To help predict what can be expected in the future, we should have a look at some recent developments.

First, there is some governmental recognition of the problem. In March 2019, the Abu Dhabi Executive Committee issued Circular No 1 of 2019 which required all government departments and “state-owned companies” in the emirate to do the following:

•  Make all payments to contractors and suppliers within 30 days of receiving the invoice;

•  Insert provisions into their contracts with those contractors and suppliers requiring them to pay their subcontractors within 30 days of receiving the above payment from government departments or state-owned companies;

•  Amend all contracts with contractors and suppliers to reflect the above; and

•  Pay undisputed parts of sums due, regardless of disputes about the other parts – such payment not constituting a waiver of rights.

Overall this is a positive step, and it is perhaps as important for the gesture as for the substance, in stating that the emirate does not support a culture of non-payment. This might influence private projects. This circular also raises two interesting points:

•  First is the requirement to amend existing contracts, and not simply apply this requirement to new contracts; and

•  Second is the requirement to practice “pay-when-paid” in second-tier contracts.

These two points might actually harm subcontractors who have already agreed, or who would wish to negotiate, payment terms based on monthly measure-and-value of the subcontract works or on the achievement of subcontract milestones.

In both cases, entitlement to payment can be dealt with entirely within the terms of the subcontract and need not be dependent on payment being received under the main contract. It is, therefore, surprising to see “pay-when-paid” being effectively mandated in this circular. 

We know that “pay-when-paid” can operate effectively but it is open to abuse and it is, in any event, an unmanageable risk. It can leave the subcontractor exposed to main contract blockages, disputes and poor practice over which the subcontractor has no control. For this reason, it is generally viewed as retrograde practice and is unlawful in some jurisdictions.  

This circular also does not address the issue of subjectivity and opacity in the payment process, which is a common issue in the region. Where, for instance, an invoice needs to be approved before it can be submitted, or where the work needs to be “to the Employer’s approval” before invoicing, the right to payment (on 30-day terms or not) may never arise if the paying party doesn’t want it to.

That takes us to another development which does aim to address those issues.

The Fidic Second Edition main contracts are more detailed than the previous forms in the payment process. Taking the Red Book as our example: the payment cycle begins with the issue by the engineer of the interim payment certificate (“IPC”) in response to the contractor’s payment application (“Statement”). That part isn’t new but the IPC must now include details of all additions and deductions from determinations of existing claims or matters and it must identify any differences between the certified amount and the claimed amount – with reasons for such differences.

In other words, greater transparency is required from the first stage of payment administration so that, if the contractor is not going to receive the sum applied for, he can at least see where the issues are.

Secondly, if the engineer proposes to withhold money on the basis of contractor failure to perform any work, service or obligation, the engineer must promptly give notice of that failure with detailed supporting particulars to include the reasons for withholding and a calculation of the amount withheld. In these ways, Fidic (among other published forms) is adopting modern practice in forcing transparency in the way payments are calculated.

These changes and the Abu Dhabi circular are, of course, not the whole answer to non-payment because swift redress for it is not generally available in the region. Quick and summarily-enforceable adjudication is not a legal reality and payment security is not (usually) a commercial reality. They are, however, steps in the right direction.

 

* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.  




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