No Notice, No Variation: Why Contractual Discipline Matters in UAE Oil & Gas Projects

In complex oil and gas projects, variations are an essential element of the contract to allow the parties to contend with change. Increase in costs and changes to schedule are unwelcome bedfellows in any project, so a keen focus on how to limit variations, and effectively manage those variations is essential. Perhaps predictably, variations represent the most common area of dispute in oil & gas projects. The underlying contention arises when the parties disagree as to whether a variation has in fact occurred in accordance with the contract. We will briefly explore in this article the importance of following the agreed contractual mechanisms.

What is Variation?

Well drafted oil and gas contracts (particularly those relating to more complex projects) will include a robust and clearly set out contractual mechanism for variations. This mechanism must be followed precisely, and it should define a variation with reference to clear authority, and strict form and process. If the contractual process is not followed and a dispute arises, the UAE courts would ordinarily seek to enforce the terms of the contract. Typical variation provisions will cover a wide variety of matters such as (but not limited to):

• what constitutes a change (whether in scope or design for example)
• what matters are expressly excluded from being considered a variation (for example correction of contractor defects)
• who has authority to issue a variation
• confirmation of written notice requirements (including time limits and consequences for failure to comply)
• distinction between informal instructions and variations
• cost impact considerations

Notice is the Gatekeeper, Not a Bureaucratic Formality

It is perhaps easy to gloss over contractual notice provisions as being “boilerplate” or as having less importance than other provisions in the contract. This interpretation of notice provisions underestimates the important legal role that they play in the context of the variation.

As a principle of UAE law, parties are free to allocate risk by contract. Variation notice provisions set out to do exactly that:

• forcing early cost visibility,
• allowing mitigation or redesign, and
• preserving commercial control at employer (and JV) level.

While UAE law (namely Article 246 of the UAE Civil Code*) requires contracts to be performed in good faith, contracting parties should not regard this as a remedy for non-compliance of notice provisions. Good faith obligations are important, but they cannot (and should not) be seen as an enabler for poor contract management. Good faith obligations are not a substitute for, nor should they be used as a tool to circumvent notice provisions. In summary, when parties agree to specific notice requirements in their contracts, they must be followed precisely as agreed.  

Knowledge is Not Notice

Parties should always remain vigilant of the fact that merely having knowledge of an event that may lead to a valid variation under the contract (including documented discussions and back-and-forth correspondence), may not result in a formal assertion of contractual rights. Accordingly, awareness or acquiescence does not automatically translate into consent or waiver, nor does it relieve a party from complying with the agreed contractual mechanisms. A party can see otherwise legitimate variation claims fail, even when both parties had knowledge of the underlying circumstances. This “grey area” is fertile ground for project claims.

Closing Thought

The primary takeaway from this brief article should be that each party should focus on the contractually agreed variation process. Variation claims tend not to fail on merit, but fail at a process level. If the variation process is not followed closely, in accordance with the provisions of the contract, it is less likely that a variation claim will be successful. 

*Note: a new version of the UAE Civil Code is expected to come into force shortly after publication of this article.