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ENGLISH LAW CONCEPTS IN THE

GULF COOPERATION COUNCIL

COUNTRIES

A paper presented to the Society ofConstruction Law at a meeting in London

on 7th April 2009

James Bremen

April 2009

D98

www.scl.org.uk

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ENGLISH LAW CONCEPTS IN THE

GULF COOPERATION COUNCIL

COUNTRIES

James Bremen

Introduction

This paper seeks to provide a guide to the application of established English

law concepts in the Gulf Cooperation Council countries (GCC) jurisdictions

and to highlight important similarities and differences.

English law is often chosen by parties to international commercial contracts

due to the relative certainty its established legal principles provide. In some

GCC jurisdictions such as the Kingdom of Saudi Arabia, government

institutions are prohibited from submitting to the law of another jurisdiction

for domestic contracts unless special dispensation is granted. In these

circumstances, parties contracting with government entities will be required to

submit to the law of the relevant GCC jurisdiction if they wish to secure

contracts. This can be of concern to some organisations as the GCC legal

systems are unfamiliar and, from a commercial law perspective, relatively

undeveloped.

There are two types of legal regime in the GCC. The first comprises those

countries subject to a type of customary law deriving from the Shariah which

operates in parallel with a legislative framework, as in the Kingdom of Saudi

Arabia and Oman. The second comprises countries subject to a civil code

such as Qatar, the United Arab Emirates and Bahrain. The majority of the

GCC civil codes are based on the Egyptian code which is derived from the

French code.

There is an element of commonality throughout the GCC legal systems in that

they are all subject to the Shariah (Islamic) law to some degree, although its

influence is stronger in the customary law regimes. While there are importantdifferences between these regimes, this paper focuses on Saudi Arabian and

Qatari law and my experiences with projects and disputes in these two

countries.

It should always be borne in mind that common law systems (and elements of

the Shariah law) have developed through a system of binding judicial

decisions in response to specific problems. Civil codes, on the other hand, set

forth general principles to be applied by the courts (which are not bound by

previous decisions) on a case-by-case basis. Despite the variances between

the various legal systems and their differences from English law, outcomes

will often be comparable for similar facts.

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The reasons for this are manifold although some important ones are that:

o most GCC legal systems are based on the fundamental concepts of

fairness and equity (whether through the application of the Shariah

or a civil code) and allow tribunals a degree of flexibility in

making awards;o in civil and Shariah jurisdictions, customs, practices and usages

which developed under common law jurisdictions are often

applied by courts to fill gaps in the law; and

o in the majority of circumstances, disputes in respect of large

commercial contracts will be resolved by arbitration in front of

arbitrators trained in common law, and the parties will be advised

by legal counsel based in common law jurisdictions.

Freedom of contract

A fundamental characteristic of the English law of contract is that the parties

should be entitled to strike any bargain they please, provided they do not

contravene the law and public policy. Courts will ordinarily not interfere in

agreements unless there are compelling reasons to do so.

The position is very similar under Shariah law, except that the scope of public

policy exceptions is wider than in the UK. Civil codes in GCC jurisdictions

also respect the sanctity of contract, having grown from the French law maxim

of les conventions lgalement formes tiennent lieu de loi ceux qui les ont

faites meaning the contract is the law of the parties.

The extent of public policy exceptions to this rule varies between jurisdictions

and will depend on the extent to which the Shariah takes constitutional

precedence over other forms of law. In addition to the public policy

exceptions, civil jurisdictions sometimes allow scope for the adjustment of

awards in accordance with overriding notions of fairness and equity. This is

unlike the rigid enforcement of contractual terms agreed by sophisticated

parties with similar bargaining power under English law.

The manner in which the GCC jurisdictions treat the principle of freedom of

contract, whether that be through a framework of general legal principles or

the application of public policy, has a number of important consequences forthe following common features of international construction and engineering

contracts:

(i) guillotine clauses;

(ii) the prevention principle;

(iii) the rule against penalties liquidated damages;

(iv) the contra proferentemrule;

(v) remoteness of damage;

(vi) estoppel by conduct.

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I will also discuss an important difference between English law and the civil

law regimes: without prejudice privilege.

Guillotine clauses

The provision of notice within a specified time period as a condition precedentto claim additional costs or an extension of time is often known as a guillotine

clause. The effect of guillotine clauses is that failure to submit notice within

the time period specified means that the contractor is deemed to have waived

its right to claim. Under English law, these clauses are enforced strictly and

this is the case in many other common law jurisdictions, with some states in

the USA being the notable exception(s). The basis for this position lies in

freedom of contract. Courts are unwilling to interfere in commercial contracts

between entities of comparable bargaining power.

In contrast to this, in some civil law jurisdictions (for example, Qatar), while

courts will uphold the terms of a contract, by application of the principles offairness and equity, failure to comply strictly with notice periods is not

necessarily fatal to a contractors right to make claims but is something which

will be taken into account by a tribunal in making its award. This is discussed

further in the section below on the prevention principle.

This does not mean that the role of guillotine clauses in construction

agreements governed by the law of a GCC country can be ignored. These

clauses still play an important role in effective contract administration and a

failure to comply with them may sound in damages (so long as these damages

flow directly from the breach). For example, late notice may vitiate an

owners ability to assess the subject matter of a claim and make a decision onthe manner in which it wishes to proceed. This in turn may frustrate the

contractors ability to adjust its work programme to mitigate the delay, causing

further inefficiency and disruption to the works.

The prevention principle

The prevention principle is a well established doctrine in English law which

provides that a party which has prevented the performance of an obligation by

another party may not insist on the performance of that obligation. The

principle has been developed widely in the context of construction cases and

can result in liquidated damages provisions becoming unenforceable,completion deadlines falling away and time being set at large. This leaves the

court with the task of determining a reasonable time for completion and

assessing the extent of any general damages.

The position under civil law is similar in application to the concept of

apportionment of damages and operates in much the same way as the

prevention principle. Take the example of one party preventing another from

performing and seeking to claim liquidated damages as a result. Civil

jurisdictions may uphold a liquidated damages provision but allow tribunals a

wide discretion to reduce the value of any award, to the extent that a party has

contributed to its own losses. The result is that the claimant is in a similar

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position to the party having to demonstrate general damages where liquidated

damages are unenforceable.

The civil law approach may however result in a simpler mechanism for

quantifying damages than under English law, as there is no requirement to

prove general damages and liquidated damages are reduced by a setpercentage. There is unfortunately very little guidance on how courts or

tribunals will apply this in practice.

The rule against penalties liquidated damages

Under English law, for liquidated damages to be enforceable, they must

represent a genuine pre-estimate of losses resulting from the events to which

they apply. The reason for this is the English law rule against penalties which

prohibits the imposition of punitive damages by one party in the event of a

failure by the other to perform. Should a tribunal find the liquidated damages

to be punitive, it will declare the liquidated damages provisions unenforceable,meaning that the affected party will be left to prove its general damages at

law. This can be difficult, time consuming and expensive.

Civil law jurisdictions have no concept of a rule against penalties. However

the court can (as in Qatar) have a discretion to reduce the liquidated damages

payable, based on considerations of fairness, if it considers liquidated damages

excessive in comparison to the actual damages sustained.

For example, Article 266 of the Qatari Civil Code provides a defence against a

claim for liquidated damages. Pursuant to this, the court has a discretion to

make no award of liquidated damages where the claimant has suffered no loss.Article 266 also allows the court to reduce liquidated damages if it considers

them grossly exaggerated.

Thecontra proferentemrule

Under English law, a general rule applicable in resolving ambiguity in

contracts is that where no other rule of construction can resolve the ambiguity,

the provision will be interpreted against the drafter. This is known as the

contra proferentemrule.

In civil code jurisdictions a similar principle exists, with one importantdifference. Under civil jurisdictions, ambiguity will be construed in favour of

the obligor. The difference between that and English law where ambiguity

will always be construed against the drafter is that in civil law jurisdictions,

ambiguity can be construed against either party, dependant on which party

owes the obligation under the relevant provision. (See Article 170 of the

Qatari Civil Code in this respect.)

Remoteness of damage

Under Article 263 of the Qatari Civil Code, the amount of damages

recoverable by the claimant is limited to those which were foreseeable at thetime of execution of the contract, except in the cases of fraud or gross

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negligence. This rule is similar to the English law principle of remoteness of

damages which imposes a limitation on the damages which can be recovered

by the claimant for breach of contract.

Pursuant to the remoteness rule, the claimant is entitled to recover only those

damages which were reasonably foreseen at the time of the contract and whichnaturally flow from the defendants breach.

Estoppel by conduct

Under English law, a party may, as a defence to a claim for lack of

performance or defective performance, state that the other party (through its

acts or omissions) led the defendant to believe that it had waived or accepted a

variation to its rights or obligations forming the basis of the claim. The

application of the defence is controversial, especially where agreements

contain entire agreement, no waiver and no variations unless in writing

clauses. However there are circumstances where it will apply.

The position under Qatari law is similar. The civil code respects the sanctity

of contract and will give effect to entire agreement, no waiver and no

variations unless in writing clauses. However, the civil code also states that

agreements can be made by conduct, common signs, orally or in writing and

courts may take the overriding considerations of equity and fairness into

account when making awards. This may introduce a scenario very similar to

estoppel by conduct where a party may use extra-contractual conduct by the

claimant as a defence against claims relating to failure to perform.

Without prejudice privilege

An important difference between English law and some GCC jurisdictions is

that the English law without prejudice privilege afforded to parties disclosing

commercially sensitive information in a genuine effort to settle a dispute, does

not apply in some GCC jurisdictions. Correspondence, meetings, negotiations

and disclosure made during negotiations to resolve disputes can be disclosed

in later proceedings. This may affect the way in which dispute resolution

clauses are structured, particularly in relation to mediation.

This has important consequences for mediation and any other form of

negotiation as a dispute resolution mechanism which may require parties todisclose their views on the strength of their positions to one another. In a

number of GCC jurisdictions, this is especially undesirable given that the

disclosure rules only require discovery of documents of which the other

parties are aware.

Parties involved in disputes in the GCC or subject to a GCC law, ought to bear

in mind the lack of without prejudice privilege when conducting settlement

negotiations, and avoid making damaging admissions or disclosures.

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Conclusion

The GCC legal systems are torn between an adherence to tradition and the

need to modernise and adapt to accommodate the foreign investment and

commercial activity the Gulf countries need to stimulate their economic

development.

In recent years, this dichotomy has seen the establishment of financial centres

with separate, modern regulatory systems operating alongside the more

traditional commercial and civil legal systems (for example, the Dubai

International Financial Centre and Qatar Financial Centre). In Saudi Arabia,

the regulations for the new King Abdullah Financial Centre, currently under

development by the government, may include a relaxation on the restrictions

imposed on the employment of women.

Despite these tensions, there are a number of similarities between the

traditional principles enshrined in the Shariah law and general principlesapplicable in the civil codes and English law. Setting aside the uncertainty

associated with disputes resolved by local GCC courts, due to their lack of

experience in deciding large, complex international disputes, parties involved

in these transactions can take some comfort in the likelihood that the outcomes

associated with certain types of conduct are similar in the GCC legal regimes

to English law.

There are, however, important exceptions of which parties ought to be aware

and these may vary according to the circumstances. This paper has

highlighted a number of the key exceptions.

James Bremen is a partner in the projects and construction department ofKing & Spalding International, London.

James Bremen and the Society of Construction Law 2009.

The views expressed by the author in this paper are his alone, and do not necessarily

represent the views of the Society of Construction Law or the editors. Neither the

author, the Society, nor the editors can accept any liability in respect of any use to

which this paper or any information or views expressed in it may be put, whetherarising through negligence or otherwise.

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The object of the Societyis to promote the study and understanding of

construction law amongst all those involved

in the construction industry

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