Contributed By Simmons & Simmons
With the exception of Abu Dhabi, governments of the Emirates do not currently have standardised forms of contract. However, many government entities, especially those in Dubai, have in-house bespoke forms that they rely on. In Abu Dhabi, the government introduced both construction and design-and-build contracts in 2007 for use by Abu Dhabi government departments on all projects. The construction contracts are based on the FIDIC Conditions of Contract for Construction (the Red Book), whilst the design and build contracts are based on the FIDIC Conditions of Contract for Plant and Build Design (the Yellow book), both revised in favour of the employer.
The United Arab Emirates (UAE) does not have a separate specialist construction court. If litigation is the preferred choice, the parties are limited to either the UAE courts (whereby the proceedings will be based on a civil law system and conducted entirely in Arabic) or the Dubai International Financial Centre (DIFC) court (which is subject to its own laws and based on the English common law system). As a result, it is common to see arbitration clauses in construction contracts in this jurisdiction.
The UAE legal system is primarily based on codified UAE Civil Code. Where the law is silent on an issue, the principles of Shari'a law are applied. Federal Law No 5 of 1985 (as amended) (the UAE Civil Code) generally governs the construction and interpretation of contracts and, through Article 257, affords the parties the freedom to agree their own contractual terms (subject to various statutory exceptions).
Where clear words are used, those words will be given effect. If there are two possible interpretations of the words used, doubt will be resolved in favour of the party which has to perform the obligation. However, if the intention is unclear a court/tribunal will seek to ascertain the parties' intentions at the time the contract was made.
In addition, the UAE Civil Code imposes a duty of good faith on the contracting parties, with Article 246 saying a contract “must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith”. This Article continues, however, by confirming an implied obligation for the parties to perform not only what is expressly stated in the contract but what is appurtenant to it by virtue of law, custom and the nature of the transaction, effectively extending the good faith doctrine to prohibit the parties from merely relying on a strict interpretation of the contractual clause.
Under UAE law, the parties’ pre- and post-contractual conduct can be found to be relevant to the interpretation of obligations after a contract is formed. As stated above, where there is contractual ambiguity, a court or tribunal will seek out contractual intention by looking at negotiation notes, draft agreements, letters of intent and other types of correspondence exchanged before the contract was made. Where there is no ambiguity, the court will give effect to what is clearly stated.
Further, Article 141(2) of the UAE Civil Code allows parties to create contractual relationships even if there is only agreement on the essential terms but none on matters of detail, which are to be agreed at a later date. In that sense, a judge may adjudicate on matters which have not been contractually agreed in accordance with the nature of the transaction, the parties’ communications and the provisions of the law.
If there is deviation from the terms of the contract during performance, and if accepted by the innocent party, this is more likely viewed as an agreed variation to the contract, rather than evidence as to the interpretation of the meaning of the original obligations.
As a general rule, the parties are free to agree the terms that govern their contract and the local courts will generally uphold and enforce such contractual terms. However, whilst contractual terms can be agreed, mandatory provisions of the law, public order and moral principles take precedence over contractual terms. Therefore, if a mandatory provision of the law conflicts with a contractually agreed provision, the entire provision would be held to be invalid. In addition, Article 248 of the UAE Civil Code provides that the courts have the right to redress the balance between the parties if the contract contains an oppressive provision causing any agreement to the contrary to be held invalid.
There are various limitation periods for bringing a claim in the UAE.
Article 473 of the UAE Civil Code provides that contractual claims will be time-barred within 15 years, while Article 95 of the UAE Federal Law No 18 of 1993 (UAE Commercial Transactions Law) provides a time-bar of ten years. Article 298 of the UAE Civil Code stipulates a time-bar of three years for delict claims (depending on the type of harm suffered, eg personal injury) arising from the discovery of the damage.
The UAE Civil Code further provides additional time limitations specific to construction. Article 880, which provides for the strict liability concept of decennial liability in construction projects, ensures the contractor and architect remain jointly liable for total or partial destruction that threatens the safety and stability of the building that occurs within ten years of the delivery of the works. Whilst the shortening of these provisions is not permitted, they may be extended by agreement of the parties.
The parties are under a duty to negotiate in good faith prior to the formation of a contract as set out at Article 246 of the UAE Civil Code. As a result, it is possible to imply that the duty of good faith has been breached even if a contract has not been entered into as the parties are required to conduct themselves at all times in good faith. In practice, this means that a contracting party must disclose material facts to their counterpart in circumstances where the counterparty could not or would not be able to discover this material information on its own.
In respect of the assessment of damages, Article 390(2) of the UAE Civil Code provides that damages must be equal to the loss actually suffered. An individual, despite having a right of action, would not necessarily be able to recover any sum if no actual loss has been suffered as a result of the breach of duty of good faith, as there would be no means of quantifying the sum actually lost.
The law provides a remedy for misrepresentation.
Construction contracts in the UAE are specifically governed under the UAE Civil Code by 25 Muqawala provisions (Articles 872 to 896). A Muqawala is interpreted as a contract to make a thing or perform a task. Any construction or engineering contract governed by UAE law must comply with these 25 Articles, regardless of what the parties agree in their contract. Based on Article 874, it is understood that a valid and binding construction contract should contain a clear description of the subject matter of the contract, the work to be carried out, the time and manner of performance, and the contract price.
A contract can be deemed to exist under Article 141 of the UAE Civil Code even if a formal contract has not been formed, as long as the essential elements of the obligation can be ascertained and it can be proved that they were established. The law stipulates that it must be clear that the parties intended to reach an agreement even if they fail to finalise all of the details of the contract.
Without a formal contract, the court may give effect to signed letters of intent if this clearly reflects the agreement of the parties to enter into a binding agreement by incorporating all essential rights and obligations. A letter of intent is still a written document that the parties could point to as evidence and will place the parties in a better position than to refer purely to verbal discussions. Although the UAE Civil Code does not prohibit parties from entering into a contract verbally, a formal contract generally puts the parties in a better position than an oral agreement.
In practice, a contract which complies with all legal requirements applicable to the making of that contract becomes legally binding when it has been signed by all parties. As outlined in the previous paragraph, in instances where there is no signed contract an agreement may be evidenced by other means such as in verbal agreements, correspondence and payment for work, etc.
Under Articles 888 and 889 of the UAE Civil Code, a party is entitled to a fair remuneration for work undertaken. The court would deem that this is either an implied right due to the work undertaken, even if there is no formal contract, or arguably it could be stated that a contract was formed between the parties because work was undertaken.
Article 246(2) of the UAE Civil Code provides that the parties will not only be subject to the obligation to perform pursuant to the contents of the contract, but will also be subject to what is appurtenant to it by virtue of law, custom and the nature of the transaction. In addition to the imposed duty of good faith, as explained the section on Interpretation of Contracts above, the UAE Civil Code provides for several compulsory provisions and, in respect of construction contracts, sets out 25 provisions from Articles 872 to 896 that any construction or engineering contract must adhere to. These provisions include obligations regarding quality, equipment, liability for wrongful acts and decennial liability (as further discussed in 2.4 Limitation and Prescription above).
Entire agreement clauses are used in contracts in the UAE subject to certain mandatory provisions, which means that this is restricted in certain situations. For example, under civil law jurisdiction, misrepresentation occurs when one of the parties 'deceives the other by means of fraud, by word or deed, which leads the other to consent to what he would not otherwise have consented to' under Article 185 of the UAE Civil Code.
In general, the courts and arbitral tribunals are flexible in the UAE regarding such clauses and will give weight to such provisions if they are expressly set out in the contract and do not attempt to exclude liability for fraud and wilful misconduct.
If, however, a contractual interpretation exercise needs to be carried out because the agreed terms are ambiguous, a court may look into the pre-contractual negotiations to seek to give meaning to the contractual words. In this sense, the entire agreement provision operates to exclude misrepresentation claims.
Exclusive remedy clauses are widely used in the UAE, such as the liquidated damages provision in construction contracts. Under Article 390(2) of the UAE Civil Code, the court 'may in all cases, upon the application of either of the parties, vary such agreement so as to make the compensation equal to the loss, and any agreement to the contrary shall be void,' so the court has the power to override and adjust (increase or decrease) the amount to reflect the actual loss suffered by a party.
If there is no price on the contract but work is being performed, the work must be valued at a reasonable price pursuant to Article 888 and 889(1) of the UAE Civil Code. This will impose fair remuneration for the value of the works, together with labour and materials provided.
If a contract has set the agreed price, a party would be remunerated accordingly.In the event of a dispute, the court will determine a reasonable price for the works. This is generally determined by expert evidence provided to the court and drawn from industry practice or industry prices.
Under UAE law there is no requirement for a contract to contain specific payment terms. In fact, UAE law is generally flexible, allowing for ‘paid when paid’ provisions, as further discussed in the section below on Restrictions on Ability of Parties to Agree Terms.
See section on 4.6 Mandatory Payment Terms.
There are certain restrictions that apply in relation to payment terms within the UAE, though they are more flexible than in other jurisdictions. ‘Paid when paid’ clauses (provisions stipulating that a sub-contractor will be paid when the main contractor is paid) are permitted in this jurisdiction. Alternatively, provisions stipulating that the sub-contractor will be paid only if the main contractor is paid or ‘paid if paid’ provisions, are not permitted under UAE Law and would not be upheld.
UAE law recognises suspension of a contract on the grounds that a party refuses to carry out its obligations for non-performance of the other party. Article 247 of the UAE Civil Code provides that in contracts binding upon both parties, 'if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do.' In effect, one party can suspend carrying out the contract of works on the basis that it has not been paid. However, suspension should be treated with caution as wrongful suspension may permit the employer to terminate for contractor breach.
While there is no express provision as regards the impartiality of a certifier, in this instance the engineer who is a representative of the employer, Article 246 of the UAE Civil Code provides that all contracts must be performed in accordance with their contents and in a manner that is consistent with the requirements of good faith.
The certifier is empowered to carry out the functions defined in the contract and must perform those functions in a spirit of good faith. There is a fundamental obligation under both the UAE Civil Code and the Shari'a law that binds the parties to act in good faith. A party which has a vested interest and uses that to its own benefit is unlikely to be acting in good faith.
Under UAE law, a contractor can bring an action against the employer if it suffers damage due to acts by the engineer representing the employer. Since a construction contract is between the contractor and the employer, a contractor therefore does not have a contractual relationship with the engineer. Due to the principal-agency relationship that is established between the employer and engineer, the employer is ultimately responsible for any damage caused to the contractor as provided by Article 153 of the UAE Civil Code.
Parties can agree to almost anything contractually as long as it does not violate UAE Law. There are prescription periods under the UAE Civil Code in respect of the acceptance of certified sums, and usually under a contract these certified sums must be challenged within a certain period of time. In practice, however, these are usually applicable to global claims and if an arbitration provision is broadly enough drafted, any claim, even a certified one, can be ruled into an overall global dispute. If a final account is not certified, then effectively the whole mechanism is not conclusive and all sums can be opened up.
It is possible in this jurisdiction for the parties to agree that the opening-up, review and/or revision of a certificate is only to be performed in a particular forum (eg in arbitration).
Further to the section above on 3.2 Formation of the Contract, for a construction contract to be binding it must contain a clear description of the subject matter of the contract, the work to be carried out, the time and manner for performance, and the contract price. In instances where a contract is entered into without a specific time for completion, the courts will generally rule that the works have to be completed within a reasonable time, taking into account the time necessary for completion and business efficacy.
The courts will give effect to the agreement and the risk allocation therein. However, if the employer has caused a delay deliberately or in bad faith, or if the delay event is of a type that was not reasonably foreseeable at the time the contract was made, the court can be invited to redress the balance between the parties, having regard to all the circumstances (including employer breaches). Further, where this is not possible, the court may order termination.
Liquidated damages are often applied in the region and are generally upheld. However, pursuant to Article 390 of the UAE Civil Code, the courts retain the discretion to increase or decrease the damages awarded to ensure that the compensation awarded is equal to the harm caused. Any agreement which seeks to remove the courts’ ability to exercise this discretion will be considered void.
Concurrent delay is one of the most problematic issues relating to a construction delay claim. The concept of concurrent delay is not expressly provided for under UAE law, but there are provisions under the UAE Civil Code which provide for a similar result. Various principles of UAE law support an apportionment approach in relation to competing causes of delay and concurrency.
Where there is no express provision in the contract to resolve the issue of delay, the critical delay event will have to be assessed to determine if the employer risk event occurred as claimed by the contractor for them to be entitled to an extension of time. In order for the contractor to claim financial entitlement, the contractor will have to establish and quantify the loss suffered as a result of the employer’s delay.
Similar to the concept of concurrent delay, there is no recognised principle of acceleration under UAE law, so advancing a claim will be guided by the basic principles of a claim. To mitigate the employer’s delay, assuming the contractor itself is not in culpable delay, the contractor for that reason is entitled to advance a claim for acceleration costs, since it is not obliged to incur additional costs for the employer’s delay. However, the contractor would have to establish that there was an express or implied instruction from the employer to accelerate the works to be able to claim for additional costs.
It does not make a difference even if there is a contractual entitlement for an extension of time in instances where the extension is not granted by the employer/engineer.
Whilst not typical, global claims are permitted in this jurisdiction and have seen some success in complex, large-scale construction projects, where it has not been possible to identify the actual individual loss.
In the UAE, notice provisions are commonly used and generally adhered to. When an instance arises where a contractor has not complied with the notice provisions, the courts will look at whether the employer previously waived the notice requirement, has given the impression that they will not insist or rely on the notices, or whether they were aware of the issue because of their own action/prevention. As such, the courts may look more favourably at the contractor and look at the circumstances at the time. However, it is not likely that the courts will support a provision that seeks to extinguish a party’s claim as a result of being ‘out of time’ under the notice provision.
In this jurisdiction, the court can order performance of an obligation if it is possible, and specific performance is the primary remedy for breach of contract pursuant to Article 380(1) of the UAE Civil Code. If the application of specific performance is inappropriate, the court may assess the compensation under Articles 386 and 338 of the UAE Civil Code. Specific performance may be sought if a time limit for performance is not specified which makes it possible to perform the works or if circumstances permit without causing prejudice to the other party with regard to the compensation as a result of the breach.
The assessment of damages in contract would typically run from the date of breach. For a non-contractual claim, damages are assessed from the date of injury and potentially the date of discovery of the damage, if later in time.
In general, parties to a contract are free to agree the terms that govern their contractual relationship and thereby limit the extent to which one of them is entitled to claim, for example, limitation of liability provisions in respect of consequential losses. The local courts will generally uphold and enforce such contractual terms, save for where any mandatory provisions of the law take precedence over these contractual terms, such as prohibiting the restriction of “harmful acts”, fraud and gross negligence or criminal liability.
In addition, recoverability in respect of decennial liability, as discussed in 2.4 Limitation and Prescription, cannot be excluded or restricted.
In this jurisdiction, Shari'a law prohibits the acceptance of interest save for commercial contracts or debts due. The parties to a contract are free to agree the applicable rate of interest for sums due subject to a cap of 12%. In instances where the contract fails to set the interest rate, a default rate is often implied at 9%.
As stated in 4.9 Suspension of Performance on Grounds of No Performance above and subject to any limitation in the contract, a party can suspend or terminate a contract under Article 247 as a result of the other party’s non-performance of its obligation.
Pursuant to Article 369 of the UAE Civil Code, parties can agree to a right of set-off in a contract and this will be generally upheld by the courts. In addition, Article 370 provides a legal right of set-off which sets out a number of conditions that need to be met for set-off to apply. The effect of this is that the employer has a right to set off any sums due to it from the contractor.
However, where the contractor has the right to terminate in the event of non-payment, this can create an evidentiary issue and the courts will look to the terms of the set-off and the right to determine to ensure that the contractor has not wrongly terminated.
The concept of material breach (unless defined in a contract) exists in common law, not civil law, and therefore is not immediately understood. Breaches of all terms (conditions, warranties and innominate clauses under common law) are equally serious under civil law. The consequences of the breach is where a distinction arises between a breach of a trivial term or a non-trivial term. For example, if a party seeks to terminate a contract for default of a minor term, the principle of good faith may prevent the innocent party from exercising their rights in such a draconian fashion.
While there are no published statistics, research suggests that 60-70% of construction disputes are handled through arbitration.
Arbitration is widely used in the UAE for the settlement of disputes but unlike many other jurisdictions, no separate UAE legislation governing the arbitration process currently exists and at present it is governed by provisions contained within Federal Law No 11 of 1992 (as amended) (the UAE Civil Procedure Code).
In respect of enforcement, the UAE is a member of the New York and Washington (ICSID) Conventions. To enforce an award, an application to the local courts can be made, and the courts have demonstrated that foreign arbitration awards will be recognised and enforced.
The introduction and general acceptance of the FIDIC 1999 suite of contracts began to raise awareness of the use of the dispute adjudication board (DAB) in the region, with the government of Abu Dhabi adopting an ad hoc DAB as the first tier of its dispute resolution process in its Condition of Contract (Law No 1 of 2007). However, despite the region embracing these contracts, the DAB provisions did not gain the widespread support they have seen internationally and remain seldom used, often being omitted from the contract entirely.
Unlike jurisdictions such as England, which have a scheme for adjudication together with the legislative infrastructure and case precedent which allows courts summarily to make orders to give effect to adjudication decisions in the interim, such a process does not exist in the UAE.
There are various international bodies that have local presences in the UAE from which experts can be called such as the Institute of Chartered Civil Engineers (ICES). Alternatively, the local courts have a list of experts that they call upon to advise the courts. However, it is somewhat different in principle from an expert determination. Expert determination is sometimes used as the preferred means of dispute resolution before resorting to arbitration or litigation, due to its speed, simplicity, and the lack of involvement of other participants. Depending upon the terms of reference of the expert and the submission agreement, the decision may be binding upon the parties as a matter of contractual agreement. However, in local courts, the report from the appointed experts is not binding and can be totally or partially rejected by the courts.
Mediation is generally encouraged in the UAE, as is demonstrated by the formation of the Centre for the Amicable Settlement of Disputes in Dubai, and the Conciliation and Reconciliation Committees in the other Federal Courts.
The Centre for the Amicable Settlement of Disputes has jurisdiction to oversee several disputes, including where the dispute involves claims of AED50,000 or less, the division of common property or claims where a bank is a party, as well as instances where the parties agree to such. In the event of a settlement, a reconciliation agreement will be signed by both parties and attested by a judge, following which it will become legally enforceable. If an amicable settlement is not achievable, the case is referred to a specialised court.
The other Federal Courts have also introduced Conciliation and Reconciliation Committees, requiring that any matter being brought before the courts will be reviewed before being placed before the Court of First Instance in an attempt to resolve the matter. As with the Centre for the Amicable Settlement of Disputes, any settlement reached will be embodied in a court document and will therefore be legally binding.