Construction Law 2022

Last Updated June 09, 2022

UAE

Law and Practice

Authors



Norton Rose Fulbright has a team of Middle East construction lawyers who offer comprehensive contentious and non-contentious legal advice to clients throughout the finance, development, construction and engineering process of construction projects. It acts for contractors and specialist contractors, major developers, project companies and sponsors, investment funds, consultants, government entities and financiers lending to projects. Norton Rose Fulbright's construction lawyers offer its clients a full service throughout the life cycle of a project, from initial project inception and planning, through tendering, tender evaluation, contract award, construction and operation. Its team has an in-depth knowledge of the standard form agreements commonly used in the region (in particular the FIDIC forms), having amended and negotiated these contracts many times on numerous projects across the Gulf. Its construction specialists advise clients across many sectors, including real estate (residential, retail, commercial), leisure and hospitality, education and insurance.

The United Arab Emirates is a civil law country that follows a Civil Code. The law is a codified established comprehensive legal framework that governs most eventualities. 

Dubai is bound by both the federal laws of the UAE and laws specific to the Emirate of Dubai. The main federal law is the Civil Transactions Code Federal Law No 1 of 1985 (as amended) ("the Civil Code").

Dubai has numerous standards, regulations, guidelines, codes of practice and circulars issued by Dubai Municipality and the free zones of TECOM and JAFZA in relation to building standards in their relevant jurisdictions. These include building standards, environment, health and safety guidelines and other technical conditions.

Administrative Resolution No 125 of 2001 concerning the adoption of Building Regulations and Standards provides a detailed technical discourse about how to build in Dubai Municipality-governed areas. There are also similar standards for TECOM and JAFZA areas.

Health and safety provisions fall under Federal Law No 8 of 1980 (as amended) ("the Labour Law") as well as employment-related matters, numerous regulations, codes of practice and specific technical guidelines.

For local projects, the most common form of construction contracts in the UAE are the International Federation of Consulting Engineers (FIDIC) forms of contract. These have an employer-contract relation. These include:

  • The Conditions of Contract for Construction (Red Book);
  • The Conditions of Contract for Plan and Design Build (Yellow Book); and
  • The Conditions of Contract for EPC/Turnkey Projects (Silver Book).

In the UAE, the predominant forms are the first editions (published in 1999). The FIDIC Red, Yellow and Silver Books are collectively referred to as the “Rainbow Suite”.

Bespoke construction/EPC contracts are generally used in the power and water sector projects, as well on PPPs.

It is common for local developers to develop their own suite of standard form construction contracts, which are often based on the FIDIC forms.

The construction industry is vital to the UAE’s economy. Following COVID-19, the industry faced several challenges such as schedule delays, disrupted cash flows, delayed permits, approvals and inspections, travel restrictions, health and safety concerns, and material and equipment shortages, among others, which hindered the timely delivery of construction projects.

At the introduction of the sterilisation lockdown in response to COVID-19, the government deemed construction to be a “vital sector”, exempting it from government restrictions. This meant that construction sites were permitted to remain operational and workers could continue to work on site, subject to obtaining a permit from the Dubai Municipality and the Permanent Committee for Labour Affairs.

In order to support the construction sector, the government introduced various measures. The UAE Ministry of Human Resources and Emiratisation has permitted employers to make temporary changes to employment terms, imposed compulsory precautionary measures to ensure the health and safety of employees in the workplace and to provide onsite labour accommodation. The Dubai Municipality also issued a directive applying to all labour accommodation and construction sites in Dubai requiring measures to be implemented regarding accommodation and transportation of workers.

The Dubai Development Authority (DDA) has taken steps to mitigate the impact of COVID-19 such as through the creation of a digital portal to process all engineering services, moving standard business practices to electronic means (eg, registration and licensing service requests and electronic format approvals and documents issued by the DDA). These efforts proved effective in supporting the construction industry against the adverse effects of the pandemic.

Typically, a land owner or land developer: this party procures the work.

Employers have an obligation to protect employees' health and safety, and they must apply all means of protection as approved by the Ministry of Labour and Social Affairs under Article 91 of the UAE Labour Law.

Articles 884 to 889 of the Civil Code contain the rights and obligations of the employer. These include:

  • to take delivery of the work once completed;
  • to pay the consideration upon delivery of the property contracted for;
  • the right to withdraw from the contract and suspend the execution where plan costs are exceeded;
  • the right to consent to any variation or addition made to the plan; and
  • to give the contractor/architect fair remuneration for work completed.

The most common corporate structures seen in the construction industry are limited liability companies and private joint stock companies that carry out local projects. International projects are usually by joint ventures or special purpose vehicles.

The contractor must complete the work in accordance with the conditions of the contract (Article 877 of the Civil Code).

The Civil Code imposes certain conditions on muqwala (work) contracts, including a provision that a contractor is liable for damage caused by its acts.

The contractor remains liable to the employer for the acts or defaults of any subcontractor, its agents or employees, as if they were the acts or defaults of the contractor (Article 890(2) of the Civil Code).

Articles 875 to 883 contain the obligations of the contractor. These include:

  • to provide materials for the work, with liability for the quality thereof;
  • if the employer is bound to provide the materials, the contractor must take due care and observe proper technical standards;
  • to complete the work in accordance with the conditions of the contract;
  • the requirement to make good of defective work or work completed in breach of the agreed conditions; and
  • liability for any loss or damage resulting from the contractor's act or work.

The majority of subcontractors are appointed by the contractor and the employer traditionally plays no part; however, nominated subcontractors are those selected by the employer but appointed directly by the contractor under a subcontract.

Banks and other institutions and parties (eg, government organisations) provide finance to the employer towards the development. This can be a single bank or a syndicate of banks.

Local, government and public authority projects are generally self-financed, but can be privately financed or funded through a public private finance initiative. International projects tend to be financed by lenders on a corporate or full recourse basis or on a project finance basis, depending on the sector and size.

The scope of works is produced by the contractor and details the works to be completed under the construction contract. It includes the stages of work, descriptions of tasks and deliverables.

UAE Federal Ministerial Decision No 20 of 2000 (as amended by Minister of Finance Resolution No 90 of 2008) sets out the detailed requirements for the scope of work in relation to public-private partnerships. This includes tender procedures, bid and performance bonds, specific requirements in terms of contracts, payment and penalties for delay.

Under Article 877 of the Civil Code, the contractor must complete the work in accordance with the conditions of the contract. It is customary that the contract provides for variation of the works.

The FIDIC standard forms detail the employer’s entitlement to order a variation to the works and as a result broaden or reduce the contractor’s scope of work or alter the material quantity of the work. The contractor is entitled to additional time and money for such variations, as well as being able to raise reasonable objections to material changes.

There are many models an employer may wish to follow when procuring a construction project. Models used include the following.

Traditional procurement

The employer engages a design consultant to prepare the design for a project and then bid and award a construction contract to a contractor to construct the project in accordance with that design. The employer will take responsibility for the design provided by the design consultant or team and the contractor will be entitled to relief (which may be in the form of an extension of the time for completion and/or increase in the agreed remuneration) if there are defects or deficiencies in such design.

Design-and-build contracts

The contractor is responsible for both the design and construction to meet the specification of the contract. The employer has "single point responsibility".  This structure allows for easier determination of liability.

EPC/turnkey

In EPC contracts, a contractor takes responsibility for all element of design, construction and procurement on a "turnkey" basis. These involve a greater transfer of risk from the employer to the contractor.

Each of the employer, contractor, subcontractor and other parties are responsible for the work in which they are engaged. The contractor and subcontractors provide services, skills and knowledge towards the construction of the project in a timely manner and on budget. The employer provides the economic power and any project manager/engineer on the project works to maintain efficient progress on the project.

The employer is usually responsible for the status of the site, including existing pollution and ground conditions, and is also responsible for obtaining relevant consents and permits. However, under EPC contracts some of these risks may be passed onto the contractor. The employer also generally ensures there are uninterrupted rights over the construction site for the contractor. 

The contractor is normally responsible for the maintenance of the site, health and safety measures, and the levels of onsite noise and pollution.

There are different licensing requirements across the Emirates, depending on project type, height of building and internal directives applied by the municipality of the emirate. There are also different authorities within the Emirates themselves, which have distinct requirements (eg Dubai Municipality, JAFZA, TECOM).

The following applies to projects in the UAE:

  • Before – the contractor obtains no-objection certificates from relevant government departments (for electricity, water, roads etc). Once obtained, the employer applies for a building permit.
  • During – the contractor requests and receives various inspections, such as for the foundations, the first floor slab and the frame.
  • On completion – the contractor requests and receives final inspection from the relevant authority and from civil defence. The employer then applies for a building completion certificate.

The contractor is responsible for the maintenance of the site during the works. Once the works are completed, the responsibility for maintenance lies with the owner.

The owner is usually obligated to deal with operation, finance and transfer functions. The FIDIC Silver book states that the owner must submit to the contractor reasonable evidence that financial arrangements have been made and are being maintained, which will enable the owner to pay the contract price.

Only in specific cases are the operation, finance and transfer obligations assigned to the contractor, for example, in a PPP project model for a large development project; or a build, own, operate, transfer contract.

The construction contract will set out a testing and commissioning regime to be complied with before and, sometimes, after completion. As the works proceed towards completion, the contractor must demonstrate to the employer that they comply with the requirements of the contract, subject to relatively minor items of defective and outstanding work. Taking-over occurs when the works or sections have passed the tests on completion and are otherwise ready to be taken into commercial use and occupation by the employer, subject to snagging or relatively minor items of defects or incomplete work.

Some contracts, including the FIDIC Yellow and Silver books, also include provisions relating to testing after completion, to be carried out in accordance with: the test programme; and the notice given by the contractor during the trial operation period, when the works or section are operating under stable conditions, that they are ready for any other tests on completion, including any performance tests.

On completion, final inspections have to be carried out by the relevant authorities and the Civil Defence Authority. There is also a requirement for employers to issue a taking-over certificate upon handover of the project and then a final completion certificate upon expiry of the defect liability period.

Typically there is a contractual defects liability period of 12 months from taking over, within which the contractor remains liable to remedy any defects discovered in the works. 

Articles 880 to 883 of the Civil Code state that contractors and supervising architects are bound by decennial liability for ten years following completion of the construction works for any defects that threaten the structure or integrity of the works or for any total or partial collapses of buildings or other structures.

There are four main types of payment in contracts and these vary according to the works:

  • lump sum;
  • measurement;
  • prime cost; and
  • cost plus.

Payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).

Advanced payments are common in the UAE and are generally between 10-20% of the contract price, although we have seen higher. 

A contractor may be entitled to suspend its works where there has been a lack of payment by the employer. Under FIDIC contracts, once an interim payment application has been certified by the engineer for payment, the employer has a defined time period to pay said amount under the interim payment certificate.  If this is not paid within the defined time period, the contractor has to give a notice of suspension in order to allow the employer a further opportunity to pay the interim payment. After such notice period expires, if the employer has failed to pay, the contractor is then entitled to suspend its works.

The FIDIC Red Book contains conditions to recover late payment interest or financing charges, suspend work or reduce the rate of work and exercise termination for default provision.

A contractor may rely on Article 247 of the Civil Code, whereby one party can refuse to carry out its obligations if the other party is not performing.

The contractor must first consider and address any issues the employer may have raised to justify the non-payment, so that the contractor has not acted in bad faith. The Dubai Court of Cassation decided that the requirements of good faith under Article 246 of the Civil Code is applicable to the right to suspend performance.

See 4.2 Payment regarding invoicing under FIDIC contracts.

If part of an invoice is in dispute by the parties, the undisputed part of the outstanding invoice must be paid. Payment of the undisputed part shall not constitute a waiver of rights by either party until an agreement as to the outstanding amounts is reached in accordance with the contract.

In Abu Dhabi, the Executive Council of the Emirate issued circular No 1 of 2019. The circular instructs government department and state-owned entities to:

  • pay construction contractors within 30 days of receiving the invoice; and
  • amend contracts so as to require contractors and suppliers to pay subcontractors within 30 days of receiving payment from government departments and state-owned entities.

There are a number of methodologies that are followed in construction projects. These include traditional procurement; design-and-build; and EPC/turnkey (see 3.3 Design).

The contractor usually prepares a plan for the works and it is submitted to the employer for approval.

The construction contract will contain clauses relating to delay. It will usually require the contractor to give notice to the employer and, if permitted, request an extension. The employer may also be entitled to require the contractor to propose and implement measures to accelerate the works, so that the time for completion can be achieved.

In the UAE, it is standard for the contractor to be required to pay liquidated damages in the event of late completion of the works.

Liquidated damages are fixed with the quantum having been agreed between the parties in advance of the delay occurring (Article 390(1) Civil Code). It is typically deducted at a rate per day or week of delay in the completion of the works, often set out in an appendix to the construction contract. There is no requirement for liquidated damages to be a genuine pre-estimate of loss.

Article 390(2) states that the court may vary such agreement so as to make the compensation equal to the loss.

Contractors may seek to apply the prevention principle (where the employer’s action or inaction prevented or hindered the completion of works) in order to render the provision for liquidated damages unenforceable. The employer instead has to bear the burden of approving and apportioning the actual damages suffered as a result of the delay.

If delay is attributable to the employer, it will generally result in the contractor being entitled to an extension of time and, in certain circumstances, additional costs. 

Sub-clause 8.4(e) of the Red Book allows a contractor to claim an extension of time for any delay, impediment or prevention caused by an employer.

Extension of Time clauses are embedded into contracts on the notion that no party should gain from its own breach or default.

Force majeure is recognised in the UAE (Article 273 of the Civil Code) and is commonly found in most contracts, giving grounds for an extension of time. In order to succeed in an argument for force majeure, a party must normally prove:

  • the event was unforeseeable;
  • to carry on with the project would be impossible (not just harder economically); and
  • the event was unavoidable.

Where the contract is deemed impossible to perform, it will be automatically terminated.

It is also possible for partial or temporary impossibility, whereby only the impossible part of the contract will be extinguished.

The Abu Dhabi Court of Cassation (No 13/2010) stated that force majeure must be an external event that makes performance of obligations absolutely impossible by all parties, not simply more burdensome.

In addition to contractual force majeure provisions, UAE law allows a court or arbitrator, after weighing up the interests of each party, to reduce a contractual obligation to a “reasonable level”, if all of the following apply:

  • there are “exceptional circumstances” of a public nature;
  • as a result of the exceptional circumstances, the obligation is “oppressive” (although not necessarily impossible to perform); and
  • the person with the obligation is threatened with “grave loss”.

Unforeseen conditions are usually dealt with under the contract.

In standard FIDIC contracts, it is a requirement that the contractor gives the employer notice should it encounter unforeseeable physical conditions. If there are delays as a result associated with the conditions, the contractor is entitled to an extension of time.

The Dubai Municipality Conditions of Contract for Works of Civil Engineering Construction places an imperative stance on the concept of foreseeability of physical conditions and whether they could have been anticipated.

Article 249 of the Civil Code covers exceptional events of a public nature that could not have been foreseen. These differ from force majeure in that it must render performance onerous and rather than termination, the court or arbitral tribunal can adjust and reduce the contractual obligations.

Contractual liability is usually capped in construction contracts at or near the contract price, depending on the nature of the work. There are some exclusions to the overall cap such as IP rights, death, personal injury and property damage.

Gross negligence is not defined in the Civil Code, but Article 383 of the Civil Code states: “(1) if that which is required of an obligor is... the exercise of care in the performance of his obligation, he shall have discharged that obligation if, in the performance thereof, he exercises all such care as the reasonable man would exercise, notwithstanding that the intended object is not achieved, unless there is an agreement or a provision of law to the contrary. (2) In all cases, the obligor shall remain liable for any fraud or gross negligence on his part.”. The wording indicates that if conduct goes beyond what a reasonable person would exercise, it may constitute gross negligence.

There are some clauses that can be included in a construction contract that are enforceable under UAE law. These include clauses that limit, cap or exclude liability for consequential losses, loss of production and loss of revenue.

There are certain statutory terms that cannot be excluded. These include:

  • Article 296 of the Civil Code – a provision entirely exempting a guilty party from liability;
  • where a party has committed a “serious fault”;
  • parties bound by strict decennial liability (see 3.11 Defects and Defects Liability Period); and
  • Article 390 Civil Code (see 5.3 Remedies in the Event of Delays).

Other than general Civil Code provisions, there is no statute providing for third-party rights. Instead, a third party may seek protection through collateral warranty agreements.

Indemnity clauses in construction contracts are characterised by the indemnifier assuming a primary responsibility for the adverse event covered by the clause and the indemnifier undertaking to hold the indemnified party harmless against the consequences of that event.

A subcontractor may be required to indemnify the contractor for damages to the extent that they are caused by a default on the part of the subcontractor.

Employers will generally require contractors to provide either or both of performance bonds and parent company guarantees. Performance bonds are where the issuer undertakes to pay if the contractor fails to meet its obligations. A parent company guarantee secures the performance of the contractor’s obligations.

Typically, it is the contractors who take out and maintain all-risks insurance. Responsibility for the insurance programme is a matter for pre-contract negotiation.

UAE federal law does not require any specific construction-related insurance to be taken out in respect of projects. However, the UAE Labour Law gives employees, or their families, compensation rights in the event of work-related death or disability. Therefore, although there is no UAE federal law requirement to take out workers’ compensation insurance, it is generally considered essential for contractors to ensure cover is in place.

In addition, various free zones may have their own regulations governing workers’ compensation insurance requirements.

Typical insurance policies featured in construction projects include: employer’s liability insurance; third-party liability insurance; and contractor’s all-risk insurance.

A construction project can only be terminated early by way of agreement or a court order. It is therefore usual to insert a clause allowing for termination if the contractor files for insolvency or is deemed to be insolvent.

A feature of the FIDIC standard form is the intention to produce a "fair and balanced" allocation of risk. Employers typically assume risk for the site condition, design and force majeure events, whereas the contractor assumes risk for inflation and labour.

Risks that are typically allocated between the parties include:

  • the volume of resources;
  • errors or inaccuracies in information provided to the contractor;
  • unforeseen ground conditions;
  • force majeure;
  • change in law;
  • delay;
  • performance guarantees;
  • indemnification;
  • insurance.

Contractual provisions regarding personnel are found in most, if not all, standard form construction contracts. By way of example, the 1999 FIDIC Red Book includes the following provisions requiring contractors to, in relation to its personnel:

  • pay a wage at a rate that is not less than that established in the industry;
  • provide housing and transport for employees;
  • provide onsite medical staff, first-aid facilities, sick bay and ambulance services at all times; and
  • put in place necessary welfare and hygiene requirements to prevent epidemics.

Additionally, local labour laws apply to construction workers that, in the UAE, include the following. 

  • Working hours – employees are not permitted to work more than eight hours a day and 48 hours per week unless they hold management or supervisory positions.
  • Overtime – overtime is permitted but should not exceed more than two hours per day (unless necessary to prevent substantial loss or serious accident). Employees are entitled to an additional 25% of their hourly wage, increasing to 50% between 9pm and 4am. 
  • Emiratisation – the Emiratisation policy encourages the employment of UAE nationals. In the event of non-availability of national workers, first preference must be given to Arab nationals, followed by nationals of other countries. 
  • Public holiday – all employees are entitled to all public holidays as applicable to the private sector as announced by the UAE government.

Subcontracting is common in the UAE construction industry.

Right to Subcontract

The Civil Code allows the main contractor to subcontract all or part of the works to a third party, unless the contract between the employer and contractor prohibits or restricts subcontracting or the nature of the works requires the contractor to carry out the works itself (Article 890(1) of the Civil Code). It is important to note the general right under UAE law to subcontract, unless it is specifically restricted under the contract. Clear and careful contractual drafting on subcontracting is, therefore, required for construction contracts in the UAE.

It is common to see limitations on subcontracting all of the works. For example, clause 4.4 of the FIDIC Red Book 1999 provides that a contractor shall not subcontract the whole of the works. In addition, contracts will generally require the employer’s prior written consent for subcontracting part of the works. This standard provision may be caveated with the wording “such consent not to be unreasonably withheld” and/or a list of approved subcontractors that do not require prior consent and/or an agreed subcontract value threshold, beneath which no consent is required.

Contractor’s Liability

The general position is that the main contractor will continue to be liable for performance of the contract, even if it subcontracts all or part of the works (Article 890(2) of the Civil Code). This provision was tested in the Court of Cassation (Case No 266/2008), where the court held that, if a subcontractor is selected (ie, nominated) by an employer, the employer will be liable for any delay in the subcontracted part of the contract if it can be proven that the main contractor was not liable for any such delay. This case appears to be a one-off and the court did not outline the grounds for departing from the Civil Code. Accordingly (and noting that cassation cases hold persuasive but not precedent value), contractors are generally held to be liable to the employer for performance of all of the works, notwithstanding any subcontract (including nominated subcontracts).

Subcontracts in the UAE often contain the onerous payment terms, known as “pay when paid” or “pay if paid” clauses, which, as the names suggest, limit the contractor’s obligation to pay a subcontractor to “when” or “if” it is paid by the employer. Such clauses, when properly drafted, are generally enforceable under UAE law.

Employer’s Liability

As there is no direct contractual relationship between the employer and the subcontractor, the employer has no obligations to the subcontractor – and a subcontractor cannot compel an employer to pay it. Article 891 of the Civil Code provides that the subcontractor may not claim from the employer any sums due to the main contractor, unless it was assigned by the main contractor to do so. The flipside to this position is that the employer has no contractual entitlement to claim against a subcontractor for delayed or defective work. This can be addressed, of course, by an employer requiring its contractor to procure that any (or specific) subcontractor(s) provide a collateral warranty in favour of the employer.

Generally, the ownership of any intellectual property in construction contracts is contained in the contractual terms between the parties. 

Typically, construction contracts will require the designer of any intellectual property to grant the right to use the design in order to perform the contract. Without such a clause, the contractor will not be legally entitled to use the designs. A common approach to protect all parties is to insert a defined term of "Design Documents" in construction contracts and include designs, drawings, models, calculations, images, reports etc that are produced by the consultant or contractor. Any such clause should make clear that use of the Design Documents is strictly limited to performance of the contract in question.

Additionally, the contract should outline the rights for use of "Background IP", which considers the rights or documentation that the designer used to create the Design Documents. This separate right needs to be protected so the individual designer may use their own work and ideas on any future projects. It would be the responsibility of the designer in question to protect their designs in accordance with the local copyright laws, which reserve a set of rights to ensure that designers are attributed in their designs; do not receive any false attributions; and protects the moral rights of creators to be afforded "respect" in each of their given designs.

One way in which parties are able to de-risk IP related liabilities is through the use of indemnities by which one party may hold another harmless and indemnify it against any liability resulting from an IP infringement. It is commonplace, by way of example, for a designer to indemnify the employer for any liability that the employer incurs if the Design Documents infringe the intellectual property rights of a third party. There are a number of factors to consider when drafting these indemnities – the most common area of contention is if there is a limit on the liability, or whether such liability is expressly excluded from any cap that may be agreed in the contract.

In the UAE, remedies for breach of a construction contract are generally in the form of:

  • direct (and often, actual) losses; and/or
  • contractual damages; and/or
  • interim orders.

The starting principle under UAE law is that damages will only be awarded by the court if it is no longer possible for the underlying obligation to be performed. If the breach of contract is capable of remedy, the court may opt to order specific performance such as recommencing building works (Article 386 of the Civil Code).

Damages will likely be awarded where specific performance becomes impossible and the parties affected can prove they have suffered actual losses as a result of the material breach of contract. UAE law does not formally recognise an express duty of mitigation but courts usually expect the injured party to have taken reasonable steps to mitigate, or reduce, their losses arising from a breach. Damages can be reduced if this can be shown not to be the case.

Parties to a construction contract must also be aware of the decennial liability imposed at law (Article 880 of the UAE Civil Code). Decennial liability is, put simply, a ten-year liability period imposed upon contractors, engineers and architects (ie designers) as a matter of UAE law. It is a strict, no-fault, liability relating to any building or other fixed installations with an intended installation life of ten years or more. 

Contractors and designers are jointly liable to pay compensation to an employer for:

  • any total or partial collapse of the building they have constructed or installation they have erected; and/or
  • any defect that threatens the stability or safety of the building.

The fact that decennial liability is a strict, no-fault liability means that, in practice, no proof of negligence or fault is required for a claim under the liability to be made. Furthermore, Article 880 is a mandatory provision of law and it is not possible for parties to contract out of or limit this provision.

It is reasonably common in the UAE for contracts to limit the remedies available to parties pursuant to that contract. Article 390(1) of the Civil Code provides that “contracting parties may fix the amount of compensation in advance by making a provision in the contract” – this provides the legal basis for contractual clauses that seek to limit liability.

The three most common ways to restrict liability are the following.

  • Contractually stipulated liability caps:
    1. A simple way to limit liability is to restrict the total monetary amount the party may claim for a breach of contract.
    2. There is no specific way set out at law to calculate this cap but contracting parties may look at the value of the contract or professional indemnity insurance as a basis and negotiate from there.
    3. Parties may need to be careful when deciding the cap – if the agreed amount does not cover the damage sustained, the aggrieved party may seek to apply to the Dubai Courts to strike out the clause, in favour of damages that reflect actual losses.
  • Excluding indirect and consequential losses:
    1. Damages for consequential and indirect losses are a rarity in the UAE and can be difficult to enforce against. However, in the interests of conflict avoidance on this point, it is advisable to include an express contractual clause that excludes liability for indirect and consequential losses and clearly define what this means. 
  • Liquidated damages:
    1. It is common for construction contracts to provide that specific remedies apply in certain circumstances, such as in respect of liquidated damages in the event of delay and/or failure to satisfy certain performance criteria. 
    2. Such liquidated damages will typically be limited to 10–20% of the contract price and be stated to be exclusive remedy for that specific breach (ie delay or performance shortfall) (see 9.3 Sole Remedy Clauses). 
    3. If there are both delay and performance liquidated damages, then there will usually be an overall cap for liquidated damages, typically between 15-30% of the contract price.
    4. The contractor’s total liability under a construction contract in the UAE is typically limited to 100% of the contract price.

Exclusive remedy clauses, also known as sole remedy clauses, are common in construction contracts but are often the subject of disputes.

It is usual for construction contracts to state that specific remedies will apply in particular circumstances, for example liquidated damages in the event of a delay. Given the multitude of the obligations that a contractor has, it is unlikely that the contract would specify the remedy for every possible breach. As a result, exclusive remedy clauses may be able to provide some certainty and limit a contractor’s liability.

However, it is arguable that exclusive remedy clauses are not enforceable under UAE law as they may be viewed as contravening mandatory provisions of the Civil Code.

For example, Article 106(2) of the Civil Code provides that it is unlawful to exercise a contractual right if “the expected benefits are not commensurate with the prejudice sustained by other persons”.

Similarly, Article 390(2) states that the “judge may in all cases, at the request of one of the parties, amend such an agreement in order to make the amount assessed equal to the prejudice. Any agreement to the contrary is void”.  Arguably, a party that is deprived of compensation as a result of an exclusive remedy clause could seek protection under Article 390(2) and claim damages.

Article 878 appears to contradict exclusive remedy clauses entirely and provides that the “contractor shall warrant against whatever prejudice or loss resulting from his act and work, regardless of whether it was caused by his trespassing or negligence”. Even if the contract does include an exclusive remedy clause, the employer may be able to claim under this provision of the Civil Code.

Nevertheless, it is not at all certain that the UAE Courts would strike out an exclusive remedy clause. Therefore, neither employers nor contractors should be complacent in their approach and should carefully consider the allocation of risk prior to agreeing to their inclusion in construction contracts. 

Contractual clauses that exclude claims for loss of profit, loss of any contract or indirect or consequential loss or damage, are generally enforceable under UAE law.

There are, however, certain kinds of damages that can not be excluded in construction contracts, including:

  • personal harm, injury or death;
  • criminal liability;
  • a tort, including negligence;
  • liability for fraud or “gross error”;
  • decennial liability, which covers the total or partial collapse of a building and/or any defects that affect the stability or safety of the structure within ten years of delivery of the works; and
  • personal injury or death.

It should be noted that there does not appear to be an accepted definition of “consequential loss” in the Civil Code but liability for any consequential loss may only be found if the individual party acted deliberately or wrongfully and that their actions can be directly linked to this loss. 

To avoid a debate as to whether or not a loss is consequential, parties should ensure the definitions used in the contract is clear. Where contracting parties have expressly referred to consequential loss in an exclusion of liability clause, and clearly defined what the term encompasses, that definition is likely to be accepted by a court or tribunal applying UAE law unless it is considered unlawful or unfair. In the event of uncertainty or lack of clear definition, the UAE Court will need to ascertain the intention of the parties; this is a subjective test and could lead to an uncertain outcome. 

Retention

Retention rights of the employer are common in the UAE.  Typically, the employer shall be entitled to retain up to 10% of each interim payment, up to a maximum of 10% of the contract price: 5% of the retention money is usually released to the contractor on the employer’s taking over of the works and the remaining 5% on expiry of the defects notification period.  Sometimes, a retention bond for the value of 5% of the retention money can be provided to the employer on taking over, in lieu of the employer retaining 5% during the defects liability period. 

Suspension

The UAE Civil Code does not expressly recognise the specific concept of suspension but Article 247 of the Civil Code recognises that a party can refuse to carry out its obligations if the counterparty is not performing under the contract, for example, if payment is withheld or deadlines are not met. 

Parties may need to be careful, however, given that treating the contract as suspended could lead to allegations that the party is trying to terminate the contract in whole. This is an important distinction, particularly in light of Article 892 of the Civil Code, which states that contracts may only be terminated in the following circumstances:

  • completion of all the agreed works or services;
  • mutual consent of both parties; or
  • court order.

Completion of the contract and a court order are fairly self-explanatory, but it should be noted that obtaining a court order may be a lengthy (and costly) process. Therefore, an easier way to allow for suspension of a contract is to ensure this right is carefully drafted into the contract in a manner that may serve to evidence mutual consent between the parties. 

Construction disputes in the UAE are primarily resolved through litigation, arbitration or negotiations.

The forum under which disputes are resolved is a matter to be agreed by the parties to a construction contract, subject to some statutory requirements. For example, parties to a construction contract may elect a foreign governing law unless the contracts:

  • relate to property and projects located within the UAE or the contract; or
  • are entered into with a governmental or quasi-governmental body of the UAE.

Construction disputes may be brought in either the onshore courts or in the courts of the DIFC or ADGM, depending on the forum and choice of law agreed to by the parties in the contract.

The onshore Court of First Instance does not have a specialist construction division, so matters are referred to the commercial division. The onshore system relies heavily on the appointment of experts, so it is likely that an expert will be appointed to consider the evidence and determine construction disputes; more so in complex matters that require in-depth technical knowledge.

The DIFC Court set up a specialist Technology and Construction Division in 2017, which draws on specialist, industry-specific rules and common-law trained judges to enable the fact-track resolution of cases.

Arbitration is the predominant method of resolving construction disputes in the UAE.

As of March 2022, the main locally based arbitration centres in the UAE are:

  • the Dubai International Arbitration Centre;
  • the ICC (which has a satellite office based in the ADGM);
  • the Abu Dhabi Commercial, Conciliation and Arbitration Centre; and
  • the International Islamic Centre for Reconciliation and Arbitration.

Agreements to arbitrate disputes seated in onshore UAE are governed by the Federal Arbitration Law, which is based on the UNCITRAL Model Law. The default language for arbitrations seated in the UAE is Arabic, so parties should make sure to specify in contracts if they wish to deviate from this non-mandatory provision.

The UAE Arbitration Law specifies the grounds for challenging an award including the absence of an agreement to arbitrate; lack of capacity to have entered an agreement to arbitrate; failure of the tribunal to apply the governing law; or circumstances where the award has been rendered is in conflict with “public order and morality”. 

Under UAE law, there is no statutory mechanism or requirement for other means of alternative dispute resolution such as mediation. However, mediation has certainly become increasingly popular in recent years and is recognised as matching the sharia principles of conciliation.

The Dubai, DIFC and ADGM courts have recently introduced court-referred mediation, which contains separate rules, while the UAE has joined the Singapore Convention on Mediation, which provides a framework for the enforcement of international settlement agreements that result from mediation.

Norton Rose Fulbright (Middle East) LLP

4th Floor
Gate Precinct Building 3
Dubai International Financial Centre
PO Box 103747
Dubai
United Arab Emirates

+971 4 369 6310

+971 4 369 6350

Kerry.Schultz@nortonrosefulbright.com www.nortonrosefulbright.com/en
Author Business Card

Trends and Developments


Authors



Norton Rose Fulbright has a team of Middle East construction lawyers who offer comprehensive contentious and non-contentious legal advice to clients throughout the finance, development, construction and engineering process of construction projects. It acts for contractors and specialist contractors, major developers, project companies and sponsors, investment funds, consultants, government entities and financiers lending to projects. Norton Rose Fulbright's construction lawyers offer its clients a full service throughout the life cycle of a project, from initial project inception and planning, through tendering, tender evaluation, contract award, construction and operation. Its team has an in-depth knowledge of the standard form agreements commonly used in the region (in particular the FIDIC forms), having amended and negotiated these contracts many times on numerous projects across the Gulf. Its construction specialists advise clients across many sectors, including real estate (residential, retail, commercial), leisure and hospitality, education and insurance.

Trends in the Construction Sector in the UAE 

The construction sector in the UAE has seen a positive uptick following the country’s easing of COVID-19-related restrictions, and is expected to have a value of USD111.2 billion by 2025 – an increase of 33.1% since 2020.

Growth in this period is in part driven by the UAE’s development agenda to strengthen industrial, transport and energy infrastructure. The Project of 50, announced in September 2021, includes a series of developmental and economic projects that aim to accelerate the UAE’s development and transform it into a comprehensive hub with the clear goal of attracting AED550 billion (USD149.8 billion) in foreign direct investment over the next nine years.

Over the past year, activity in the commercial and tourism sector has boomed, driven in part by Expo 2020 and the UAE’s easing of COVID-19 restrictions, which attracted tourists and investors from around the world. It is no surprise that last year Dubai International Airport reclaimed its title as the busiest global airport, which has provided developers with increased and renewed confidence to invest in large-scale tourism projects including:

  • the USD5 billion Heart of Europe project, which will span 4 km of the Dubai coastline and accommodate up to 16,000 tourists;
  • the USD160 million Kempinski Floating Palace, the world’s first floating luxury hotel;
  • the USD1 billion Guggenheim Museum in Abu Dhabi; and
  • the multibillion-dollar development of an integrated resort in Marjan Island, Ras al-Khaimah. 

The UAE government is keen to diversify the economy with greater investment in industrial and residential construction. There are a number of high-value industrial projects planned, including the UAE Railway Programme, a blue-ammonia production facility and an Amazon logistics centre in Abu Dhabi. 

Similarly, the UAE government is hoping that improved visa rules will attract high net worth individuals who are keen to invest in property, particularly in Dubai and Abu Dhabi. Property prices in Dubai recorded growth in 2021 and the best-performing subsector was high-end real estate, with one property consultant reporting that prices increased by 44% in 2021. This has clearly been noted by the key developers in the industry, who are continuing to announce new residential developments including the Pulse Beachfront Villa Community; the Louvre Abu Dhabi Residences; and, recently, the Lamborghini-branded villas in the Dubai Hills Estate.

Public-private partnerships (PPPs) have also become vital for the UAE government to deliver large projects and develop infrastructure across the country. The PPP model has enabled the UAE government to deliver essential strategic projects in a cost-effective manner, without compromising on quality. Mohammed Al Gergawi, Minister of Cabinet Affairs, has championed PPP projects in the UAE, saying that the road to 2071 (in reference to the UAE Centennial 2071 Vision) involves the “private sector, under an integrated system, and a series of strategic projects are being rolled out under the action plan to bolster the country's key and emerging sectors”.

The emirates of Abu Dhabi and Dubai, in particular, have accelerated the implementation of PPP projects across various sectors including healthcare, transport, infrastructure and urban development. In 2021, the Dubai Department of Finance hosted the first Dubai International PPP Conference, under the umbrella of Expo 2020, and announced new PPP projects worth USD6.81 billion. This followed the Abu Dhabi Investment Office (ADIO) announcement in February 2020 that projects worth USD2.72 billion would be introduced through the PPP model. Abu Dhabi, in particular, continues to tender PPP projects in the power, water and clean-energy sectors.

To date, USD7.6 billion has been invested in four of the top five PPP projects across the UAE, which includes the Mirfa Seawater Treatment & Transportation Facility and Al Dhafra Solar Photovoltaic (PV) Independent Power Producer (IPP) project in Abu Dhabi and Phase 4 of the Mohammed Bin Rashid Al Maktoum Solar Park in Dubai. The government of Dubai has 29 active projects across five strategic sectors and continues to invite private sector companies to tender for contracts.

Following COP 22, it is clear that PPP projects will be driven by the need to deliver sustainable solutions. The UAE is keen to set a positive example and lead the way in delivering a sustainable economy on a global scale, evidenced by its own commitments to a low-carbon future. Private companies bidding for tenders therefore need to be able to demonstrate that they will be able to deliver environmentally friendly projects in a value-for-money manner which, ultimately, delivers low cost for consumers.

Trends in Construction Disputes in the UAE 

Value and number

The average value of a construction dispute continues to rise. According to Arcadis’ 2021 Global Construction Disputes Report, the average value of a construction dispute in the Middle East is USD86 million.

Not only has there been an increase in the value of disputes, the number of claims that are referred to arbitration and/or litigation is also on the rise. By way of illustration, the number construction cases before the DIFC’s Technology and Construction Court have substantively increased over recent years and this is expected to continue. Claim values increased by 72% from 2019 to 2020, reaching USD2.7 billion and the number of cases registered increased by 200% in 2021.

Types of disputes

The majority of construction disputes arise from traditional claims by contractors for time and money. Irrespective of the nature of the project (eg residential/commercial/transport/utilities), the manner in which these claims are framed have clearly been affected by the COVID-19 pandemic with contractors seeking time (and potentially money) due to the impact of changes in law and force majeure. A number of high-profile insolvencies (such as Arabtec and NMC) have had a ripple effect on a number of projects, which has led to further proceedings in the DIFC, ADGM and onshore UAE. The impact of the COVID-19 pandemic, the Russia/Ukraine crisis and the resulting supply chain crisis have precipitated matters – faced with a challenging economic outlook, employers appear more willing to call on demand bonds.

Dispute resolution methods

While historically, mediation has been an integral part of the Arab culture, parties have resisted engaging in structured mediation and have demonstrated a preference for arbitration and litigation (with some utilising Dispute Adjudication Boards). We have seen a developing trend over the past several years of parties opting for meditations (both institutional and ad hoc), with even more parties agreeing to refer disputes to ad hoc expert determination. In the face of tight financial constraints and a need to mitigate losses, parties are opting for the less costly and quicker alternatives to traditional forms of dispute resolution such as arbitration and litigation.

In this regard, in recent times the UAE has instituted a number of measures to encourage parties to resolve their disputes via mediation or other means outside of the court process. In 2012, the Centre for Amicable Resolution of Disputes was opened as a joint venture between Dubai Courts and the Department of Economic Development, with the aim of facilitating mediation as an alternative to parties engaged in court disputes.

More recently in March 2022, the UAE announced plans to join the Singapore Convention on Mediation. If the UAE does accede to the convention, it will facilitate will enforcement of UAE-based settlements abroad among member nations. The Singapore Convention has been warmly received in the Gulf, with Qatar and Saudi Arabia also joining in recent years, and will provide parties to disputes with increased confidence to engage in mediation over the coming years.

Further, in April 2021, the UAE enacted Federal Law No 6 of 2021, ”On Mediation for the Settlement of Civil and Commercial Disputes”, which instituted a formal mediation framework in the UAE.

In spite of the increased uptake for alternative methods of dispute resolution, high-valued disputes continue to be referred to arbitration. Key to this trend is that parties are now increasingly able to avail third-party litigation funding in this jurisdiction. While the market for litigation funding in the UAE has not developed as rapidly as in other jurisdictions, primarily due to perceived uncertainties, third-party litigation funders are now actively pursuing opportunities here. This change has no doubt been as a result of a number of progressive developments in the UAE, namely the introduction of the Federal Arbitration Law No 6 of 2018.

DIAC 2022 Rules (2022 Rules)

As of 21 March 2022, the Dubai International Arbitration Centre’s (“DIAC”) new Arbitration Rules came into effect and will govern all arbitrations submitted to the centre on or after that date. The 2022 Rules are particularly significant as DIAC assumes its position as the sole arbitration centre in Dubai following the abolition of other arbitration centres, most prominently the DIFC-LCIA Arbitration Centre, pursuant to Decree No 31 of 2021 (the “Decree”). The decree also founded a new DIAC Arbitration Court (the “Arbitration Court”) in anticipation of the 2022 Rules.

This is the first time that DIAC has updated its rules since 2007. The 2022 Rules are an enormous step forward. They reflect a modern approach to arbitration practice with an emphasis on party autonomy, flexibility, procedural integrity and efficiency. The opportunity has been taken to address some ambiguities and difficulties arising under the 2007 DIAC Rules, such as providing the tribunal with explicit power to award legal and other arbitration costs. Updates in relation to hot topics such as third-party funding of parties, virtual hearings and remote practice reflect a modern view of arbitral best practice. New provisions relating to expedited proceedings, the joinder of parties, and the consolidation of claims under different contracts provide for greater procedural flexibility and match similar innovations in the equivalent ICC and LCIA arbitration rules.

Norton Rose Fulbright (Middle East) LLP

4th Floor
Gate Precinct Building 3
Dubai International Financial Centre
PO Box 103747
Dubai
United Arab Emirates

+971 4 369 6310

+971 4 369 6350

Kerry.Schultz@nortonrosefulbright.com www.nortonrosefulbright.com/en
Author Business Card

Law and Practice

Authors



Norton Rose Fulbright has a team of Middle East construction lawyers who offer comprehensive contentious and non-contentious legal advice to clients throughout the finance, development, construction and engineering process of construction projects. It acts for contractors and specialist contractors, major developers, project companies and sponsors, investment funds, consultants, government entities and financiers lending to projects. Norton Rose Fulbright's construction lawyers offer its clients a full service throughout the life cycle of a project, from initial project inception and planning, through tendering, tender evaluation, contract award, construction and operation. Its team has an in-depth knowledge of the standard form agreements commonly used in the region (in particular the FIDIC forms), having amended and negotiated these contracts many times on numerous projects across the Gulf. Its construction specialists advise clients across many sectors, including real estate (residential, retail, commercial), leisure and hospitality, education and insurance.

Trends and Development

Authors



Norton Rose Fulbright has a team of Middle East construction lawyers who offer comprehensive contentious and non-contentious legal advice to clients throughout the finance, development, construction and engineering process of construction projects. It acts for contractors and specialist contractors, major developers, project companies and sponsors, investment funds, consultants, government entities and financiers lending to projects. Norton Rose Fulbright's construction lawyers offer its clients a full service throughout the life cycle of a project, from initial project inception and planning, through tendering, tender evaluation, contract award, construction and operation. Its team has an in-depth knowledge of the standard form agreements commonly used in the region (in particular the FIDIC forms), having amended and negotiated these contracts many times on numerous projects across the Gulf. Its construction specialists advise clients across many sectors, including real estate (residential, retail, commercial), leisure and hospitality, education and insurance.

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