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Construction Law and Disputes in Iraq: Contractor and Employer Obligations

  • Iraq
  • Middle East
  • Construction and engineering

29-09-2022

The construction industry growth rate in Iraq is increasing annually and has a market size of USD9.7bn. However, the Iraqi construction laws are underdeveloped to meet the complexity of the expanding market. It is, therefore, essential that parties are aware of their rights and obligations under Iraqi Law and applicable construction dispute procedures. Regardless of the nature of the construction contract, there are risks relating to the execution and completion of such contracts that must be considered by both the contractor and the employer. This article aims to highlight the essential key obligations and rights of parties in a Construction Contract, in addition to applicable termination procedures.

Under Iraqi Law, it is critical that both the Contractor and the Employer always consider the following issues:

  • Material breaches that provide a basis for valid termination;
  • Agreed upon time frames for completion of work;
  • Agreed upon price and variations;
  • Inspection of completed work and apparent defects; and
  • Compensation and damages.

Construction contracts in Iraq are governed by article 864-899 of the Iraq Civil Code No.40 of 1951 (“Civil Code”). A construction contract is defined as an agreement pursuant to which one party undertakes to manufacture something or render work (offer labour/craftsmanship) in consideration of remuneration undertaken to be paid by the other party (“Construction Contract”). Construction Contracts in Iraq are executed between two private entities or with a governmental entity. The nature of construction contracts primarily tends to be standard turn key contracts with public authorities, whereas private parties generally execute such contracts in fixed-price or work-by-force account construction contracts.

Obligations and rights of the contractor

The provisions of the Civil Code regulate the relationship between the contractor and the employer including: their respective obligations, performance of work, warranties, delays, defaults and a variety of issues which may take place during or after completion of the works.

One of the key factors of executing a Construction Contract are the time periods agreed upon between the contracting parties. The provisions of the Civil Law reiterate the contractual obligation of the parties to complete the work within the required time frame. Article 868 of the Civil Code requires the contractor to commence and complete the work within the time frame agreed upon. If the contractor is delayed to the extent that it would be highly improbable for the work to be completed within the agreed time limit, the employer may terminate the Construction Contract prior to the delivery deadline. A number of precedents by Iraqi courts have enforced contractual penalties for delay, in addition to the expenses and damages incurred by the employer.

Additionally, a key factor of Construction Contracts is the performance of the contractual works in a manner which is satisfactory to the employer and as per the provisions and specifications agreed upon in the contract. Article 869 of the Civil Code states that “if the contractor is performing work in a defective manner or in violation of the agreement, the employer may serve formal notice to the contractor within a reasonable time limit of such default”. If the contractor fails to rectify the situation within the set time limit, the employer may file a claim to terminate the contract or hire another contractor to perform the work at the cost of the original contract. Furthermore, the employer may terminate the contract if the defective work is impossible to rectify, and claim damages. However, if the defective issue does not significantly reduce the value or suitability of the work, the employer may not terminate the contract. Iraqi courts have interpreted termination under Article 869 to only apply in situations whereby the work is defective and not just a failure to implement the work.

Moreover, the provisions of the Civil Code regulate and set in place high standards on contractors concerning their warranties and obligations. A contractor is obligated to warrant against the collapse of the building or fixed installation for a period of 10 years from the date of completion or delivery of work. Equally importantly, contractors that undertake to supply all or part of the materials to be used in the work are responsible for its sufficient quality to the employer. Not only evident in the provisions of the Civil Code, high standards of warranty and liability are also evident in the decisions of the Iraqi courts, who have taken a strict approach when holding contractors accountable for warranties provided under the contract.

Obligations and rights of the employer

The provisions of the Civil Code require that the employer to fulfil certain obligations with regards to the receipt of the project from contractor and inspection of the works. The employer is obligated to inspect the work when it’s complete and to complete delivery procedures as soon as possible. If the employer, without a legitimate reason and after receiving formal notice, refuses to inspect or receive the work, the work shall be deemed to be delivered. On the other hand, the employer may refuse delivery of the work if the contractor has breached terms of the contract or design to the extent that they would be unable to use the work or it would be unjust to receive it. If the work can be repaired without exorbitant expenses, the employer may request that the contractor fix the breach within a set period of time.

The employer must also be aware of any ‘apparent defect’ before receiving the work. The Civil Code does not provide a clear definition for ‘apparent defect’, however the Iraqi courts have interpreted an ‘apparent defect’ as a defect that “could be detected by the common man”. The contractor’s liability for any apparent defects or breaches is waived when the work has been de jure or de facto received by the employer. If the defects of the work are not apparent at the time of delivery though and were revealed later, the employer must notify the contractor when the defect is discovered. If the employer fails to notify the contractor of the defect, the work will be deemed to have been accepted.

The Civil Code and Iraqi courts also have a strict approach to the price of a Construction Contract. If the Construction Contract includes a fixed price based on the agreed upon design, the contractor may not claim an increase in the price. However, the contractor may claim an increase in the price if it was due to a mistake by the employer or it is agreed upon by both parties. Unless the fixed price was specifically amended by both parties, most Iraqi courts have refused to increase the price of the Construction Contract, even after an amendment to the design was agreed upon. Additionally, the contractor may not increase the price for the work if prices for raw material and labour have increased, although the court may order an increase of the price or terminate the contract if an unforeseen event occurs that disrupts the economic balance between the obligations of the contractor and employer. The unforeseen event cannot have been taken into consideration in the financial assessment when contracting.

Termination of the construction contract

The employer may terminate the Construction Contract at any time before completion. Following termination, the employer is required to compensate the contractor for expenses incurred, work executed and profit made had the work been completed. However, courts may reduce compensation for loss of profit under equitable circumstances. Correspondingly, Iraqi courts have taken into consideration breaches or delays by the contractor when determining or reducing compensation.

Moreover, a Construction Contract may be terminated if its execution is impossible to perform. If the agreement’s impossibility to perform is due to force majeure, the contractor shall not be compensated, except to the extent that the employer benefited from work already completed and expenses incurred. Iraqi courts have interpreted the impossibility to perform as a foreign cause over which the Contractor has no control.

Published by The Oath Middle East.