The Political Instability Issues in the Middle East - Essay Example

SECTION A This section of the research will examine the case of New Construction Group, which is a UK entity that is operating in the Middle East and North Africa. The current political instability issues in the Middle East have led to several issues in the construction of a Gas Pipeline project for a North African government that can be viewed from different frameworks by the various construction contract frameworks. The issues include: 1. The new government’s threat to classify New Construction Group as a corrupt entity and hence, terminate it; 2. A general threat to UK citizens due to a standoff between the new government and the UK government; 3. Issues with the legitimacy of the government in the international community 4. Claim that the costs of the contract between the government New Construction Group was inflated and a renegotiation was necessary; This paper examines the issues of force majeure and illegal termination in light of the French-Sharia legal system in relation to three main construction contract systems which are outlined below. However, prior to delving into the technicalities of the contract forms, there will be a brief discussion on the French-Sharia legal system and process. French-Sharia Legal System Sharia-law is based on a civil code system that was developed from the principles of the Koran and Sunnah (Islamic traditions that goes back to the days of the Prophet of Islam)1. Sharia-Law operates on the basis of the principles of good faith and it is particularly against the principles of unjust enrichment2. This implies that there is a general opportunity for an organisation like NCG to make claims within these broad principles and scopes in a court of competent judicature and on the basis of the new legal system that will be put together by the new regime. The French legal system which was adopted by most of the Middle Eastern and North African countries after independence has to do with the Napoleonic code which was a tradition that was steeped in new laws3. What the French code shares in common with the Islamic code is that they are both civil law jurisdictions and they are all made up of codified rules and regulations that are held to be absolute which is in contrast with the English legal tradition of using judicial precedence4. The benefit to NCG is that they can always make claims and go to court about a perceived injustice and raise important legal restrictions based on the facts and challenge the government on the basis of acting in bad faith. On the other hand, the Sharia-French system is one that is not steeped in precedence, so what a given generation of legal scholars and constitution makers state is the rule and this could be divergent from the reality. Conditions of Contracts for Works of Civil Engineering Construction 4th edition The preamble of the CCWCEC indicates that the contract is made between a contract is made between the contractor and the employer which happens to be the North African state in question5. NCG becomes the contractor in this case. In the normal sense, the contract is binding and until it is completed, the parties are bound by their terms. Termination of contracts in the CCWCEC Section 20.4 identifies that the contractor, NCG is not responsible for risks and issues that relates to force majeure and this include wars, disasters, damage and other matters which could affect the completion of work. Hence, the employer which is the North African state bears the obligation and responsibility for the political turmoil and its related situations and circumstances. To this end, NCG will be entitled to what they are due as long as it is stipulated in the contract and after the riots, they will have the right to get everything reinstated to the previous conditions and work within the previously defined terms. Section 65.6 states that in the event of wars, the contract remains valid and the contractor has to do his best to continue the construction project until further notice. From the fact of the case, it is apparent that NCG can continue to work on the contract and continue to deal with things and this means that the previous agreement stands valid. On the other hand, section 65.8 states that in cases where the contract proceeds, the employer has to pay the contract, NCG what was previously negotiated in the original contract. The CCWCEC also stipulates that in cases of dispute, the matter should be referred to the Engineer stated in the contract to review things. Hence, it is not possible for the government of the country to revalue and restate the values of the contract (Section 67.1). This means the government cannot change much unilaterally as Employers. Section 67.2 state that disputes must be settled amicably so it will not be permitted for them to determine what they will pay to them alone. Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer 1st edition The FIDIC condition of contracts for constructions has detailed rules on offer and acceptance which forms a binding and standard commercial contract. Section 10 indicates that the work must be taken over if certified as completed by the engineer and the employer must be liable to paying what is due. Measurement and evaluation is placed firmly in the hands of the Engineer who is to certify every step and ensure they conform to standard and when this is done, the employer (government) will be liable to pay for what was done as stipulated in the contract (Section 12.1). Variations and adjustments are in the hands of the engineer (Section 13.1). And this means that the government will not be permitted to unilaterally review and change the values of the existing contract. Adjustment for changes must be based on value engineering and this is stated in Section 13.2. However, this law gives room to the employer to terminate contracts when they fail to comply with performance security (Section 4.2). Section 15 allows the employer to terminate contracts, but that does not include changing and modifying the terms of the payment as presented by the North African government Engineering and Construction Contract of the NEC 3 suite – April 2013 The 2013 edition adjusts the NEC system to accommodate international construction contracts. Section 3 of the NEC 3 Suite indicates that there must be specifications that are set up and must be decided upon by the employer and the contractor. Hence, this is binding and dictates the contract throughout the period in question. Section 4 involves the constraints that must be provided by the employer. And since there were no clear constraints that limited the work, there is little room for further changes and modifications for projects’ costs. However, defects are to be addressed when they are technical (Section 112). Termination is to be done for non-payment. Therefore, in this case, the government will be able to invoke section 112 for the address of inflation but this is likely to fail because the section is mainly about valuation of the work in question and not the methods of estimating the costs. On the other hand, the government can seek to terminate the contract by non-payment of the fees for 13 consecutive weeks (Section 91.4). Hence the only thing NCG can do is to demand a fair payment for work already done and sue for damages. SECTION B The term ‘turnkey’ is used in its original sense to mean a contract where the contractor undertakes the total responsibility for designing, engineering, procurement, construction, construction, commissioning, and testing of the work and training of clients’ staff6. Turnkey contracts are not common in the UK because it involves some challenges to the traditional views of separation of powers, segregation of duties and independence in order to ensure that projects are checked and delivered according to specifications and standards necessary to ensure that they are done right7. Conceptually, the “turnkey” concept indicates that the employer will get the contractor to turn in the key to the structure after they are done because the inputs of the employer or other third parties might not be necessary8. This implies that the contract is solely reliable for providing all the actual and supervisory activities necessary to complete the project. Obviously, these turnkey projects come with the challenge of leaving a project in the hand of one dominant and powerful contractor who might be involved in anti-competitive practices. This could also lead to other circumstances like fraud and illegalities which could harm the competitiveness and appropriateness of a project. Basically, the sponsor or employer just gives instructions of what is wanted and the turnkey contractor will need to do it alone with little instructions from the employer. And in cases where the employer is not an expert, there might be some issues of construction choices which might go to affect the final deliverable. Again, the supervision of the employer might be questionable since supervision might be built into the construction contract itself already. Hence, the builder has full control and authority over everything that must be done. This might lead to major problems and issues that will not be duly and appropriately addressed throughout the process. A proper turnkey arrangement could have the advantage of reducing administrative costs and requirements. This is because there will be fewer needs for tenders and there will be less in terms of administrative oversight and delays9. However, the challenges involve the inability to check for mistakes in a thorough manner and fashion. Also, the contract price could be inflated, especially if the risks and issues relating to the contract are quite high. Due to the complications of turnkey construction projects, there is the need for some amendments and changes to be made to standard-form contract in order to ensure that they meet their fundamental objectives and the best interests of all the parties are met significantly10. These modifications and changes to contracts come in different ways and forms and hence, they can be analysed and reviewed differently in the various construction standard form systems. Needs of the Employer in Turnkey Contracts and Contract Provisions: FIDIC 1999 When an employer gives the details and desire to carry out a turnkey contract, The Conditions of Contract for EPC (Engineering, Procurement and Construction must be used as it provides detailed and specific rules and principles of how to conduct these turnkey projects11. The EPC/Silver Book provides important regulations and principles on how to deal with contracts and ensure that all the parties carry out their activities and processes well within the right framework. At the introductory level, the Silver Book offers additional rules and regulations on the tendering process and the tendering system12. Consequently, there is the need for the contract to assume a higher level of risks for the project than under the Red and Yellow Books which has different dynamics and less demands. Therefore, the Silver Book focuses on the typical elements and aspects of the operations of a contractor in an EPC contract which includes taking turnkey responsibility to deliver a complete facility for a guaranteed price, by a guaranteed date which must be performed to a specified level. Hence, the Silver Book as a balance of risks that is not the same as other construction contracts. Bankability The EPC must make some adjustments for lenders. These EPCs seek to protect lenders by ensuring that the lender is able to guarantee that they will remain solvent and have enough funds to complete the project. Hence, Lenders are required to look at the contractor’s security and other guarantees. Hence, lenders are to satisfy their risk checks and ensure that a vying client for these contracts is covered fully and duly. Hence, Article 8.2 of the Silver Book requires lenders and contractors to fix completion date and completion price (Article 4.11). Additional risks like technological risks are to be reviewed and analysed as per articles 5.8 and 7.5. Other output guarantees like performance and liquidated damages are to be covered in these bankability risk analyses. Security from the contractor or its parent company is to be examined and reviewed as per Article 4.2. Also, restrictions are placed on the contract to seek extra money and extra time in Articles 13.1 and 13.4. Key Clauses and Common Approaches There is single point responsibility that the contractor takes and this is to be seen in the form of a joint venture (Article 4.1). Also, fixed construction price and fixed completion date is in Articles 13.1 and 14.1. Performance guarantees are integrated in Article 9.4 and performance liquidated damage which covers genuine losses and their methods are included in the Silver Book of FIDIC. Caps on liability are set around 20% for most cases and should not exceed 100% as per Article 17.6. Consequential damages, however, are often excluded. Article 4.2 states that there must be some kind of market security which is some kind of a bank guarantee of 5 – 15% of the contract price. Hence, a retention of 5-15% will be made on every payment made and this is to act as some kind of guarantee for future payments and future transactions and processes. The article also covers advanced payment guarantees as well as parent company guarantees which are to ensure that the company carries out its activities and processes in a way and manner in which the employer’s risks are reduced because these guarantees will ensure that in any event or situation, the work will be continued and the employer will get their money’s worth. Defect liabilities are often stipulated for a period of between 12 and 24 months and within this period, they will have to repair all damages that will ensue on the completed project (Article 11). In Article 17.5, the contractor must state and guarantee that they own the intellectual properties to be used and performance in periods of force majeure is stated in Article 19 of the Silver Book. Termination Contract can be terminated for non-payment, extended suspension and material breach by employer as per Article 16.2. This implies that the employer is significantly protected and prevented from exploitation from the contractor. NEC 3 Engineering and Construction Contract Inherently, the, NEC3 is a construction contract system that utilises less words and is much more brief than the FIDIC standard contracts13. The NEC3 Engineering model for single point projects are such that there is a focus and an emphasis on cooperation and collaboration rather than the adversarial system and processes. This indicates that the NEC3 provides a collaborative approach that brings in the employer and the contractor into the obligation system of managing risks and playing a proactive role in dealing with issues and matters in these projects. The NEC3 family of construction contracts do not really accommodate turnkey contracts as the FIDIC rules do. This is primarily because the NEC3 family is such that they are designed with an end of simplifying the process in mind rather than the quest to promote and enhance specificity. An employer who contracts on a turnkey basis will select a design and build contract and the employer will have to specify what he requires in the performance terms and hence will choose Option A: Priced Contract with Active Schedule14. The main process that will be conducted involves the definition of the activity schedule and the range is defined and identified in Clause 11.2(20). This will define the terms and the main process for conducting the contract. In this process, there will be some degree of flexibility which can be exercised by the employer in order to protect all his interests and rights. This is bespoke and can be changed and modified at will. There are 14 clauses in Option A and the most important include 11.2(27) which states that the price of each activity must be put together and summed in order to find the amount due at a particular date. Clause 11.2(30) provides some degree of flexibility and allows lumpsum for various activities to be changed as per the changes in the circumstances within which the contract is conducted. Also, Clause 54.1 states that there is a distinction between information on schedule and information on site and this indicates some room for changes and modifications. Payment is to be made on work done to a due date. This indicates that work done merits payments and this is one that the contractor will complete will be presented to the employer who will make the payment as required and as expected (Clause 50.2). This is because Option A contracts enable contracts to be broken down into separate smaller units and this is utilised as the basis for invoicing and in this case, turnkey contracts can be conducted in a way and manner in which payments will be made from time to time in order to meet the expectations and requirements of the contractor. Synthesis The main point of the NEC3 is to create a proactive management system and process through which an employer can get the opportunity and the right to play an active role in dealing with contracts and trying to deal with it. Clearly, this approach is deficient in areas and situations relating to turnkey construction contracts. This is because there are limited checks and balances that are placed on the contractor in the turnkey construction contracts. Hence, there is some degree of loopholes that contractors can explore which might be detrimental to employers in different contexts and situations. Hence, there is the need for care and assertion of appropriateness by the person utilising the contract. This could lead to additional costs for employers because the employers might need to examine the work and value other things which could defeat the purpose of running a turnkey contract and process. The concept of bankability on the other hand provides a specialise and emphatic process and system through which contractors are vouched and audited in order to ensure that they have the resources and competency to complete a given project. This prevents the handing over of the project to contractors who are not capable of meeting the ends of a given contract and process in the FIDIC Silver Book. Also, the FIDIC Silver Book promotes certainty. This is because it has rules and regulations that are laid down significantly and the parties have a clear view of how the contract is to be conducted and how things are to be done. This is not the case with the NEC3 which has numerous loopholes and several approaches that could lead to leakages and limits in turnkey contracts and processes. FIDIC Silver Book by far protects the employer in many ways. This is because the employer gets numerous advantages and benefits that will not be apparent in the NEC3 which is mainly for other contract types. However, the downside of this is that all contractors on the market will also assess and evaluate their risks, which will lead to the inflation of contract costs and limits. This will cause the employers to spend more money on their projects. Finally, the employer cannot intervene in the project due to the fact that such an act or possibility will cause them to incur high costs which could mean the modification of the contract under the FIDIC Silver Book. However, other standard contracts like the NEC3 will give a higher degree of flexibility that can help in promoting supervision on the part of the employer. Bibliography Aldohni, Abdul Karim. The Legal and Regulatory aspects of Islamic Banking. London: Routledge. 2012. Ashworth Allan. Contractual Procedures in the Construction Industry London: Routledge, 2013 Eggleston, Brian. The NEC3 Engineering and Construction Contracts: A Commentary Hoboken, NJ: John Wiley and Sons, 2013. Furst Stephen, Ramsey Vivian, Hannaford Sarah, Williamson Adrian. Keating on Construction Contracts London: Sweet and Maxwell, 2012 Marsh, David. Contracting for Engineering and Construction Projects. Surrey: Gower Publishing, 2013. Miller, Roger. Business Law Today, Comprehensive: Text and Cases. Mason, OH: Cengage. 2014. Totterdill Brian. FIDIC Users’ Guide: A Practical Guide to the 1999 Red Book and Yellow Book. London: Thomas Telford, 2012 Vinter Graham & Price Gareth. Project Finance: A Legal Guide London: Sweet and Maxwell, 2012. Wilkins, Rob & MacDonalds Pamela. New Libya: The Impactof Sharia Law on Construction Law Contracts. [Online] Available at: http://www.building.co.uk/new-libya-the-impact-of-sharia-law-on-construction-contracts/5033953.article Retrieved: June 30, 2014. Read More