Bonds and insurance policies are frequently encountered in construction projects throughout the Gulf. Held by banks — and usually required by employers of their contractors and contractors of subcontractors — bonds exist for many reasons.
They ensure security of payment or guarantee performance, or ensure other securities on a project. In the UAE, the importance of bonds was heightened since the global financial crisis in 2008, when termination or suspension of projects became common.
Most bonds are written on the basis that they are payable on demand. Issues over whether the sums secured by the bond are actually due will be a matter for later proceedings, either in court or more usually through arbitration.
However, several high-profile decisions have raised questions about this. In several instances, courts have refused to allow the bond to be encashed. Just because a bond exists, it isn’t necessarily the case the employer could benefit on termination of the contract.
Deciding the result of a claim on a bond may not be simple. The terms are important — the words ‘on demand’ may not necessarily mean ‘on demand’.
Courts have said the presence of a bond alone doesn’t give a right to call it. They have looked closely at the terms to examine the rights to claims. Also, the law of the country as applicable to the contract is supreme.
Careful legal advice can help to manage risks and preserve the right to perform a bond. With regard to insurance, many types exist — ‘construction all risks’, ‘delay in start up’, and the most common, ‘professional indemnity’. The last cover protects professionals, particularly those involved in the design of projects. In most construction projects, the three key variables remain time, money and quality.
Professionals appointed to oversee the design and supervision of projects are required to deliver on time, within budget and conforming to the quality requirements of the client. If an issue arises relating to one of the elements and it is suggested the cause is a default on the part of consultants, claims can, and do, arise.
However, the reasons a project may be delayed or run over budget are often far more complex. Many of the region’s larger projects are at the cutting-edge of construction. Furthermore, many may have been commissioned on a fast-track basis and despite the apparent need for speed variations.
In some instances budgets could have been revised during the work phase. These can combine to mean that a project runs over time and budget and may not be of the quality originally envisaged.
As the UAE and the wider Gulf have recovered from the impact of the financial crisis, awareness that budgets are finite, and that time and money are closely linked, has grown.
Claims against professionals are becoming more commonplace. However, it should not be thought that the consultants’ professional indemnity insurers should necessarily have deep pockets and reimburse clients who have suffered overruns.
In any claim of this sort, the question will always be whether the consultant has failed to exercise reasonable skill and care. And in the event that he did, whether the effect of his failure was to cause the client to suffer the extent of losses claimed for.
— Nick Carnell is a Partner at the law firm Taylor Wessing, while Stuart Wilks is Senior Manager at Hill International, UK. Hill International is holding a ‘Masterclass’ series in Dubai in early November.
