Monday, July 10, 2017

Understanding Construction Contracts in Oman: An Employer's Perspective

The scope of work represents a key constituent of a construction contract as it is a key factor in a decision of an employer to choose a contractor and the structure of the contract. Accordingly, the scope of work can be summarised as the tasks promised to be accomplished by the contractor and expected by the employer. 

Determining the contractor’s liabilities, the scope of work and its implementation are generally at the source of a significant amount of litigation; therefore, it is key for any business to make sure that the scope is drafted with no ambiguities in the purpose of the smooth running of its project.

The scope of work, specifically in construction contracts, is frequently subject to change (variation); consequently, the parties should be aware that the foreseeability of such variations can be instrumental to ensure the continuity of the progress of work.

We published an earlier article (19 December 2013) which addressed “Variations to Construction Contracts” under the Standard Documents for Building and Civil Engineering Works (Fourth Edition – September 1999); today, Decree 29 of 2013 enacting the Civil Code (“SD 29/13”) provides a regulatory framework on this matter. 

Article 640 of Decree 29/2013 enacting the Civil Code states the following:

1. If a contract is made under an itemized list on the basis of unit prices and it appears during the course of the work that it is necessary for the execution of the plan agreed substantially to exceed the quantities on the itemized list, the contractor must immediately notify the employer thereof, setting out the increased price expected, and if he does not do so he shall lose his right to recover the excess cost over and above the value of the itemized list.

2. If the excess required to be performed in carrying out the design is substantial, the employer may withdraw from the contract and suspend the execution, but he must do so without delay and must pay the contractor the value of the work he has carried out, assessed in accordance with the conditions of the contract.

Article 641 of the same Decree states as follows:

1. If a contract is made on the basis of an agreed plan in consideration of a lump sum payment, the contractor may not demand any increase over the lump sum as may arise out of the execution of such design.

2. If any variation of addition is made to the design with the consent of the employer, the existing agreement with the contractor must be observed in connection with such variation or addition.

With the two above-mentioned articles, it is clear that the Civil Code adopts a clear segregation between contracts based on the type of pricing and subjects each to a specific regime with regard to the effect of the variation in the scope: 
  • The first type of contract is the one in which the pricing is set based on a “unit price”; in this case the legislator subjects the possibility of increasing the price to two conditions:
    • Discovery during the work for the necessity of substantially exceeding the scope of work; and
    • The immediate notification to be made by the contractor to the employer of the excess.
    The lack of an immediate notification would lead directly to the loss by the contractor of its right to recover the excess.
    In this first type, Article 640 offers to the employer the possibility, in case of a substantial increase, to withdraw from the contract and resort to remedies, such as the suspension of the contract.
    • The second type of contract is the one in which the pricing is set based on a “lump sum payment” where the contract, in principle, may not demand an increase over the lump sum for the execution of the design agreed on earlier; any change to this design should be made with the consent of the employer.
In practice, for this second type of contract, a recent court ruling has shown that the Omani Court of Appeal is adopting a broad approach towards the interpretation of the “consent of the employer” where, in some cases, remote factual indications, presumptions or clues, such as providing the contractor with the paperwork or administrative support to obtain necessary licences for the execution of the design resorting to a more expensive implementation mean, is deemed an acceptance of the increase.

Facing this broader interpretation of the employer’s consent, it is in the interest of the employer to properly document, in explicit terms, its position in relation to matters in connection with the scope of work in a construction contract.