Challenges facing the Middle East construction industry: performance bonds – part two
Projects & Construction
Price escalation is a widespread concern amongst many contractors in the Middle East. The price of steel has increased globally, whilst shipping costs have increased fivefold and are unsustainable. In our new series of market insights, we explore the key challenges facing the construction industry in the Middle East, commencing with price escalation.
In this article, we discuss the challenges of increased costs and the potential options available to contractors operating in the UAE to recover their additional costs.
The UAE Code, Article 887(1) provides: “If a muqawala contract is made on the basis of an agreed plan in consideration of a lump sum payment, the contractor may not demand any increase over the lump sum as may arise out of the execution of the plan.”
In order words, in relation to a lump sum construction contract, a contractor will not be paid any more than the lump sum agreed for performance of his contractual obligations. The starting point is therefore a statement of the obvious, which is often missed, namely that there needs to be a sound legal basis for any claim to additional payment.
Inflation isn’t caused by the employer; he isn’t at fault. There is no entitlement to additional money just because it seems unfair (and concepts of good faith, abuse of rights and ‘estoppel’ will not assist). A proper legal basis will need to be identified and articulated.
There are three potential legal bases available to a contractor:
We expect price escalation will continue to be a prevalent concern across the global construction sector in 2022. Alexa Hall and Richard Harding QC explore the options available to contractors in our podcast.
If you would like to learn more about this subject or have a related legal query, please contact our Projects and Construction specialists.