How to renegotiate contracts in the UAE

The global economic crisis has sparked an increase in construction contract re-negotiations in Dubai and the UAE. Numerous projects have been put on hold over recent months and now clients are often asking contractors to revise their price, change their construction programme and renegotiate their existing contractual and commercial terms. So, what to do if you are a contractor that finds itself in this position?

Firstly, check your existing contract. Are you contractually obliged to re-negotiate? Probably not. Are you legally obliged to do so? Again, probably not. In fact, the UAE Civil Code provides that parties to a valid contract may only alter it in certain limited circumstances. However, if you don’t agree to a re-negotiation, there may be a risk that you will lose the work and a valuable commercial relationship going forward. In certain circumstances, you may therefore need to consider such a re-negotiation but be clear, is it a renegotiation of an existing contract, or putting in place a new contract?

Contractual considerations

Firstly, insofar as you are able to, you should use any re-negotiation to ensure that any outstanding claims are agreed and paid up to date. You can then draw a line in the sand and proceed with a clean slate going forward.

Before you agree to a reduced contract price, check your payment terms. Is there a clause in the existing contract that only permits interim payment applications to be made for a minimum amount? If so, you will need to reduce that limit proportionately, or remove the provision altogether and replace it with perhaps a regular monthly application for payment.

Consider the implications to your cash-flow of a reduced price contract. Further, are there any set-off or abatement provisions in the current contract? If such a provision was to be implemented during the course of the contract, will you have enough funds to continue with and complete the works now that you will have a reduced income?

Ensure that any time related obligations in the revised contract are updated to accommodate changes to the construction programme and completion date so that you don’t prematurely trigger any contractual delay penalties. Also, check that the extension of time provisions remain suitable.

Occasionally, some clients will attempt to reduce the scope of the works by utilising the variation provisions under the contract. You may therefore have to accept a reduction in the scope of the works to ensure that you are engaged to complete the remainder of the contract. However, you must be protected going forward. For example, avoid provisions that give the client the option to further reduce the scope of works at will and re-tender a portion of the works package in anticipation of finding a cheaper contractor further down the line.

In addition, check that you have suitable rights to suspend and/or terminate the works. Are your de-mobilisation and re-mobilisation costs adequately covered? If not, then now is a good time to discuss them.

Commercial considerations

Savings on material prices are likely to be first on the agenda. Likewise, any savings on labour costs you are able to secure may also need to be accounted for. However, should the costs of such elements rise significantly during the remainder of the contract, then you are likely to be left out of pocket. Therefore, make sure there is a fluctuation clause included in the renegotiated terms to accommodate this possibility.

You should also be aware that revisions you agree may also need to be addressed within the contracts agreed with your subcontractors. Consider what cost savings are reasonably attainable and what other terms of the subcontracts may need to be revised in turn.

Have you already provided a performance bond and/or advanced payment bond? If so, consider negotiating the terms of the bond. It is also worth noting that a conditional bond will be preferable to an unconditional bond. However, this is likely to be a matter for spirited commercial negotiation. Most importantly, ensure that all bonds are revised, updated and re-issued to reflect the re-negotiated terms.

Perhaps most importantly it is vital to ensure that all amendments work effectively within the existing terms. Failure to ensure appropriate drafting could well negate both parties’ efforts. It is therefore advisable to take legal advice so as to ensure that the intended amendments work properly. Finally, remember to notify your insurer of the changes to the contract so that your insurance cover is revised as appropriate.