Charles Gavamukulya, ACIArb

  • Drafting of Effective Arbitration Clauses

    ·

    Charles Gavamukulya, ACIArb

    Introduction

    A recent judgement delivered on 23 February 2023 in the High Court of Uganda in a case between The Attorney General of the Republic of Uganda (Applicant) v Networth Consult Co. Limited (Respondent) went to the heart of discussing the nature of an arbitration agreement and what constitutes a pathological clause. As a result, this drives a conversation towards the drafting of effective arbitration clauses.

    Dispute resolution clauses are often time referred to as “midnight/ champagne clauses”. This is because once the rest of the contract has been agreed upon, the parties are quick to celebrate and the dispute resolution clause becomes an afterthought, or a matter of “copy and paste” which more often than not results into unclear, incomplete, or contradictory clauses. The parties, often time, agree not to have a dispute resolution clause because there is an anticipation at the start of the performance of the contract that there will not be dispute and if it occurs, there is a general feeling that the parties will always have an amicable settlement. This is always not the case as parties can disagree on legal or technical aspects of the contract and at such a time, the good will and good faith that existed at the agreeing of the contract does not exist anymore. The need for a clear clause to highlight the parties’ consent to settle their dispute under alternative dispute resolution cannot be overly emphasized.

    The Case

    The Respondent filed Civil Suit 541 of 2022 [“main suit”] against the Applicant for breach of a consultancy contract and recovery of sums stated to be payable under that contract. The Applicant brought an application to the court, contending that the dispute between the parties was amenable to arbitration. Accordingly, the Applicant  contended that the Respondent’s suit was barred by law.

    The Applicant asserted that the parties had a binding and enforceable arbitration agreement and that as a result, the Respondent’s suit should be dismissed, and the matter referred to arbitration. The Applicant contended that there was a valid arbitration agreement to submit all disputes arising from the contract  exclusively to arbitration. On the other hand, the Respondent contended that reference to arbitration was optional.

    The Clause in dispute was Clause 45.1 of the Contract between the parties which reads as below.

    “Any dispute between the parties arising under or related to this contract that cannot be settled amicably may be referred by either party to the adjudication/arbitration in accordance with the provisions specified in the SCC.”  SCC in this case is an abbreviation for Special Conditions of Contract.

    The special conditions at Clause 45.1 then proceed to spell out an elaborate set of rules and procedures for arbitration of disputes arising from the agreement.

    The Judgement

    The Judge in this case noted that he was aware of an ADR process called “Adjudication”. Furthermore, he noted that this process was most common in construction contracts but may exist in other contracts. This process  involves the submission of a dispute to an expert who makes a determination often on technical grounds. Adjudication clauses typically have rules indicating how an adjudicator may be appointed and how adjudication may be undertaken. In this case, the contract was not a construction contract and therefore the learned judge concluded that the word “adjudication” was intended to refer to litigation since “The parties could not have intended to have adjudication (as an alternative dispute resolution) as well as an arbitration before an expert arbitrator as this would have achieved the same thing. Still, there is nothing in the agreement that points to an agreement to undergo adjudication as an alternative dispute resolution process.”

    It is from this that he tackled a clause that provides for both litigation and arbitration. In ISC Holding AG v Nobel Biocare Investments N.V 351 Fed. Appx. 480, the US Court of Appeals held that an arbitration clause must exclude the involvement of state 15 courts (save for interim reliefs and/or recognition and execution) and an agreement that did not exclude them was ambiguous and therefore incapable of being enforced. In X Holding AG and Ors v Y Investments NV 4A_279/2010 where a similar clause was involved, a Swiss Court held that an agreement that does not clearly 20 exclude state courts is ambiguous as it does not reveal a clear intention to arbitrate.

    The court also considered whether the use of the phrase “may” was optional. In Meshack Kibunja Kaburi & 3 others v Kirubi Kamau & 5 others; Central Highlands Tea Company Limited (Interested Party) [2021] eKLR the court, considering a clause that provided that a dispute may be referred to arbitration, held that there was a clear intention to refer the matter to arbitration and thus the same had to be undertaken notwithstanding the use of the word “may”.

    Another question was whether in this case, the plaintiff was obliged to submit to the arbitration proceedings initiated by the applicant from this clause. The Judge ruled that from reading the parties’ contract in full, “it appears from the contract that the initiating party is at liberty to decide how to initiate the dispute. Once they had made their election, the other party was obligated to defend or counterclaim in the forum in which the proceedings had been began.”

     He further added that “ in cases of this nature, the initiating party has the election  to determine which mode to commence in, and the other party has to defend in that forum. However, this does not mean that if another dispute arises, it should go to, say, court simply because a previous dispute went to court. The right of election exists in each case.”

    As such, it was not mandatory for the parties to go for arbitration as the clause had been constructed in such a way that the arbitration was another option to litigation in case a dispute arose. The Judge also noted that “This is obviously a little bit disorganized and a clear clause that provided for one 30 mode of dispute resolution would have been a lot more preferable.”

    In that case, the arbitration agreement between the parties was incapable of being performed within the meaning of Section 5(1)(a) of the Arbitration and Conciliation Act as the Respondent had already elected to commence proceedings before the court. As such, the dispute was no longer amenable to arbitration.

    Discussion

    1. What if a deviation from the Judge’s consideration of Adjudication was taken?

    The Judge considered adjudication in this case to mean litigation and as such, it opened up the discussion towards having both arbitration and litigation in a dispute resolution clause. If adjudication was taken for its traditional meaning in construction contracts, however, then my belief is that the judgement would have read differently. Adjudication ,as the learned judge has already alluded ,is an established process along the ADR spectrum normally based on technical aspects like the case in context here. The decision from the adjudicator is a temporary binding decision as it can be overturned by the Arbitrator’s award. The Adjudicator’s decision is made within 28 days. It serves as a quick, flexible, and informal way to solve disputes between parties. In this case, the parties could have elected to either pursue Arbitration or Adjudication as read from the clean text of the clause or could have carried out the Adjudication as a condition precedent to the Arbitration. That approach would have led to a different judgment and different considerations altogether.

    • What are the hallmarks of an effective arbitration clause ?

    Ideally an arbitration agreement will enable the parties to choose the :

    • Composition of the tribunal
    • Language of the arbitration
    • Rules by which the arbitration will be conducted
    • Institution, if any, which will regulate and administer the arbitral process
    • Jurisdiction which will govern the procedural issues in the arbitration
    • Jurisdiction which will govern the merits of the dispute or issues between the parties.

    Like any other contract, not all arbitration agreements are perfectly crafted. There will be defects sometimes whether by human error or because of lack of proper advice. There are certain characteristics which need to be satisfied for there to be an effective arbitration clause and failure to do so results into what is commonly known as a “pathological clause”. A pathological clause is one, which fails to cover the disputes the parties want arbitrated, fails to identify the appropriate “seat” for the arbitration or identifies an inappropriate seat, or fails to identify the correct set of rules or the correct institution to administer those rules. One can argue that for an arbitration clause to be effective, it is necessary that the agreement for the parties to solve disputes by arbitration and not court, should be clear and unequivocal.

    Conclusion

    The existence of a valid agreement to arbitrate has several important consequences for the resolution of a dispute. If there is a valid arbitration agreement, the parties will be compelled to resolve their dispute through the arbitral process thereby keeping the dispute out of the national courts. A party who seeks to initiate a claim in the national courts despite the existence of an arbitration agreement will likely be restrained by the court upon application by the opposing party to stay the court proceeds in favor of arbitration. In this case’s context, the judgement was to the effect that the Applicant filed an application for this restraint. However, the arbitration clause was not effective enough and as such the Applicant’s application was dismissed. This case and the subsequent judgement highlight the importance of drafting of effective dispute resolution clauses.

  • CONSIDERATIONS REGARDING DELAY ANALYSIS ARISING FROM THOMAS BARNES & SONS PLC V BLACKBURN WITH DARWEN BOROUGH COUNCIL

    ·

    Charles Gavamukulya, ACIArb

    Delay Analysis is a contentious issue in claims arising out of construction projects. Often time, there is an argument over the correct or more correct analysis method for delay analysis. The Society of Construction Law Delay and Disruption Protocol (‘SCL Protocol’) sets out the following differing methods of delay analysis that can be used to analyze the impact of a delay event to the critical path of a construction program:

    Delay Analysis Methods as set out in The Society of Construction Law Delay and Disruption Protocol

    On 17 October 2022, the High Court handed down its decision in Thomas Barnes & Sons plc v Blackburn with Darwen Borough Council [2022] EWHC 2598 (TCC), which related to the construction of a bus station in Blackburn.

    The claimant, Thomas Barnes & Sons plc (in administration) (‘Thomas Barnes’) was the contractor employed by a local Council, with the project suffering significant costs increases and delay.  The Council purported to terminate Thomas Barnes’ contract and engage another contractor to complete the works.  Soon after, Thomas Barnes went into administration, with the administrators subsequently seeking approximately £1.7 million in damages.  This included an entitlement to prolongation and delay-related damages, which led the Judge to provide some discussion on the differing forms of expert delay analysis relied on by the parties.

    In Thomas Barnes, the Judge noted that it would be wrong to place too much importance as to whether a particular method of delay analysis had been strictly followed, stating that:

    ‘The SCL Protocol itself discourages such an approach.  It states in the introduction that:

    (a) its objective is to provide useful guidance.

    (b) it is not intended to be a contract document nor to be a statement of the law;

    (c) its aim is to be consistent with good practice rather than to be a benchmark of best practice; and

    (d) its recommendations should be applied with common sense.  It states under paragraph 11.2 that “irrespective of which method of delay analysis is deployed, there is an overriding objective of ensuring that the conclusions derived from that analysis are sound from a commonsense perspective”.

    Thus, it would be wrong to proceed on the basis that, because the SCL Protocol identifies six commonly used methods of delay analysis, an expert is only allowed to choose one such method and any deviation from that stated approach renders their opinion fundamentally unreliable.  It must be borne in mind that the common objective of each is to enable the assessment of the impact of any delay to practical completion caused by particular items on the critical path to completion.  However, I do accept that if an expert selects a method which is manifestly inappropriate for the particular case or deviates materially from the method which he has said he is following, without providing any, or any proper, explanation, that can be a material consideration in deciding how much weight to place on the opinions expressed by the expert.’

    Especially when part of the claim centres around an extension of time, expert delay analysis is commonly relied on in both adjudication or litigation to prove or disprove a claim.  In light of the Judge’s comments in Thomas Barnes, it is not a requirement for a particular method to be strictly followed.  However, delay experts should be conscious of the impact that a deviation from the stated method used or the use of an inappropriate method will have on the weight of their evidence without a reasonable explanation

    Other observations from Thomas Barnes

    Traditional approaches to the main cause of delay have been the ‘dominant cause’ approach, focusing on the main cause of the delay, or alternatively, the ‘first in time’ approach, focusing on the event that occurs first. However, the Judge found that concurrent delays had occurred, even though there appeared to be a dominant delay, separate to one that occurred first. In this instance, the Judge made a finding that ‘depending upon the precise wording of the contract a contractor is probably entitled to an extension of time if the event relied upon was an effective cause of delay even if there was another concurrent cause of the same delay in respect of which the contractor was contractually responsible’. However, the Judge noted that despite being entitled to an extension of time for a dominant cause delay, the Contractor would not be entitled to costs for loss and expense where a separate concurrent delay occurred for which the contractor was contractually responsible.

  • Price escalation in construction contracts under FIDIC 

    ·

    Charles Gavamukulya, ACIArb

    Introduction

    As the cost of materials, transportation and labor rise globally, construction projects are feeling the bite of evaporating margins, constrained cashflow, and extended lead times. Moving into a post-COVID operational environment, after a long (and continuing) period of reconciliation regarding COVID costs and delays, price escalation is becoming an urgent issue for global construction.

    On top of COVID-driven inflation and delays, the commercial fallout of the conflict in Ukraine forced global supply chains and financing arrangements to adapt almost overnight, with an immediate impact on price-influencing fundamentals such as energy, iron/steel and other base metals. Unnervingly, a potentially similar economic shock could evolve from the increasingly tense international relations between China and Taiwan.

    In this context, contractors and subcontractors are not only looking for ways to manage cost increases under existing contracts, but also becoming aware that if their future contracts do not provide for the risk of price escalation in the coming years, it could lead to further problems.

    What is ‘price escalation’?

    Price escalation is sometimes known as ‘cost escalation’ or ‘material price escalation’. It refers to the sensitivity of construction contracts to the prices of materials and labour. In any fixed-price contract, the impact of rising costs in the supply chain will have a direct consequential impact on a contractor’s margin and cashflow. Under variable-price contracts, these are passed on to the Employer, with similar effects.

    It is unusual to see variable pricing in major international projects, in part because such projects are typically dependent on financing from institutions. Often these institutions mandate the contractual arrangements on projects they finance but, even if not the case, project finance is generally based on detailed risk assessments that view open-ended, uncertain cost structures unfavourably.

    New ‘target cost’ contracts are hybridising these contract models to an extent, essentially by providing a cost-reimbursable structure subject to a cap. Although these arrangements are enjoying some success in smaller domestic projects, it remains to be seen whether such arrangements will be used internationally.

    As a result, all contract models are impacted by price escalation, but it is often contractors that bear the brunt.

    Types of contracts  

    The type of contract usually informs as to which party takes the risk of price fluctuations. In reimbursable or cost-plus contracts, the employer takes the risk. The contractor is reimbursed the actual cost, plus allowances for overheads and profit. If the contractor’s actual costs increase, the contract price will increase also. 

    In remeasurement contracts and fixed price/lump sum contracts the contractor usually takes the risk unless there is a mechanism for cost adjustment.  In remeasurement contracts (such as the FIDIC Red Book – For Building and Engineering Works Designed by the Employer) the contract price is based on approximate quantities and a schedule of rates and prices. But, if the rates and prices can be adjusted where price fluctuations occur, the contract price is recalculated using the new rates and prices and the final agreed quantities. The actual work done is remeasured when the works are completed. In fixed price/lump sum contracts (such as the FIDIC Yellow Book – Plant and Design Build) the contractor provides an overall figure, ‘a lump sum’, for all the works that are agreed to be carried out under the contract. But, if the amounts due to the contractor can be adjusted where price fluctuations occur, the contract price is recalculated

    Escalation clauses 

    A mechanism for cost adjustment is, potentially, a more reliable way to limit the contractor’s risk.  In the FIDIC 1999 editions the escalation clause is at Sub-Clause 13.8, and in the FIDIC 2017 editions it is at Sub-Clause 13.7. Sometimes the escalation clause is deleted or modified. Sub-Clause 13.8 of the FIDIC 1999 editions (or Subclause 13.7 in the FIDIC 2017 editions) is an ‘opt-in’ clause. It applies only if:

    1. Under the FIDIC Red and Yellow Books 1999 – a table of adjustment data is included in the Appendix to Tender.

    2. Under the FIDIC Silver Book 1999 – provided for in the Particular Conditions.

    3. Under the FIDIC 2017 forms – a Schedule(s) of cost indexation is included in the contract.

    The table of adjustment data or Schedule(s) is a complete statement of the adjustments to be made to the cost of labor, goods and other inputs to the Works (for example, fuel). Any other rises or falls in the Costs are deemed to be included within the Accepted Contract Amount. No adjustment is applied to work valued on the basis of Cost or current prices. Where it applies:

    1. Under the FIDIC 1999 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labor, goods and other inputs to the Works’ by adding or deducting amounts calculated in accordance with a prescribed formula (in the FIDIC Red and Yellow Books) or as set out in the Particular Conditions (in the FIDIC Silver Book).  

    2. Under the FIDIC 2017 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labor, Goods and other inputs to the Works by adding or deducting amounts calculated in accordance with the Schedule(s).  

    In the FIDIC Red and Yellow Books 1999 a formula is set out, but this may be amended as the parties choose. The wording states: ‘The formulae shall be of the following general type’. The formula is as follows: 

    The n in the above formula refers to a defined period. This is usually the relevant payment period and so will typically be the month of the payment application. The o refers to the base date. Therefore, it applies the difference between the base index and the current index to the adjustable price element, bringing the contract price up in line with the change in the index (or down, if de-escalation is permitted).

    It is recognised that the formula set out above to calculate the adjustment multiplier (Pn), which is to be applied to the estimated contract value, is crude, but it is a fast and reasonably credible way of calculating and reimbursing fluctuations in costs.  The formula relies on:

    1.A fixed element (a), representing the nonadjustable portion in contractual payments, which is fixed at the time of Contract. FIDIC suggests 10% in the Appendix to Tender or Guidance.  

    2.The weighting of the resources (b) (c) (d), which is determined at the time of contract. For example, a road project might be 20/40/40 for labour, equipment and materials.  

    3. Cost indices for the current ‘now’ value (n) and the original value (o) for each of, for example, labor (L), equipment (E) and materials (M), which need to be updated frequently (preferably monthly rather than quarterly or annually, but that will depend upon the cost indices chosen).

    The mathematics involved are, therefore, relatively straightforward but the output of any formula is naturally dependent on the inputs which, although mathematical, are contractually defined. Consequently, both contractual and commercial review are essential.

    The FIDIC Silver Book 1999 and the FIDIC Gold Book 2008 do not set out a formula. The FIDIC Silver Book Guidance suggests that the wording for provisions based on the cost indices in the FIDIC Yellow Book be considered. The FIDIC 2017 editions do not set out a formula either. The Guidance states: ‘It is recommended that the Employer be advised by a professional with experience in construction costs and the inflationary effect on construction costs when preparing the contents of the Schedule(s) of cost indexation’

    What needs to be considered?

    Careful attention should be given to define key variables, such as:

    • The base date and/or start date
    • Triggers for applying the clause
    • Any caps on price increases
    • Any non-adjustable portion
    • Cost elements and weightings
    • The relevant reference indices
    • Whether different formulae are required for different costs
    • Currency variables, if needed
    • Any provisions for price de-escalation

    The price adjustment clause can directly define the commercial success of the project for the contractor in an inflationary environment. As a prime example, triggers for price adjustment often require a certain degree of increase before the clause is engaged, while a cap may prevent any cost above a certain degree of increase being passed on. This effectively creates a window of defined margin on certain core costs, and allocates an open-ended risk above the cap. 

    Conclusion

    In the current macroeconomic environment, contractors are increasingly concerned about how to handle recent cost increases, which are unprecedented in the modern era. For contracts without a price escalation clause, a detailed contract review may provide avenues to recover certain costs under other headings such as change of law, force majeure, or the variation procedures. Local law may also allow recovery, depending on the jurisdiction.

    In severe circumstances, commercial negotiation may become a necessity if the contractor is in risk of default, or if there are other risks to the project. Negotiated arrangements seen in practice include new financing, allowing some of the contractor’s proven costs to be deducted from liquidated delay damages, or new lump-sum contracts for work packages which are then removed from the main contract. All of these options are fraught with legal and commercial dangers and can bring further contentious issues if not handled carefully.

    With a view to the future, including price escalation clauses in contracts may seem disadvantageous to employers, as they are accepting the risk of increasing costs. However, price escalation clauses allow contractors to bid more accurately and competitively, resulting in lower bid prices for the employer. It also opens the door to price de-escalation, which would favour the employer if deflationary trends prevail during the project.

    Ultimately the most immediate benefit is that the project will not be endangered by contractor defaults, or contractor delays related to procurement and delivery issues arising from cost increases. In this regard, it should be borne in mind that the contractor’s delay is usually subject to liquidated delay damages, whereas the employer’s delay liability to other contractors is usually, at least theoretically, unlimited.

    Although it may seem like a risk for employers to accept price escalation clauses, the current and continuing uncertainty in global supply chains may cause havoc on future projects if not appropriately provided for in the contract. In this respect, the certainty provided by price escalation clauses has significant value in itself.

  • A Critique of the Uganda Seismic Code

    ·

    Charles Gavamukulya, ACIArb

    Seismicity of Uganda

    Uganda is situated between seismically active branches of the East African Rift System, The Western Rift (stretching from Aswa Fault Zone in the North to Lake Tanganyika in the South), and the Eastern Rift (stretching from Lake Turkana in the North to Lake Eyasi in the South) according to the Uganda Geological Surveys and Mines Department. To give perspective to the seismicity of Uganda, it should be noted that although the seismic trends in East Africa generally follow the rifts, the Western Rift shows more seismic activity than the Eastern Rift. According to the Uganda National Policy for Disaster Preparedness and Management available seismic information indicates that parts of Western and Central Uganda are prone to seismic activity. Therefore, most parts of the country are exposed to seismic hazards of varying degrees.

    Earthquakes in Uganda

    Damaging earthquakes have occurred in Uganda and they include the Masaka earthquake of 18th March 1945 with a surface wave magnitude of 6.0 in which 5 people were killed, the Tooro Earthquake of 20th March 1966 with a surface wave magnitude of 6.6 in which 160 people were killed, the Kisomoro earthquake of 5 February 1994 with a surface wave magnitude of 6.0 in which 8 people were killed. According to the United States Geological Survey, the most recently felt earthquake event was the earthquake of 4th March 2023 with a magnitude of 4.6 which occurred about 10km from Bundibugyo. With the population growing at an alarming rate, infrastructure has expanded with industrialization and urbanization, more so in Kampala City. It is generally assumed that an earthquake cannot be predicted (although it can be expected) or simulated (although we can approximate it), and that its destructive effects cannot be prevented (although they can be minimized or, at worst, optimized). Earthquakes, therefore, can create disasters of enormous magnitude when they hit such urban areas, schools or hospitals resulting into great physical and economic losses.

    Seismic Code of Uganda

    The seismic code of Uganda, US 319: 2003 was issued by the Uganda National Bureau of Standards in 2003. Three seismic zones were defined. Therefore, most parts of the country are exposed to seismic hazards of varying degrees. Other countries in the East African Rift System have seismic codes too.

    The Kenyan seismic code was issued in 1973 by the Kenyan Ministry of Works and uses the Modified Mercalli intensity (MMI) scale to map the seismic hazard of the country (MWK, 1973). The country was divided into four seismic zones: Zone V, VI, VII and VIII–IX. The building design code of Ethiopia was first introduced in 1978. Its seismic provisions have been revised twice since then. The first revision took place in 1983. The current version, the Ethiopian Building Code Standard EBCS 8: 1995, provides a seismic hazard map based on a 100-year return period.

    The Uganda seismic code is a set of guidelines and regulations designed to ensure the safety of buildings and structures in the country in the event of an earthquake. The code is based on international standards and guidelines, as well as on local knowledge and experience. The Uganda seismic code is a critical tool for design that ensures the safety of buildings and their occupants in the event of an earthquake. It is an important part of the country’s overall disaster risk reduction efforts. By following the code, designers and builders can create structures that are able to withstand the effects of earthquakes and minimize the risk of damage and loss of life. Despite its noble intentions, the code has several loopholes that need to be addressed in order to ensure maximum protection for buildings and their occupants.

    Criticism of the Uganda Seismic Code

    Firstly, the code is only applicable to new buildings and structures, leaving existing ones unguarded against earthquakes. This means that older buildings, which are more vulnerable to seismic activity, are not required to meet the code’s standards. This could be a challenge in a country where many of the iconic buildings were constructed before the advent of modern seismic design considerations. As a result, buildings that were constructed before the implementation of the code, or that were not constructed to the required standards, may not be safe in the event of an earthquake.

    Secondly, the code does not provide clear guidelines on how to retrofit existing buildings to meet the seismic requirements. This has led to many building owners ignoring the code and continuing to use their structures as they were before without retrofitting to include modern seismic design techniques and detailing requirements.

    In addition, the code does not provide clear guidelines on how to conduct seismic assessments of buildings. This has led to the use of outdated assessment methods that do not accurately reflect the seismic risks of a building. As a result, many buildings that are deemed safe by these methods may collapse during earthquakes.

    Another loophole in the Uganda Seismic Code is the lack of trained personnel to enforce it. The code requires that all building designs be reviewed by a qualified engineer, but there is a shortage of such professionals in the country. This has led to the approval of designs that do not meet the seismic requirements, which can lead to the collapse of buildings during earthquakes.

    One of the other loopholes in the Uganda seismic code is the lack of enforcement. While the code sets out clear guidelines for the construction of buildings in areas at risk of earthquakes, there is little enforcement of these guidelines by the relevant authorities. As a result, many buildings in Uganda are not constructed to the required standards, leaving them vulnerable to damage or collapse in the event of an earthquake.

    There is lack of awareness of the seismic code among builders and developers. Many builders and developers are unaware of the specific requirements of the code or are not aware of the importance of adhering to these guidelines. As a result, they may not include seismic design considerations in their building plans, leading to structures that are not adequately prepared for earthquakes. In addition to these issues, the Uganda seismic code also suffers from a lack of clarity and consistency. The code is made up of a complex set of regulations and guidelines, which can be difficult for builders and other stakeholders to understand and interpret. This can lead to confusion and misunderstandings, which can result in buildings being constructed in ways that are not compliant with the code.

    One of the major reasons for these loopholes is the lack of funding for seismic research and building inspections. There are insufficient funds for the implementation and enforcement of its provisions. This has led to a lack of resources for training personnel, conducting assessments, and retrofitting buildings.

    How can these loopholes be addressed?

    To address these loopholes, the Uganda seismic code needs to be strengthened through increased enforcement, awareness-raising campaigns, and regular inspections of existing buildings. This could involve the development of a national database of buildings and their compliance with the code, regular training programs for builders and developers, and the creation of a dedicated team of inspectors to carry out regular checks on buildings. Furthermore, there should be provision of more funding to seismic research in the country so as to aid research and development in the area.

    In addition, the government could consider offering incentives to builders and developers who construct buildings to the required standards, such as reduced fees or faster approval processes. This could encourage compliance with the code and help to reduce the number of buildings that are vulnerable to damage or collapse in the event of an earthquake.

    Furthermore, stricter enforcement measures and penalties for non-compliance should be developed. Clear guidelines on how to retrofit existing buildings and conduct seismic assessments.

    Finally, the Uganda seismic code should be reviewed and revised to make it clearer and more consistent. This could involve simplifying the language and structure of the code, as well as providing more detailed guidance and examples for builders to follow.

    Conclusion

    Overall, the Uganda seismic code is an important tool for ensuring the safety of buildings and their occupants in the event of an earthquake. However, there are several loopholes in the code that need to be addressed in order to maximize its effectiveness. By strengthening the code through increased enforcement, awareness-raising, reviewing, revision and regular inspections, the government can help to ensure that buildings in Uganda are adequately prepared for earthquakes and protect their occupants from harm.

  • The Place for Mediation in Resolving Disputes in the Construction Industry in Uganda.

    ·

    Charles Gavamukulya, ACIArb

    Introduction

    I was privileged to attend the first mediation conference hosted by the Chartered Institute of Arbitrators’ Kenya Branch on 28th October 2022 in Nairobi with the theme “Coming of Age for Mediation: An encounter from Africa”. Notable amongst the speakers was Jane Gunn, the President of the Chartered Institute of Arbitrators (UK), Owek. Chris Bwanika, the Attorney General of Buganda Kingdom, Dr. Kariuki Muigua, the Alternative Dispute Resolution (ADR) practitioner of the year 2022, and Retired Lady Justice Joyce Aluoch. The different speakers noted that conflict is culture specific and that conflict management in African culture was aimed at promoting peace, harmony, and unity in what is commonly referred to as “Ubuntu”. Mediation as a mode of dispute resolution is not a novel practice and has existed in Africa for over 600 years. It can be seen through various traditional justice systems like the Mato put in Northern Uganda, the Gachacha hearings in Rwanda. Rwanda also has the Abwonzi, who are members of the community who handle conflicts less than 3,000,000 RwF (approximately 10,700,000 UGX). The different speakers also noted the need to “Re-Africanize” conflict resolution, more so, through the use of mediation.

    The concept of Mediation

    Different scholars define the concept of mediation in various ways. Dr. Kariuki Muigua, for instance, defines mediation as advanced negotiation where two or more parties involve a neutral third party to facilitate the negotiation process. Mediation generally is a voluntary, non-binding dispute resolution process in which a third party helps the parties to reach a negotiated solution. It is a cost effective, flexible, speedy, confidential process that allows for creative solutions, fosters relationships, enhances party control. Mediation is particularly useful in projects because of the need to preserve the ongoing relationship between the parties and enhance communication. Mediation involves attempts to settle disputes outside the mainstream judicial system, through the assistance of a neutral umpire. There are two types of mediation: facilitative and evaluative. In both, the parties are given the opportunity to voice their point of view. In a facilitative mediation, the mediator simply facilitates agreement between the parties. The mediator helps the parties to focus on the real issues in the dispute and find their own solution. The mediator gives no view on the merits of each party’s position. In an evaluative mediation, the mediator provides the parties with an assessment of the merits or the likely outcomes. These views are not binding unless the parties agree that they will be. Mediation is used to resolve domestic and international disputes as demonstrated by the number of global providers of mediation services such as the International Chamber of Commerce (ICC) together with more regionally based institutions such as the Singapore Mediation Center, International Center for Arbitration and Mediation in Kampala (ICAMEK).

    Mediation and the Construction Industry

    The construction industry plays a key role in spurring economic growth. Not only does it provide employment opportunities and demand for goods and services but also through interlinkages with other sectors like the finance sector creates an eco-system of business synergies and opportunities which need to operate efficiently in the execution of a construction project. Inadvertently, conflicts are inevitable in the construction industry due to differences in perceptions among the project participants. If these conflicts are poorly identified and managed, they often quickly turn into disputes, which are among the major factors that prevent successful and timely project completion in Uganda. Therefore, it is important for us to be aware of some of the causes of disputes in the construction industry in order to complete the construction projects in the desired time, quality, and cost.

    Causes of disputes in Construction Contracts

    Ambiguities in construction contracts are one of the key causes of conflicts in the construction industry. According to Black’s Law dictionary, an ambiguity is an indistinctness or uncertainty of meaning of the expression used in a written instrument. This could present itself as being unclear about the activities, responsibilities, and risks to be borne by the individual parties involved in the construction project. Ambiguities can also be amplified when a language that will specify the parties’ rights and obligations is not chosen. Solving the ensuing interpretation problems can be complex. The meaning of terms in common usage may be lost in repeated translations. The use of a stipulated third language, in some cases, can be confusing for both parties since the services of a translator can be both expensive and time consuming.

    Unclear payment terms can also be a cause of conflict. A construction contract should comprise of the payments that are required to be made to the different stakeholders and the timelines in which those payments have to be made. A delay in payments may affect project timelines and different project stakeholders in different ways which could cause major challenges on a construction project.

    Inflation is a universal plague of the world. Given that construction projects generally span long periods of time, inflation is a cause of concern and could be a cause of conflicts on a construction project. Contractors face inflation on many fronts when they import labor and materials from a variety of countries. This could cause the construction costs to rise and therefore create a conflict between the contractor and the employer.

    Changes in the original design project scope can also be a source of conflict on a construction project. Examples of scope changes are variations in the contract price and duration. Such changes are grounds of conflict due to the loss of profit to contractors, delays, and loss of revenue to the Employers due to the over budget. When site conditions indicated in the design differ from the actual site conditions, conflicts may arise. Differing site conditions affect the progress of the works and cost of the project thereby causing a conflict between the Contractor and the Employer.

    Does Mediation have a place in the Construction Industry in Uganda?

    The question one would ask oneself ,then ,would be “Does Mediation have a place in the Construction Industry in Uganda?”

    The Construction industry in Uganda has a number of multinational companies acting in different capacities on projects across the country. It is important to note that careful preparation of contract documents does not guarantee efficient project completion. A perfect contract cannot eliminate the occasional differences of opinion between the Employer and the contractor. A working knowledge of social and cultural differences between multinational parties and domestic parties is important in order to avoid and resolve conflict. Construction disputes tend to occur as a result of a breakdown in communication between parties and as such, mediation provides the setting for the parties to communicate and negotiate effectively with the presence of a neutral third party. Additionally, mediation goes into understanding the underlying reasons behind a certain dispute through understanding the cultural and social differences between parties and thereby ensures resolution of the dispute at hand.

    Mediation is also a response to the financial cost and emotional stress to parties in a dispute that would have otherwise been incurred when the dispute is referred to litigation or arbitration. Mediation allows the parties to minimize legal costs, control the process, maintain business relationships, and provides the most rapid process for full resolution of disputes. Referring a matter to mediation reduces the instances where a dispute leads to the termination of a commercial relationship. Given that the process is confidential, parties can easily protect their brand image and reputation thereby not losing client confidence.

    Conclusion

    In conclusion, according to a survey conducted by the Construction Industry Federation of Ireland (CIF), the preferred method of ADR to resolve construction disputes was mediation followed by conciliation and arbitration. Therefore, mediation has its place in the construction industry in Uganda. Despite its importance, mediation is not yet a popular dispute resolution mechanism in the construction industry. Mediation techniques are suitable for any type of construction claim and one major way of promoting their applicability is the inclusion of a mediation clause or a provision of the use of mediation in construction disputes. These clauses are drawn in such a way that in case of a dispute arising out of a construction contract, mediation shall be the first mode of dispute resolution adopted. This shall popularize its use for construction contracts.

    Despite the fact that mediation is a court-linked process in Uganda, there is no comprehensive and integrated framework that provides for construction mediation. Bolstering the framework that would be used in promoting and guiding the use of construction mediation in Uganda is of critical importance.

    There is also a need to sensitize construction practitioners about the process and advantages of mediation through different fora for example the Uganda Institute of Professional Engineers (UIPE) and universities in order to allow its proliferation and wide use in the field.

  • The Contract: the foundation of Construction Projects

    ·

    Charles Gavamukulya, ACIArb

    Introduction

    Construction projects have peculiar characteristics unlike other commercial transactions and these characteristics result in construction projects being particularly sensitive to a large spectrum of risks. The prevailing influencing factor is the parties themselves. International construction projects for example, involve parties from differing cultural and legal backgrounds who bring with them their own ideas of not only how the works themselves should be performed, but also the way in which the parties are to structure and manage their contracting and project management. This is particularly influential when parties from differing jurisdictions enter into joint venture arrangements for the performance of works. The Uganda National Roads Authority (UNRA) project status report of March 2021, for example, showed that 14 out of 31 (45%) of the Upgrading Road Projects were being executed with joint ventures between consultancy companies from differing jurisdictions. More joint venture arrangements are expected with the advent of oil drilling and processing and the push for more involvement of local companies in these undertakings. Key considerations have to be taken, therefore, to consider who will undertake the essential functions required to take the project from concept to completion, and how the project risk including the risk inherent in valuing and paying for the work, will be handled.

    Checking for concrete slump at Drainage Improvement Works Project in Kawempe, Kampala City by CG Engineering Consults Staff and a member of the Consultant’s team.

    Risk management in Construction projects

    Successful project execution dictates that this risk must be managed and that parties settle the issues associated with project risk through contract provisions. These provisions allocate the project risks between the parties and offer specific remedies in the event of breach of contract or the occurrence of specified events. It is in this light, that the modern construction contract has become a sophisticated instrument and one that begs a question about what an ideal construction contract is. Also, important to note is that a project delivery method and a contract type that mirrors the risk profile of the project are congruent with risk allocation strategy.

    Project Delivery methods

    One distinguishing factor between various project delivery methods is who will carry the design responsibility. This concerns the level of the contractor’s involvement during the design phase. The traditional project delivery method is the “design-bid-build” where design and construction are contracted separately. Here, the owner carries out the design and only enters into a construction contract subsequent to the completion of design. The contactor is then selected by a means of competitive tender that includes a fully detailed design. The successful bidder has the obligation to construct the work designed by the owner in accordance with the owner’s detailed specifications and drawings. The March 2021 UNRA Project progress report of the upgrading roads projects showed that over 10 projects are being delivered with this method for instance Civil Works for the Upgrading of Rwenkunye-Apac-Lira-Puranga Road. Alternatively, the owner may allocate the design function to the contractor. This is commonly referred to as the “design-build” where design and construction are combined in a single contract with a single contractor. The design is accomplished in accordance with the Employer’s requirements after the award of the contract, with the contractor given broad leeway to design the job in an efficient manner. Ideally, the contractor is told what is needed, not how to achieve the desired product. This contract places additional risk on the contractor but may also leave the Employer facing a higher contract price as a result. The March 2021 UNRA Project progress report of the Upgrading roads project showed that over 3 projects were being delivered with this method for example Package 3 and Package 5 of the Critical Oil Roads.

    Once the owner has determined the delivery method, the next focus is on the type of contract. The choice of type of contract is linked to the overall payment and pricing structure that will govern the transaction.

    Types of Contracts

    The three basic types of contracts that are most commonly encountered in construction are: fixed price/lumpsum, re-measurement (admeasurement) and cost-plus. Fixed-price contracts are contracts where the contractor is paid a pre-agreed sum of money when they have successfully performed all of his or her obligations under the contract. Payment is made in pre-determined stages and the contractor assumes the risk for both performance and price. Re-measurement contracts involve the contractor having a fixed price for each item of work in accordance with the owner’s estimated quantities. During contract execution, the work completed by the contractor is measured and the amount the contractor is paid is determined as a product of the measured quantities and the contractor’s price for each item. In this, the Employer assumes the risk for the quantity and the contractor assumes the risk for the pricing. Under a cost-plus contract, the owner retains the cost risk, and the contractor is paid his or her costs including overheads and profit. This is more flexible in that it does not require full information at the time of tender, but this flexibility comes at a huge price for the owner. Additionally, administration of these contracts comes at a greater cost because complete records of all time and materials spent by the contractor on the work must be maintained and must be verifiable.

    Contract documents

    Construction contracts must include principal documents that identify and allocate the project risk and describe the works. The principal documents in a construction contract include:

    · The conditions of contract, general and specific

    · Technical documentation

    · Schedules

    · Programmes

    · Bills of quantities

    The contract sets forth the basic terms under which the parties are doing business together for example price and payment terms, commencement date, completion date, description of scope of work, allocation of risks of loss, alternative dispute resolution and indemnification provisions. The general conditions are a set of rules that cover problems such as claims, disputes, sub-contracting, changes, time, warranties, insurance, remedies, and termination that routinely arise in construction contracts.

    Specifications provide even more detail as to the materials to be used, the performance requirements for aspects of the project and the method or techniques of construction to be employed. The specifications fill in the necessary information that is not evident from the drawings and includes materials and workmanship clauses, schedules to provide additional information and provisional sums if required, for instance the General Specifications for Roads and Bridge Works by the Ministry of Works and Transport used in the execution of Road and Bridge projects in Uganda.

    The Employer’s requirements, as explained by Nael Bunni, are the main source of information for the general obligations of the contractor and should be drafted in a balanced manner so as to effectively specify the Employer’s needs, while not limiting the contractor’s flexibility in design to meet those needs. This term is used by FIDIC to denote the document that defines the purpose, scope and design and technical criteria of the works in design-build contracts. In Uganda, these are normally issued by a Procurement and Disposal Entity for example UNRA at the tendering stage.

    The bill of quantities, as used in an admeasured contract, is a list of the materials and their estimated quantities against which the contractors provide their rates during the tender phase. The agreed prices are then used for the periodic valuation of the works that have been executed.

    Conclusion

    In conclusion, the ideal contract -the one that will be most cost effective- is one that assigns each risk to a party that is best equipped to manage and minimize the risk, recognizing the unique circumstances of the project. Therefore, it is important to undertake a comprehensive and systematic approach to identifying, assessing, and developing a risk mitigation strategy which can aid in drafting of proper construction contracts by construction parties and their representatives. It is also important to choose a project delivery system and a contract type that match the risk allocation and mitigation strategy. Drafting construction contracts, therefore, requires party representatives to be well conversant with the construction industry and the risks associated with it in order to avoid the danger that can arise from “copy and paste” of “construction contract templates”.

  • Why is there a need for Arbitration in the Construction Industry in Uganda?

    ·

    Charles Gavamukulya, ACIArb

    Introduction

    The construction industry is a major contributor to economic growth worldwide. In a Report of Economic Consultants LEK for the UK Contractors Group, it has been estimated that in the United Kingdom, every £1 investment in construction output generates £2.84 in total economic activity. In Uganda, conservative estimates from the Uganda Bureau of Statistics (UBOS 2018) suggest that the construction sector directly contributes to approximately 7 percent of gross domestic product (GDP). This growth in the construction sector is attributed to an accelerated rate of execution of public investment in energy and infrastructure. The upward trend in public investment is consistent with the country’s strategy, as outlined in the National Vision 2040 and the second National Development Plan, to focus on building its capital stock, as a way to address Uganda’s infrastructure deficits and build production facilities to prepare for exploitation of the country’s oil resource(Colonnelli & Ntungire, 2018).

    CG Engineering Consults Staff on-site at the Katosi Drinking Water Treatment plant

    Alternative Dispute Resolution in the Construction Industry

    These complex construction projects are rarely completed without encountering risks that lead to changes to the time and cost required for their execution. Those changes in turn give rise to disputes, the majority of which are submitted to Alternative Dispute Resolution (ADR) mechanisms. Arbitration is one of the mechanisms that are commonly referred to as ADR mechanisms. These mechanisms are set out in Article 33 of the Charter of the United Nations. Arbitration arises when a neutral third party is appointed by the parties or appointing authority to determine the dispute and give a final and binding award. The 2017 International Chamber of Commerce (ICC) Dispute Resolution statistics show that, in 2017, 23% of the ICC’s total caseload was in the engineering and construction sector. This was the largest percentage of any subject matter by a significant margin.

    Why do parties choose ADR?

    The reasons why these parties choose ADR are varied and they include the inefficiencies of national courts as compared to out-of-court dispute resolution. Uganda, for example, lacks construction specialist departments or judges with construction expertise and judgment. Arbitration, on the other hand, allows parties to appoint arbitrators who are experts in the industry. Furthermore, arbitration allows construction parties to choose the dispute resolution procedure in a way that addresses a number of procedural challenges in construction arbitrations. These include the large volume of documentary evidence, the use of experts to determine delay and quantum in claims as well as other technical issues and program analysis. As such, international companies would rather look to arbitration to resolve their disputes, as opposed to subjecting themselves to the idiosyncrasies of local court systems and their inherent risks.

    Furthermore, the use of arbitration provides parties with a large degree of privacy, as most elements of the arbitration process are kept between the parties and are not subject to public scrutiny, unlike litigation. Most arbitration awards are never released to the public, and if they are, it will be with the consent of the parties and in a redacted form. Additionally, the decision of the arbitral tribunal may be reached with less cost and complexity than in litigation. Arbitration also has the advantage of speed as compared to litigation, for example, the backlog level as of 30th June 2021 stood at 51,748 cases in Ugandan courts. It’s important to note that In Uganda, a case is considered to be in backlog when it spends more than two years in the court system. The arbitration may appear to be more expensive than going to court. However, the flexibility of a well-managed arbitration can yield substantial cost savings to the parties, yet court costs are becoming a significant factor in some jurisdictions.

    Cg Engineering Consults Staff at a concrete U-drain construction site.

    A major advantage of arbitration for international business operators is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention). The New York Convention gives arbitration awards common currency among all states which have agreed that their courts will treat arbitration awards made in one convention state as if they were local judgments of their own state. The New York Convention is the backbone of international arbitration today. Uganda became a convention state on 12 February 1992.

    Uniqueness of the Construction Industry

    The question that often arises, therefore, is: what is special about construction disputes that require specialist arbitration knowledge?

    Firstly, Construction projects are associated with more risk than other typical commercial transactions both in terms of the risk allocated under them and the complexity of the risk. Their nature and typically long duration lead to risks including fluctuation in the price of materials and in the value of a currency, political risks, and legal risks.

    Secondly, time is often extremely critical in construction projects. The late delivery of a project, for example, a dam, can disrupt the project financing used to fund it.

    Furthermore, there is the involvement of a wide number of parties with different capacities and divergent interests which adds to the complexity of construction disputes, for instance, a limited dispute arising on one subcontract may lead to disputes under other subcontracts and the main construction contract. This may have financial and legal consequences for many of the above parties, triggering disputes under much wider documentation such as shareholder agreements, joint operating agreements, funding documents, and concessions. That often gives rise to issues about multiparty arbitration proceedings and third-party participation in arbitration proceedings.

    Another important feature of construction disputes is the widespread use of standard forms of contract, such as the FIDIC or the ICE conditions of construction contracts. These specialized forms of contract often generate difficult points of law. Efficient dispute resolution often requires familiarity and understanding of the risk allocation arrangements of these standard forms. Arbitration has been included in FIDIC contracts since the publication of the first FIDIC contract in 1957.

    Finally, construction disputes are technically complex, requiring efficient management of challenging evidentiary processes, including document management, expert evidence, program analysis and quantification of damages. Evidentiary challenges in these disputes have given rise to the use of tools, such as Scott schedules, which are unique to construction disputes.

    Conclusion

    One thing that is beyond question; there is a bright future for arbitration and ADR in Uganda and around the world. Since it is a consensual, flexible, cost-effective, private, and fast process, the role of arbitration in an emerging economy like Uganda cannot be gainsaid. The use of arbitration in construction disputes and all other disputes where it is amenable is thus the way of the future. In the past, there has been a capital flight by investors who have relocated from Uganda due to the protracted court battles that are the hallmark of any dispute in Uganda. Apart from running a profitable enterprise, an investor’s only other concern is business certainty and confidentiality, and litigation has promoted none of those.

    However, arbitration is still fairly misunderstood in Uganda, and sometimes it has been made as structurally complex as litigation by those opting for it, thus making it unattractive to others who would want to use it. However, dissemination of information and increased training of professionals in the field of ADR, with arbitration, in particular, will go a long way in popularizing and demystifying it.

    Arbitration is the way for the future, for access to justice, and for the proliferation of the construction industry in Uganda.

    Credits — Gavamukulya Charles, ACIArb — CEO CG Engineering Consults.

    CG Engineering Consults is a company that deals in engineering design, claims consultancy, and dispute resolution.