The game of renegotiating contracts with "local tyrants" -- the risks and Countermeasures of renegotiation or termination of contracts in the Middle East in the post epidemic era.

One belt, one road, one belt, one road, is the three continents of Asia, Africa and Europe. It connects the East and West hemispheres, connecting the East West and East ends of the Eurasian transportation network. As China's one belt, one road initiative has been developing in recent years, infrastructure has become an important field of cooperation between China and the Middle East countries.

Under the influence of the epidemic, the decline of the construction industry has become a foregone conclusion.

Chinese enterprises are facing a sharp increase in risks.

In addition to the traditional contracting enterprises from the United States, Europe, Japan, South Korea and the Middle East, which have occupied the Middle East market for a long time, due to the relatively low entry threshold and relatively active market, a large number of contracting enterprises from China and South Asia have also swarmed into the middle East market in recent years, and the competitive pressure of the Middle East contracting project market is increasing day by day. At present, the contracting project market in the Middle East region is at a low level. According to relevant data, the award amount in the Middle East and northeast Africa region in the second quarter of 2020 is only US $10.998 billion, which is significantly lower than US $19.462 billion in the second quarter of 2019 and us $24.389 billion in the second quarter of 2018. Contractors are often in a relatively weak position to obtain or retain projects, This has become one of the characteristics of the Middle East contract engineering market.
1、 Some contractors have to accept contract changes
Before the owner signs the construction contract with the contractor, the contractor sometimes starts the construction only by the letter of intent and correspondence to meet the owner's requirements, which leads to higher risks. Especially in the case of market depression, the contractor will be controlled by others, and it is difficult to get the construction due money. Once the owners decide to reduce the price, such projects are more likely to fall into the dilemma of passive acceptance and renegotiation. Due to the inherent uncertainty of the terms of the letter of intent, and the general contents of the letter of intent contain provisions that lead to its loss of binding force, such as "this letter of intent is not legally binding", "the rights and obligations of both parties are determined by the formal contract", etc., the contractor is in a dilemma and has to take the second place.
2、 Signed contracts may be substituted
For those who have signed the contract, although there is a legal basis as a guarantee, the contracting parties will still consider whether to renegotiate the contract due to economic factors. If the owner strongly demands to renegotiate the contract and the contractor is not willing, there will be certain risks for the contractor. If the owner thinks that it can achieve the purpose of cost saving by employing other contractors to complete the project, he may try to terminate or reduce the remaining part of the project of the contractor, thus forcing the contractor to participate in the renegotiation.
It is often seen in some contracts that if the contractor is unable to effectively solve the delay to the satisfaction of the owner, the owner can employ a third party to accelerate or take over the original contractor's works, regardless of whether the delay is caused by the owner.
For some public service projects or projects whose completion date is very critical, the contract terms allow the owner to employ a third party. If the project is delayed, only monetary compensation is not enough as compensation.

3、 Contract risk and compliance risk increased significantly
Reducing the project quantity is another risk that the contractor must consider when choosing not to renegotiate with the owner, and it is also a common way to deal with the expenditure reduction in the current market. Some owners regard reducing the quantity of works as a variation of omitting most of the works and regard it as an alternative way to terminate the contract. In addition, in order to facilitate the owner to terminate the contract at any time, most contracts in the Middle East will use the relevant provisions of FIDIC contract in favor of the owner.
According to the author's investigation, many projects under construction by Chinese enterprises in the Middle East, even important cooperation projects, are facing problems such as contract renegotiation, project scope adjustment, contract price reduction and even project cancellation, which have caused serious impact on enterprises.
Some contractors do not have a strong sense of compliance, are not familiar with the local laws or do not have a comprehensive grasp of them, and are eager to sign contracts without a correct and full understanding of the legal provisions and the meaning of the contract terms, resulting in compliance risks in the process of project implementation.
In addition, the industry generally believes that the local courts in the Middle East usually show a certain degree of bias towards their own governments and nationals, and the litigation procedures and results are difficult to accurately estimate, resulting in low litigation efficiency.

How to reduce adverse effects?

The contractors in the Middle East are often passive, and bear the most risks of the project. The owner has been criticized for minimizing the responsibilities they should bear through contract design. Although many Chinese contractors are relatively weak, it does not mean that anyone dominates them. Especially in recent years, with the accumulation of "going out" experience and the improvement of competitiveness, Chinese contractors can also aim at solving such problems.
1、 Take the initiative to consolidate the binding force of the agreement
As a contractor, it is necessary to determine whether he is obliged to renegotiate the contract. The basic premise of re negotiation is that the contract has been signed between the owner and the contractor. If the contractor and the owner have signed a contract (e.g. FIDIC based contracts), both parties are bound by the agreed price in the contract.
The main criterion to measure whether the agreement is binding should be the intention and meaning expressed by it, not the form of the agreement. For example, Article 141 of the civil code of the United Arab Emirates stipulates that if the parties reach an agreement on the basic elements of the obligation and the rest of other legal conditions deemed necessary by both parties, the question of retaining details will be agreed later, but it does not provide for the failure to reach an agreement on such details.
In addition, if the letter of intent contains the following provisions and the parties have the right to sign legally, such letter of intent may be deemed to be a binding agreement and the Contractor does not need to agree to renegotiate. The main contents are: the certainty of rights and obligations, scope of work, price confirmation, clear risk distribution, insurance obligations of all parties, clear termination rights, applicable laws, clear dispute settlement process, intellectual property license and rights, and completion time.
2、 Strive to limit the employer's employment of a third party
As a contractor, the ability to claim for construction period must be enhanced and the employer shall be limited to employ a third party for delay in a timely and powerful manner. Under a typical construction contract, unless otherwise specified, the employer shall not employ or use other contractors to carry out any work within the scope of the original contractor's works. This makes sense economically, otherwise, the owner can intervene in the overall profit margin of the original contractor by handing the works to other contractors. FIDIC red book states that termination of the contract is not permitted if the employer completes the works by replacing the original contracted contractor with other contractors. If the employer assigns the works to other contractors, the standard FIDIC contract format does not allow for the reduction of the quantities in the original contract.
3、 Stop loss in time, focus on payment terms in case of termination of contract
Contracts usually provide for the payment method in the event of termination. For example, FIDIC contracts provide that the contractor is entitled to reasonable costs incurred at the time of termination of the contract and which are expected to have been incurred for the completion of the works.
If the contract does not provide that the employer can terminate the contract for its convenience or does not specify the contents of the termination, the owner is likely to pay the contractor its loss of profits.
If either party has given a notice of force majeure, the contract generally provides that, after a period of time (such as 84 days as provided in the FIDIC contract), if the project has not made substantial progress, either party may give a notice of termination. The consequences of this situation in FIDIC contract are the same, i.e. the employer pays the contractor the completed quantities.
4、 To grasp key issues with great foresight
In renegotiation, the contractor must also address other key issues. These problems include: clarifying the new completion date and modifying them in the contract; Settle existing claims, as once renegotiated, claims will be difficult to recover; Safety inspection of all equipment and materials still on site, taking full account of the manufacturer's warranty period and handling any problems that may arise in renegotiation; If the contract price is reduced, ensure that the amount of guarantee is correspondingly reduced; Delay damages are usually expressed as a percentage of the contract amount, with the upper limit of 10% of the contract amount, ensuring that the contract definition specifies the percentage of the lower price applicable to renegotiation; The second wave of COVID-19 will no longer be an unforeseen event and should be properly dealt with.
It should be noted that if the contract price for renegotiation includes the impact of the epidemic, the owner may interpret it as having included the future impact of the second wave of epidemic in the future, thus refusing to pay the relevant expenses for the future impact. Although the advance payment is applied for at a fixed percentage monthly, the relevant terms must be revised in advance, otherwise the contractor will generate the unpaid payment to the owner. If not revised, the pricing in accordance with the bill of quantities will accumulate to the original contract price, which means that the cumulative amount of the application amount in each month will be higher than the contract price after the price reduction.
5、 To win by surprise and to seek a chance in crisis
Industry analysts believe that renegotiation of contracts can provide unexpected opportunities for contractors to avoid certain risks. For example, change the payment term in terms of payment method, and if conditions permit, both parties can agree on shorter payment terms, such as once every two weeks rather than once a month. If all parties can agree on the issuance of retention money or no further deduction of retention money after negotiation, the cash flow problem can also be eased.
In addition, although the specific terms of the contract may be different, the contractor can offer other solutions to the owner on its own initiative, which is one of the unique advantages of Chinese contractors at present. For example, the positive value project is adopted to negotiate how to reduce the project quantity under the guidance of achieving win-win results, or establish a cost reimbursement mechanism with agreed profits, so as to effectively help the owner to achieve the desire to reduce costs in order to achieve win-win results.
The world is in a great change that has not been made in a century. For the contracting market in the Middle East, the impact of epidemic situation has brought severe challenges, but also brought opportunities for the development and growth of deep-rooted market. As we know from the truth in need, 2020 is destined to be an extraordinary year. Many enterprises have left or even closed down in this year. However, enterprises that have survived the disaster and disaster will stand on the hot land in the Middle East better.

(author: China Railway International Group Co., Ltd.)