An engineering, procurement and construction contract (EPC contract) is an all-inclusive contract framework, which requires the contractor to complete an agreed scope of work by an agreed completion date, in return for an agreed lump-sum contract price. The main purpose of EPC contracts is to limit responsibility for the performance of the works to the main contractor and minimise other contractors' cross claims.
Governing law and interpretation
EPC contracts are commonly used in complex construction projects in the United Arab Emirates (UAE), especially in public-private partnership projects and are increasingly governed by local laws and regulations. With this in mind, contractors must take note of mandatory legal provisions, such as those concerning the enforceability of notice periods, liquidated damages (LDs), issuance of access permits, labour laws and health, safety and environmental regulations.
In the UAE, most EPC contracts are drafted and executed in English. Nevertheless, the use of bi-lingual contracts is not unusual, particularly when dealing with governmental and semi-governmental entities/ bodies. It is certainly advisable to avoid dual language contracts to avoid any linguistic discrepancies, especially with technical terminologies often found in EPC contracts. When this is not possible, it is advisable to provide for a provision that determines which of the two languages prevails in the event of any discrepancies or ambiguities. UAE law applies rules of literal interpretation. In the event of ambiguity, UAE law expressly provides that the judge/arbitrator will need to interpret that ambiguity by determining the parties' common intention.
Scope of work
EPC contracts require the contractor to perform all "necessary" works, even when those are not expressly described. Any change order/variation is likely to be considered as changing the scope of works, essentially inviting the contractor and employer to agree on the parameters of such change/variation, against an agreed price for it. EPC contracts typically provide that the contract price may be increased, or additional costs may be recovered, under a change order/variation, if there is:
- a change in law that adversely affects the contractor's costs of performance and/or its ability to perform the work according to the agreed schedule;
- an act or omission by the employer that adversely affects the contractor's costs of performance;
- a change in the scope of work; or
- a specific force majeure event.
Where the contractor considers that an external factor means it requires additional time to complete the works, it will seek an extension of the agreed schedule – or Extension of Time (EOT). The EPC contract commonly provides a framework for variations and EOT. That framework often includes its own time limits that usually imposes on a contractor a strict period for submitting a claim for variation or EOT.
Contractors should always be aware of the jurisdiction in which they are operating, as time-bar provisions are not always applied strictly in some jurisdictions. In a jurisdiction like the UAE, where the principle of fairness and the concept of good faith are deeply enshrined, courts may adopt a more liberal application of time-limits, subject to the evidence and circumstances of the case. Nevertheless, it is sensible for contractors to try to comply with time-limits or to offer a valid excuse for failing to comply (which excuse might be unawareness of the event causing the variation or delay). An incomplete or unclear design is often the root cause of variations and EOT claims, with 'design creep' commonly increasing the scope of the contractor's work. It is always advisable to start a project with a defined and documented design.
Performance guarantees and delay damages
Liquidated damages (LDs) are commonly found in EPC contracts and usually are the employer's sole remedy for delay in the completion of the works. LDs provide a pre-estimated figure that a contractor agrees to pay the employer, for every week/day it is late completing the works, especially when guaranteed targets for the specific performance parameters are not met. UAE laws are generally soft in this area and do not apply the same prohibitions surrounding penalties that exist in common law. The UAE courts have the power to assess the validity of LDs, to ensure that the claimed amount of damage is equal to the loss an employer has actually suffered. The UAE courts can only do so if an application in that respect is made by any of the parties and regardless of any agreement to the contrary.
Further, LDs can be claimed as a right under UAE law without the need to evidence any harm suffered as a result of the delay. Indeed, UAE court precedents have shifted the burden of proof to the contractor, to prove that LDs are not/should not be enforceable.
Any dispute over the validity of LDs inevitably involves an analysis of the period of delay assessed and any entitlement to an EOT. Delay claims are essentially factual and the availability of contemporaneous records are often key to their success. Investigation and identification of culpable delay events in 'real time' is essential to submitting a successful EOT claim.
Typically, EOT claims should address the attributable delay, the reasons thereof, the time-impact of such delay on the completion of the works, any mitigation and acceleration measures the contractor has taken, the resulting time extension and prolongation costs, if any. Broadly speaking, not all delays will affect overall completion, especially when the event causing the delay happened during a period of float.
Importance of risk allocation
There are many risks inherent in a construction project. For example the project not completing on time, or not conforming to specifications, and costs exceeding budget. The essential rule in risk allocation is that the party who is best able to manage the risk, at optimum cost, should assume that risk. EPC contracts keep the risk with the contractor, rather than the employer, given that the contractor has been appointed to deliver a facility to the standard stipulated by the employer. However, not all risks are assumed by the contractor, such as site risks when there is no opportunity to perform geotechnical surveys.
Site risks are common and involve the possibility of extra costs and delay, due to difficult access, weather or soil conditions. The employer will want to pass all site risks to the contractor, unless the latter was not previously allowed to inspect the site during the bid process, in which case the contractor will not wish to take on site risks or, alternatively, would price higher to guard against unforeseen costs caused by site conditions.
Most EPC contracts incorporate multi-tier dispute resolution clauses with arbitration usually at the heart of every clause. Direct negotiation has always been the first in a series of attempts to settle any misunderstanding between the parties in an amicable fashion.
Expert determination is sometimes offered as an option for both parties to seek guidance from an unbiased and independent third party expert. The International Chamber of Commerce (ICC) is often named as an appointing authority if the parties fail to agree on the identity of an expert. Third party expert determination is usually relied on whenever the dispute relates to the determination of technical matters, more so than the legal or factual aspect of a particular claim.
If expert determination is not considered sufficient for a final and binding dispute resolution mechanism, arbitration will be. Within the UAE, it is common to have dispute resolution clauses in EPC contracts that provide for arbitration under the ICC Rules or under one of the notable arbitration centres in the UAE, such as the Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA) or the Dubai International Arbitration Centre (DIAC).
In June 2018, the UAE enacted a new federal arbitration law, making it more appealing for contractors and owners to opt for the UAE as a 'seat' of arbitration. This is because (a) the process of enforcing arbitral awards before UAE Courts has been simplified and shortened, (b) the law provides a more arbitration-friendly framework, and (c) previous grounds for annulling arbitral awards have been extensively modified and are now more in line with international standards and best practice.
It should be noted that the approach to enforcement of domestic awards is different in the major free zones in the UAE (the DIFC and the Abu Dhabi Global Market (ADGM), which have their own court systems, independent of the onshore UAE Courts). The DIFC Courts and ADGM Courts are subject to different arbitration laws, but it would be true to say that those jurisdictions already have effective arbitration laws.
It is crucial to seek legal advice before entering into any type of contract in the UAE. It is particularly recommended to seek advice on UAE imperative laws and laws of public order applicable to EPC contracts, even where the contract is governed by a foreign law but has a nexus to the UAE.
In addition, it is recommended that parties:
- Investigate the place and means for achieving successful enforcement of the EPC contract when agreeing on applicable law and dispute resolution clauses.
- Conduct commercial and technical due diligence before pricing and committing to a delivery date.
- Keep a complete and contemporaneous record of the facts that can have an impact on their legal and contractual rights.
- Comply with the contractual provisions.
Parties should keep in mind that it may be possible to apply for interim measures before the local courts in support of their dispute/arbitration. These can include:
- Request the appointment of experts in certain circumstances, to issue reports in support of a claim, even where no proceedings (whether domestic or foreign) have been commenced.
- Request on an urgent basis the court to commission an expert to the site and issue a status report.
- Request a precautionary attachment order, which application is done on a without notice basis.
- Request the hearing of witnesses.
- Request production of documents orders.
It is also often worth investigating the possibility of stopping the calling of a performance bond.
This article was originally published on Mondaq, the 'Practical guidance' section has been added subsequently for Kennedys.