Increased costs under Qatari construction contracts
Customers who pay late, or fail to pay at all, pose a serious risk to building material suppliers and the wider construction business. As inflationary pressures continue to work through supply chains, we expect rates of non-payment to increase in the construction industry. In this article, we outline a number of precautionary measures and remedies that building material suppliers in Qatar can take to help facilitate the successful recovery of debts as well as recommending a number of preventative measures. Our second article will provide guidance on possible remedial action.
Businesses should identify habitual bad or late payers among their existing client or customer base and take this into consideration during contract negotiation. For new or potential customers, valuable information can be gathered from routine enquiries to help quantify credit risk. At the initial due diligence stage, insight may be gained by obtaining some or all of the following:
A trade licence will contain salient information such as the class of incorporation (whether a limited liability company, a sole proprietorship or a branch of a foreign company), the activities the business is licensed to undertake and the length of time it has been trading. Such information can often be used to gauge credit risk, for example, in the case of a sole proprietorship, any action for recovery of debts owed lies against the owner directly. Depending on who the owner is, this may be a cause for comfort or concern.
At the earliest stage possible, consideration should be given as to whether it is realistic to request some form of security of payment. Commonly used forms of security include:
Generally, bank guarantees and letters of credit are considered the most favorable forms of security for the supplier / creditor. Though paid a fee, banks will only issue a security if the customer i.e. the debtor, is considered credit worthy. Therefore, a debtor’s ability to raise a bank guarantee is an indication of its credit worthiness.
At the opposite end of the spectrum are post-dated cheques which are readily available at no extra cost to the debtor but are a less reliable form of security. The reason for the potency of post-dated cheques in the Qatar market and their acceptance as security is that under Article 357 of Law No 11 of 2004 (the “Penal Code”) it is an offence in certain circumstances, to make payment with a cheque that is later dishonoured. The records held by the Qatari police, immigration and other public authorities mean that even those who flee the country or seek to lie low may be caught.
In practice, advance payment is the most common form of security against payment for construction projects in Qatar.
Regardless of whether security is provided, the contractual terms should be sought out and considered in detail. Well drafted payment terms will provide certainty as to the calculation, timing and method of payment and will also contain safeguards for the creditor. Back-to-back payment terms clearly present a greater credit risk than those where the timing of payments is pre-determined.
The types of provisions which safeguard creditors include:
One barrier to timely payment is the lack of any express provision under Qatar law for interest to be awarded on late payment. However, it is broadly accepted that parties can agree on late payment penalties and thus, contractual late payment penalties are likely to be upheld by the courts pursuant to the General Principle enunciated in Article 171 of Law No. 22 of 2004 (the “Civil Code”). Article 171(1), which is similar to the common law freedom of contract principle, states:
“A contract is the law of the contracting parties and so cannot be revoked or modified except with the agreement of the parties or for such reasons as are prescribed by the law”.
Accordingly, the absence of an express contractual entitlement to interest on overdue sums provides the debtor with a period of free credit (a particular concern in the context of heightened inflation). Parties should, however, note that the rate of interest a Qatari court will award, even where an express contractual term has been agreed, is in practice capped at 5% and will likely be limited to simple interest.
Suppliers should protect their position by identifying potential bad payers, requesting security of payment and negotiating favourable contractual terms (including an entitlement to interest on overdue sums).
Although the relationship between the parties changes once a creditor has fulfilled its obligations, it is by no means at the mercy of the debtor. Our next article on the issue of payment of suppliers in the construction industry will consider the options for the use of compulsion against problem debtors and will suggest practical strategies for the successful conversion of debts into cash.
Note: All Qatari Laws (save for those issued by the Qatar Financial Centre (QFC) to regulate its own internal business) are issued in Arabic and there are no official translations, therefore for the purpose of drafting this article we have used our own translation and interpreted the same in the context of Qatari laws and regulations.