Overview of The Omani Contract of Muqawala (Construction Contract)

Contract of Muqawala is one of the nominate Contracts regulated by the Civil Transactions Law no. 29/2013, that deals with construction matters, such as construction of buildings and infrastructure and other construction works. The Civil Code governed the construction contract into four main sections in Articles 626 to 650, which are:

  • Definition and scope of Muqawala contract
  • Contractor’s obligations
  • Obligations of the owner
  • Subcontracting
  • Termination/end of contracting

The Contract of Muqawala provisions is also associated with other laws like the legislation for Engineering Consultancy Office and planning laws No. 27/2016 and labour law No. 35/2003. Below we explain the definition of the contact of Muqawala, the legal developments of the Construction Law, and the types of common disputes related to the construction contract in Oman.

Definition of The Contract of Muqawala

Article 626 of the Civil Transactions Law defines a contracting contract as a contract by which the contractor shall commit to manufacture a thing or perform work for remuneration. So, the word “contractor” given in definition includes the architect who prepares the designs and the contractor who undertakes construction. Also, the article stipulates reciprocal obligations on both the contractor and the employer; therefore, according to Article 157 of the Civil Transactions Law, each of them may refrain from implementing his commitment if the other contractor does not implement what he was obligated to.

Developments to the Contract of Muqawala in Oman

During the period prior to the issuance of the Civil Code in 2013, there was no legislation governing the Construction Contract, except the decennial liability insurance stated by Article 16 of the Engineering Consultancy Offices Law no. 120/94 issued on 10 December 1994, which has been abolished and replaced with Royal Decree no. 27/2016 issue on 12 May 2016.

Despite that, since the 70s and up until 2013, the Omani courts continued to enforce the general principles related to Construction contract, most of which were principles stated by the comparative judicial rulings which follow the Civil Law System, mainly the Egyptian Court of Cassation.

Common Construction disputes

Below we outline the most significant Construction disputes arising before the Omani Courts:

1. Design and construction defects disputes

Disputes associated with design and construction defects may arise for multiple reasons, including a flaw in planning and specifications or the negligence of engineers in overseeing the implementation of the construction works.

Also, the flaws caused by contractors lead to a construction dispute. For instance, the executing of defective works and inconsistent designs or using inappropriate materials. The contractor may also fail to alert the employer of apparent defects – which he knows or should have known – such as obvious defects in building materials, even if the employer provides them.

The above and other issues create complex judicial and arbitral disputes during construction or after the completion of the project, whether concerning determining the construction defect, the method of remedy, or the compensation for damages to the owner or other parties involved in the project. Such challenges require the assistance of a construction lawyer to assess the relevant legal issues such as insurance, limitation issues and essential measures to verify the status of the construction and determine the cause of the problem and the responsible party.

2. Delay Claim

Delay Claims are one of the most common disputes in the Omani courts. The matter gets more complex when the delays affect the project’s continuity and cause financial and legal problems to third parties. For instance, the project involves more than one contractor whose work obligations depend on the other contractor completing their works first. Another example, the delays in projects whereby the project owner may have commitments with other parties like purchasers, investors or funding bodies.

In practice, it has been demonstrated that the most common delay issues are:

  • The extent to which the delay has on the project completion program.
  • Determining the reasons for the delay, whereby the contractor is liable for the damages arising if not justified, like shortage of labour or building materials. On the other hand, the contractor is not blamed if the delays are due to the employer or the architect.
  • Determining the extent of entitlement to compensation for delays. When the delay is justified, the contractor usually demands either an extension or payment for the delay or both.

Before the courts, there is often a discussion regarding the validity of the penalty clause and the agreed compensation in construction contracts and the right of the court to amend the same.

3. Variations and modifications

Although Oman adopts model building contracts in government projects that regulate variation orders in detail, disputes about them are still common and open-ended for various reasons, including:

  • Not agreeing to describe the work as variation work.
  • The argument about fulfilling the requirements for issuing variation orders under the contract or the law, such as obtaining approval of an authorized government entity for some transactions where the value exceeds a certain amount because the engineer’s consent is not sufficient in such cases.
  • The argument on the prices of the variations and the impacts on the project completion schedule.

The best way to control various issues and problems associated with variation orders is by focusing on drafting detailed variations clause in a construction contract whilst ensuring consistency and compliance with the legislations and judicial practices in Oman, in order to mitigate risks, as well as to avoid risks of disrupting the continuation of projects.

If variation order clauses are not clear or if there is an unclear dispute resolution clause, then precautionary measures should be considered either to try reaching an amicable solution or to prepare a strategy for that particular case.

4. Delays in payment disputes

Although most construction contracts address the delays in payment, the issue frequently occurs in many construction contracts and subcontracts, which lead to several severe outcomes with a direct effect on the completion of the projects. Workers’ strikes, resorting to liquidation measures for start-ups and small contracting companies, which are just some of the examples of reoccurring outcomes resulting from late payments. For the owner or developer, the damage may exceed delay penalties to the complete disruption of the project, resulting in disputes with different parties such as sellers, tenants and other third parties.

Most construction contracts include provisions addressing late payment issues and include provisions relating to interest charges at a specified rate. However, these provisions do not entirely prevent the possibility of disputes, such as the contractor claim to compensation for lost profits or to amend the completion date of a project. Such issues could involve a substantial argument around the employer’s justification for failing to make timely payments.

5. Disputes related to letters of guarantee

To ensure thorough implementation of construction contracts, the owners require the contractor, supplier, and all other parties involved in the project to submit various Letters of Guarantee— for example, Advance Payment Bond and Performance Bond etc. In most cases, the value of the guarantee is usually determined by a certain percentage of the bid or contract value.

The parties to the contract face practical and legal challenges, and among the most common disputes are the following:

  • The Contractor objection to monetize the Letter of Guarantee due to the expiry of term or failure to fulfil the conditions for payment in whole or in part or other reasons.
  • The contractor claims compensation for the owner’s monetization of the guarantee because of not meeting the conditions for entitlement of the guarantee.
  • Claims to modify the value of the letter of guarantee, reduce or extend its validity period or modify its conditions.

6. Urgent construction disputes

Urgent issues related to construction are one of the most complex issues facing the parties to a construction contract. For instance, when the employer decides to terminate the contract, the contractor may exercise his right stated in the article 633 of the Civil Code by detain the work and refusing to hand over the same, whether due to a dispute over payment or the value of the work performed. This action not only affects the owner’s ability to move to the next stage of construction or sell or refinance the project, but it may expose responsibility to the contractor for damages if the decision he has taken is proven to be unlawful.

Therefore, this type of dispute requires taking an immediate solution, whether by terminating the contract and handing over the project to a new contractor, evaluating the contractor’s decision not to hand over the work to the owner, and filing an urgent case to assess the work performed by a neutral expert.

7. Construction accidents

The involved parties in the construction field face constant challenges concerning full compliance with the related strict laws and regulations to ensure compliance with safe building practices. Breach of such rules obligates the owners and contractors to pay substantial fines, compensate the injured parties in addition to criminal liability that may be punishable by imprisonment or deportation from the Sultanate – If the person responsible for the accident is not Omani – in some severe circumstances.

Sometimes, it is difficult to identify the parties responsible for an accident at the construction sites, especially where more than one party is involved. Another challenge is related to technical reports issued by official authorities such as the Royal Oman Police. Courts usually rely on such reports, whether in determining the occurrence of the accident and responsible party, so it is essential to appoint a litigation attorney during this stage.

Ali Al Rashdi

ali.alrashdi@sandalaw.om

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