Real Estate, Construction and Hotels & Leisure Focus
Leith Al-Ali Senior Associate, Construction & Infrastructure
After over two years of Covid lockdowns, the hotel and hospitality sector in the UAE is bustling once again. The UAE Governments’ swift and robust response to the pandemic has meant that the UAE has been able to benefit from being one of the first countries in the world to open its doors to tourists and business travelers from across the globe, in search of something more than just a staycation or business meeting via Zoom.
It has been widely publicised in the press just how badly affected the hotel and hospitality sector has been by the Covid-19 pandemic. Guest and visitor footfall at hotels and various other hospitality venues fell dramatically. Many employees were made redundant with some hotel operators withdrawing altogether from certain international markets. As a result hotel construction projects largely stalled or were put on hold as owners, developers and operators sought to conserve cash flow and mitigate their losses.
In this article we will briefly examine some key contractual lessons that can be learnt from some common mistakes that we have seen being made by contracting parties involved in the execution of hotel construction projects during the Covid-19 pandemic, with a view to helping contracting parties try and mitigate against the risk of similar issues arising in the future.
Hotel construction projects can encompass a myriad of different types of construction works, of varying scope and complexity. Whether a new luxury hotel resort is being developed or an existing high street hotel is being renovated or refurbished there will invariably be some form of underlying hotel operation agreement entered into by the owner or employer with the hotel operator. This will heavily influence the scope, nature and complexity of the construction works, including the manner in which such works are to be procured and executed. Such agreements therefore add a further layer of complexity that must be factored into the project procurement and execution process.
Employers must carefully consider the impact of such agreements and ensure that the terms and conditions of the construction contract are, where relevant, back to back with terms agreed with the hotel operator. Unfortunately, we have seen numerous contracts where provisions have not been adequately passed down into the construction contract in a clear and robust manner, thereby resulting in a disconnect in the owner or employer’s risk exposure between the two contracts and thus resulting in further, additional exposure to contractor claims for additional time and/or costs. Importantly any pass down of provisions should address the following:
design, material and quality requirements and specifications imposed by the hotel operator. In an industry where hoteliers pride themselves on quality and appearance, the importance of adherence to such requirements is magnified within the context of a hotel construction project;
agreed programme requirements including milestone or other completion dates by which certain works must be completed or handed over, need to be clearly reflected;
any delay damages that are to be imposed on the contractor should capture any delay or other performance related damages that the employer might itself be exposed to higher up the contractual chain, should the works fail to be completed within the agreed time for completion; and
relief provisions that ensure the contractor is only entitled to additional time and/or costs to the extent the employer is granted such relief under the hotel operation agreement, unless perhaps delays caused by the employer itself.
Contractors should ensure they request a copy of such agreements well before the execution of the construction contract in order so that any additional obligations and risks arising as a result can be considered, negotiated and if necessary priced for prior to executing the construction contract, thereby mitigating the risk of multiple claims for relief being brought after the commencement of the project.
There was arguably a time pre-Covid when during the contract negotiation process, force majeure provisions were perceived by the negotiating parties as something of an ‘after thought’, not examined and interrogated by stakeholders with the same degree of rigour as other provisions within the construction contract. Parties were perhaps more willing to sign-up to whatever boiler plate force majeure provision was presented to them without properly examining its potential implications should it need to be invoked.
Force majeure provisions have in our experience proved to be a significant battle ground in the construction contract, which parties have sought to invoke in the hope of securing some form of contractual relief, often without success.
Now more than ever, it is important that parties pay particularly close attention to the drafting of their force majeure clauses, in order to ensure it clearly defines what constitutes a force majeure event and captures the parties’ intent with respect to how such events are to be dealt with and their consequences should they arise. Parties should therefore ensure they include a well-drafted definition of exactly what events will constitute a force majeure event, with a clear reference to those events that will be excluded from the scope of the provision. Under the unamended suite of FIDIC contracts (such as the Red and Yellow Books), given that the definition of force majeure does not require that the event or circumstance needs be unforeseeable, there is arguably still considerable scope and therefore a risk that contracting parties currently procuring works for hotel construction projects, unintentionally capture Covid-19 as a force majeure event, even though the works are now being procured and the contract entered into at a time when Covid-19 and its potential consequences is arguably an event which is obviously within the knowledge of and thus known to the parties.
It is important to note that under UAE law, the main emphasis will generally be on what the parties have agreed contractually. This reaffirms the need for careful drafting within the construction contract, given that the force majeure provision will play a critical role in determining if and to what extent a party may be entitled to relief as a consequence of a force majeure event. Where the contract is not sufficiently clear and thus does not assist, parties will have to refer to the UAE Civil Code (Federal Law No. 5 of 1985) (the “UAE Civil Code”), which may result in the obligation being extinguished or the contract potentially being terminated if it is deemed to be impossible to perform.
Well drafted hotel construction contracts usually include a comprehensive, claims protocol regime governing the process to be adhered to by each party where it considers itself entitled to additional time or costs under the contract. In the FIDIC Red, Yellow and Silver Books this features under Sub-Clause 2.5 (in respect of employer claims) and Sub-Clause 20.1 (in respect of contractor claims).
After the onset of the pandemic and its impact began to permeate throughout the construction industry, with costs spiraling and delays accruing, we have seen parties’ often negate their obligations in this respect, including notably the obligation to properly notify and particularise their claims within the contractually agreed timeframes, thus potentially precluding themselves from being able to claim relief under the contract. Non-adherence to such provisions invariably paves the way for a protracted back and forth between the parties in terms of if and to what extent a claim can and should be upheld. This is something which could easily be avoided with closer oversight, contract management and administration.
This issue is particularly important within the context of UAE law where time bars are generally strictly enforced. This is affirmed under Article 243 of the UAE Civil Code such that where an employer or contractor fails to comply with “what the contract has bound him to do”, it runs the risk of foregoing all rights in respect of its intended claim. Parties are therefore well-minded to ensure that claims are submitted in a timely and well substantiated manner in accordance with the agreed claims procedure set out in the contract.
In order for any party to have a right of recourse against a contractor, subcontractor or other supplier they must have some form of written, contractual recourse in place. This need for a contractual nexus is a fundamental premise of the UAE Civil Code.
The pandemic has led to numerous contractors encountering financial and other cash flow issues, some of which subsequently became insolvent, with others simply being unable to settle their considerable payment obligations towards subcontractors and suppliers. As a result, some projects stalled or were suspended. In others, where defects arose and the main contractor was unable or unwilling to return to site to resolve the issue, some employers were left with no alternative way of enforcing their rights against the second or third tier sub-contractor that undertook the works. Where no collateral or other form of warranty was obtained, employers were therefore left with no recourse against parties further down the supply chain from whom works or services had been procured.
Given the multitude of trade contractors and suppliers that are often engaged in hotel projects, it is important to ensure that well drafted, collateral, manufacturer, and supplier warranties are procured at an early stage in the project, in favour of the employer, hotel operator and any other stakeholders with an interest in the works. In addition, attention should be paid to the inclusion of clear step-in rights within collateral warranties, especially in respect of those key trade subcontractors where the employer may need to ensure the works can continue to be progressed notwithstanding the main contractor’s insolvency or termination.
As the hotel and hospitality sector gradually emerges from the effects of the pandemic, there are various lessons that can and should be learnt from some of the contractual issues which have been faced by project stakeholders during the project procurement and execution process. Parties should ensure they carefully consider the implications of these, with a view to addressing them in a clear and robust manner within the contract during contract negotiations, well before the commencement of future hotel and hospitality projects.
For further information, please contact Leith Al-Ali.
Published in July 2022
