Revising Lump Sum Construction Contracts: A Case Study from Bahrain
Dispute Resolution / Bahrain
Lump sum construction contracts are a common method of project delivery where the contractor agrees to complete the project for a fixed price.
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Hatem El KatanSenior Associate,Dispute Resolution
Bradley PriceAssociate,Dispute Resolution
Lump sum construction contracts are a common method of project delivery where the contractor agrees to complete the project for a fixed price. However, complications arise when the schematics or design specifications provided to the contractor are significantly revised after the contract has been concluded. This article explores the legal framework in Bahrain that allows for the revision of lump sum contracts under such circumstances, drawing on a specific experience involving a recent construction project in Bahrain.
Briefly, the Contractor was initially approached in October 2020 to provide a lump sum proposal based on schematic design stage drawings and specifications. The Contractor submitted a value-engineered offer on 22 February 2021, which was accepted by the Employer. However, the detailed design drawings provided later were significantly different from the initial schematics, leading to disputes over the scope of work and compensation.
As suggested by the name, maximum lump sum contracts are generally fixed and contractors will need to show their entitlement to any additional payments in accordance with the contractual terms, this can simply be demonstrated as follows:
Lump Sum Basis: The contract is based on an agreed plan.
No Claim to Increase: Generally, the contractor cannot claim an increase in price.
Exceptions: Modifications or additions due to the employer's fault or authorized by the employer allow for price adjustments.
Article 613 of the Bahrain Civil Code However, Article 613 of the Bahrain Civil Code is pivotal in addressing the issue of modifications and additions to a lump sum contract. It states:
When a contract is concluded on a lump sum basis according to a plan agreed with the employer, the contractor has no claim to an increase of price, even if modifications and additions are made to the plan, unless such modifications or additions are due to the fault of the employer or have been authorised by the employer."
Court of Cassation Judgment The Court of Cassation in appeal No. 334 of 2010 further clarified the application of Article 613. The court held that if the predetermined lump sum was based on initial drawings that were not implemented, and another design was executed resulting in a different product, the contractor is entitled to additional fees. This judgment underscores that a contractor may charge the employer an additional fee if the final design deviates significantly from the initial schematics.
Initial Agreement and Subsequent Changes The Contractor's initial lump sum proposal was based on schematic drawings provided by the Employer. The Letter of Intent confirmed that the lump sum amount was based on these schematic drawings. However, the detailed design drawings provided later were substantially different, leading to an increase in the built-up area and additional work not accounted for in the initial lump sum.
Contractor's Claims The Contractor argued that the significant differences between the schematic and detailed design drawings constituted a variation. The Contractor's position was that the lump sum price was based on the initial schematics, and the detailed design drawings represented a substantial change in scope, entitling them to additional compensation.
Employer's Position The Employer attempted to bind the Contractor to the initial lump sum despite the changes in the design. The Employer's stance was that the lump sum was a maximum guaranteed price, even though the detailed design drawings were not available at the time of the initial agreement.
Interpretation of Article 613 The Contractor's entitlement to additional compensation is supported by Article 613 of the Bahrain Civil Code. The modifications and additions to the initial plan were authorized by the Employer, as evidenced by the detailed design drawings provided after the initial agreement. Therefore, the Contractor is entitled to an increase in the lump sum price.
Court of Cassation Precedent The Court of Cassation's judgment in appeal No. 334 of 2010 reinforces the Contractor's position. The judgment confirms that if the final design deviates from the initial schematics, the contractor is entitled to additional fees. In this case, the detailed design drawings were significantly different from the initial schematics, justifying the Contractor's claim for additional compensation.
The case of the Sheraton Hotel refurbishment in Bahrain highlights the complexities involved in lump sum construction contracts when the initial schematics are revised. Bahrain law, specifically Article 613 of the Civil Code, provides a clear framework for addressing such issues, allowing for the revision of lump sum contracts if the modifications are authorized by the employer. The Court of Cassation's judgment further supports this interpretation, ensuring that contractors are fairly compensated for additional work resulting from significant changes in design. This case serves as a crucial reference for contractors and employers alike, emphasizing the importance of clear and consistent design documentation in lump sum construction contracts.
For further information,please contact Hatem El Katan and Bradley Price.
Published in October 2024
