Supply chain and increased cost issues in construction disputes in Oman
Chelsea PollardAssociate,Dispute Resolution
In recent years, supply chain delays and costs of raw materials, equipment and products required for construction have increased due to pandemics, blockades, trading restrictions and natural disasters. Inevitably, this has given rise to a number of issues and disputes in the construction sector resulting from the limited remedies provided under Omani law. Where the contract is a fixed price contract (otherwise known as lump sum contract), the issue of increased costs becomes more pertinent as opposed to a measurement contract. For purposes of this article, we focus on the issue that arise from a lump sum contract and the employer – contractor relationship, however, the same issue may arise between a contractor and subcontractor.
As described below, Omani law provides limited remedies for contractors to claim for increased costs. Whether the contractors will be entitled to claim for the increased cost will depend on the variation, adjustment, measurement, evaluation, escalation (de-escalation) and change in law clauses of the contract, as there are no provisions under Omani law which grant an absolute right to an increased cost claim. Under the FIDIC Red Book, for example, although sub-clause 12.3 provides instances in which a fixed price may be varied, the mere increase in cost of an item is not one of the grounds to claim for a new rate or price. Contractors may nevertheless rely on clause 13.8 of the Red Book, which provides contractors with an avenue for claiming for an adjustment for rises or falls in costs of labour and goods and other inputs to the work, subject to an agreed upon formula and the cause being external and beyond the control of the parties (otherwise known as an escalation (de-escalation clause). On the other hand, article 65(4) of the Oman Standard Form Contract for Civil Works (4th Edition, 1999) provides that that the employer shall repay the contractor for any increased cost in the event of a special risk, which is connected to the special risk, subject to certain conditions with respect to the outbreak of war. Special risks include war, hostilities, invasions, act of foreign enemies, nuclear and pressure waves risks, rebellion, revolution, insurrection, usurped power, civil war, riot, commotion or disorder. Another clause parties may consider is a change in law clause, which provides for adjustment to reflect the change in the price of a raw materials caused by a change in law.
While the force majeure clause may provide for remedies in the event of delays caused by unforeseen events, such clauses do not provide contractors with an avenue for purely increased cost claims. Accordingly, where the result is an increased cost, and not a delay, a force majeure clause would not provide a contractor with any relief.
Alternatively, under Omani law, article 159 of the Civil Code (Royal Decree No. 29 of 2013) states that if an exceptional circumstances of a public nature, which could not have been foreseen, occurs as a result of which the performance of the contractual obligation, even if not impossible, becomes so oppressive that it threatens that party with a grave loss, the court may, in accordance with the circumstances and after weighing up the interests of the parties, reduce the oppressive obligation to a reasonable level, and any agreement to the contrary shall be void. The burden will be on the contractor to prove that the increased cost resulted from (i) an exceptional circumstance of public nature, (ii) that was unforeseeable and (iii) caused performance to be oppressive. In assessing aby application for adjustment, the court will look at the relevant state of affairs in Oman surrounding the contract and performance. Generally, the burden of proof required under article 159 is high and requires an element of public nature, meaning it affected the public as a whole.
Where the increase in cost results in the contract no longer being economically viable for the contractor, the contractor may wish to consider terminating the contract. However, unless such a ground is provided for in the contract, articles 167 and 171(1) the Civil Code, stipulate that a contract may only be terminated where either (i) both parties agree to the termination or by court order or (ii) if the contract prescribes an obligation on both parties, and a party fails to perform its obligation, then the other party may request the court to terminate the contract. In order to substantiate a claim for termination, the contractor must prove under article 171(1) of the Civil Code that the employer has failed to perform an obligation under the contract. Accordingly, unless the employer has breached its obligations, the increase in costs would not be sufficient for a contractor to terminate the contract under Omani law.
Additionally, contractors should obtain legal advice prior to terminating a contract as Article 267 of the Civil Code, stipulates that while contracting parties may agree on damages in contracts where the subject matter of the obligation is not a monetary, the court may, upon the application of either party, alter such agreement to make the quantification of the damages commensurate with the harm suffered; and any agreement to the contrary shall be void. As a result, even if the contract includes a liquidated and ascertained damages clause, the employer may be entitled to claim for the actual damages suffered, including, delay damages, the difference between the contract sum of the terminated contract and any new contract awarded to another contractor, costs of performing the work itself and any other damages which the employer can prove resulted from the termination.
Although the Civil Code does not impose a requirement of good faith on contracting parties, the Omani courts (and arbitral tribunals) typically require that the parties perform their duties and obligations under the contract in good faith. The courts have held that although the first portion of article 156 of the Civil Code requires that the contract terms prevail and shall be performed in accordance with its terms, the second portion, which stipulates that the obligations of the parties should not be restricted to only the terms of the contract and shall embrace what is just and appurtenant to it pursuant to law and custom should be interpreted to imply an obligation to act in good faith on the parties. Whether the employer has acted in good faith with respect to any increased cost claim will be assessed on a case-by-case basis and the court will take into consideration the specific facts surrounding the request and the terms of the contract.
In long term contracts, the price of labour, goods and materials is difficult to predict, therefore, contractors should endeavour to include clauses in the contract which allow for adjustment claims resulting from increased costs. Adjustment clauses are also beneficial for employers as such clauses will help reduce the likelihood of disputes, delays and failures to complete the project due to the contractor’s lack of cashflow. Where a clause is provided in the main contract, it is imperative for similar clauses to be included in the sub-contracts to ensure the same remedies are provided to sub-contractors, who are likely to suffer the most detriment from the increased costs. Therefore, these clauses should be carefully drafted to balance the interest of all parties and ensure that claims for cost adjustments may only be raised in limited circumstances where the increase was not expected or drastically higher than previous years.
For further information,please contact Chelsea Pollard
Published in August 2023