In the UAE, all commercial activities (including building or construction activities) are regulated by Federal Law No 18 of 1993, also known as the UAE Commercial Transaction Law or the UAE Commercial Code.

In addition to the Federal Law, each Emirate has its own laws and regulations that regulate the construction sector. For example, Abu Dhabi has specific laws regarding building and construction, such as the Building Law No 4 of 1983.

Similarly, in Dubai there are various regulations, guidelines and circulars issued by the Dubai Municipality, such as Administrative Decision No 125 of 2001 that provides a detailed technical discourse on building regulation and standards.

In addition, the free zones in the UAE have special regulations for ascertaining the building standards alongside environment, health and safety guidelines and other technical conditions.

Other laws that are particularly relevant for the construction industry are laws that govern employment matters, including the labour law.

Public federal tenders (ie, those by the federal UAE government) are regulated by Federal Regulation of Conditions of Purchases, Tenders and Contracts, Financial Order No 16 of 1975 (“Federal Public Tenders Law”). For federal Public Private Partnerships (PPPs), the procedures and provisions are defined in the manual first published under UAE Cabinet Resolution 1/1 of 2017. In addition to the federal procurement laws, procurement contracts with the Abu Dhabi and Dubai governments are regulated by Abu Dhabi Law No 2 of 2019 and Dubai Law No 22 of 2015.

In the UAE, it is common practice for parties to adopt the International Federation of Consulting Engineers (FIDIC) forms of contract. The predominant forms are those from the first editions (published in 1999), including:

• 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).

The FIDIC forms have significant influence on construction practices. It is common for developers to use FIDIC as guidance to tailor bespoke contractual provisions.

Recently, there has been a marked shift away from the FIDIC Red Book (characterised by very limited design obligations on the Contractor, if any at all) to more design responsibility for the Contractor through design and build projects. As for large-scale and mega projects, the recent trend has also been towards tailored bespoke contracts, including PPPs.

For the procurement of construction projects, the Abu Dhabi government mandates the use of the Abu Dhabi Government Conditions of Contract. These Abu Dhabi government standard form contracts were first introduced in 2007, and are based on the 1999 FIDIC Red and Yellow books.

The construction industry in the UAE is a specialised field. Established developers – who have significant experience in construction projects – are the typical employer for large construction contracts for commercial properties. For smaller projects, the employer is more likely to be a private landowner than a commercial or institutional developer. As for public utility or transportation projects, the employer is typically a governmental or semi-governmental entity.

Employers are responsible for ensuring that planning permits and building permits are obtained at the appropriate time, as well as for ensuring the health and safety of their employees, particularly for work-related injuries.

The rights and obligations of the employer include the obligations to issue taking-over certificates, to comply with their payment obligations, to consent to additional works and variations and to fairly remunerate the contractor, as well as the right to terminate the construction contract (Articles 884 to 889 of the UAE Civil Code).

The corporate identity of the contractor is often determined by the nature of the construction project. Prior to 2020, UAE law placed significant restrictions on the corporate forms accessible to non-UAE nationals for commercial and civil activities. The recent massive liberalisation of UAE corporate laws grants contractors and subcontractors who are not UAE nationals more flexibility in adopting the corporate form most appropriate for their business.

While local UAE companies are the typical contractor for domestic, small to medium-sized projects, international projects are often undertaken by joint ventures (JVs) or special purpose vehicles (SPVs). The JV or SPV will typically include one or more international companies, together with a local company. Sometimes, contractors form a consortium to bid and undertake projects together. 

Given that contractors, subcontractors and employers have separate contractual arrangements with each other, privity of contracts dictates that subcontractors are generally not able to seek compensation from employers directly. Back-to-back provisions are sometimes inserted in subcontracts, which makes the contractor’s obligation to pay the subcontractor conditional upon the contractor receiving payment from the employer.

Similar to what is set out in 2.2 The Contractor, the kind of corporate entity that acts as a subcontractor depends on the nature of the project, although it is more likely for locally incorporated companies (rather than, for example, a branch office of an international company) to act as subcontractors on international contracts.

Subcontracting is a highly prevalent practice in the UAE. Article 890(1) of the UAE Civil Transactions Code allows subcontracting without the permission of the employer, although in practice the main contract would give the employer a contractual right to levy some control over any subcontracting or to impose restrictions on it.

In principle, subcontractors are not liable to employers directly. In practice, employers may require subcontractors to provide a collateral warranty for any defects in the works undertaken by the subcontractor. In any event, and despite the collateral warranty, the contractor remains responsible towards the employer for the works of the subcontractor (under Article 890(2) of the Civil Transactions Code). Thus, the main contractor generally remains liable for the timely completion and quality of the subcontracted works, although this liability may be contractually limited.

In the UAE, both local and international banks play an active role in the financing of projects. One specificity of the UAE construction market is that Islamic finance structures are at times incorporated, which provide another alternative to conventional financing.

The size of a construction project will usually determine its financing. For large-scale or mega projects, project finance is the default through international banks or a syndicate of lenders. Small to medium-scale projects are generally financed by lenders on a corporate or full recourse basis.

Government and public authority projects in the UAE – whether federal or emirate-specific – are generally financed by the public body itself, although there has been a recent increase in public-private investment schemes in recent years as part of a general policy to incentivise and encourage investment.

While the financiers’ role is limited to providing finance for the construction project, the financing contract may give the financier a right to oversee and confirm future contracts concluded for the project. For example, the contractor may be contractually required to obtain approval from the financiers for any subcontractors, which gives financiers an opportunity to conduct due diligence over the subcontractor and the subcontractors’ finances, including bonding and discounting of the payment certificate.

A description of the works will be provided by the employer (for main contracts) or by the contractor (for subcontracted works). This will define the scope of works. For works designed by the employer, the specifications and drawings, as well as inter alia programme and schedule, bills of quantities (BOQ), soil investigation report and milestones, will be provided by the employer, although the contractor may propose alternative value-engineering solutions in its tender. For works not designed by the employer, the employer provides the engineering requirements for the project, in response to which the contractors will include developed specifications and drawings in their tender.

Typically, the process to be followed for variations, including the price for variations, is regulated by the contract in place. Typically, variations may be requested by either the employer or the contractor, and – if accepted – will create entitlements to additional time and money. Additionally, where the variations are necessary because of a party’s error, delay or default, the erring party is not entitled to additional time or money under the contract.

Generally, works are completed in accordance to the date stipulated in the contract (which may be subject to amendment). If variations result in time extensions for the completion of the works, there can be claims for prolongations costs, claims for extension of time and claims for additional works.

Traditionally, and very commonly still, the employer will engage a design consultant, and the contractor’s scope of work would be limited to executing the design prepared for the employer.

More recently, there has been some shift towards design and build contracts, where the contractor is responsible for design of some or all of the works as specified and required by the employer. When the contractor undertakes design works, the contractor would generally hold a professional indemnity insurance.

It should be noted that even when the contractor does not undertake any design work, the UAE’s mandatory decennial liability provision (Article 880 UAE Civil Code) places joint liability on the contractor and designer for partial or total collapse of the building. The contractor’s decennial liability remains in place even when the design was undertaken by a third party. The impact of the decennial liability provision is that the contract always bears a minimum responsibility for the design with respect to collapse.

Finally, the contractor is always responsible for the design of the temporary works (such as scaffolding).

The responsibilities of each party are determined under the contract. As is typical for construction contracts, the employer is responsible for providing access to the site and providing payments to the contractor that (at least partially) fund the costs associated with executing the works. The engineer/consultant will supervise the contractors’ execution of the project, and may also provide the design. The contractor will execute the construction works as per the contract requirements.

The employer is responsible for granting the contractor access to the site within the time required by the programme of the works. The employer is responsible for informing the contractor of the status of the site, including existing pollution and ground conditions. Once the site is under the custody of the contractor, the contractor is responsible for the site. When in possession of the site, the contractor is normally responsible for the maintenance of the site, health and safety measures, and the levels of on-site noise and pollution.

With respect to archaeological finds, the party (whether the contractor or the employer or subcontractor) who makes the discovery is responsible for reporting it to the authorities and informing the contractual parties to ensure that all works are halted until an investigation has taken place.

In general, construction projects in the UAE require a building permit issued by the municipality where the works will take place.

In order to obtain the building permit, the design of the building would first be approved by the relevant authorities (these permits would be obtained by the engineer). Once the permits have been obtained for the design of the works, the contractor is responsible for obtaining permits for the execution of the works, such as “No Objection Certificates” (NOC) from the appropriate agencies (for example, an environmental permit relating to the disposal of waste or permits from utility agencies for water and sewage lines).

Corrective works during the defect liability period are undertaken as per the division of works under the main contract and subcontract.

After the defects liability period expires, employers generally enter into contracts for ongoing maintenance services with specialised companies (particularly for elevators and air-conditioning systems).

The Employer is usually responsible for operation, finance and transfer functions. In the typical UAE construction contract, the contractor and subcontractor are generally not responsible for other functions in the construction process, although there may be exceptions for PPP projects or build, own, operate, transfer contracts.       

The required tests on completion of a construction project are specified in the contract.

Tests on completion are generally undertaken either by the main contractor or, in specialised areas, by third parties (for example, electrical or mechanical works such as commissioning and testing of the fire alarms, elevators and air conditioning systems).

Under the Red Book, the tests on completion are overseen by the engineer/consultant and must take place within 14 days following notification of the engineer/consultant. The contractor is responsible for remedying any defects before the taking-over certificate can be issued by the engineer/consultant.

Once the tests on completion are satisfactorily fulfilled and the taking-over certificate has been issued by the engineer/consultant, the contractor would invite the employer to take over the works.

Tacit takeover: In the absence of a taking-over certificate, if any part of the works are used by the employer, that part of the works is considered to have been taken over and the contractor’s liabilities relating to the possession of the site are transferred to the employer.

Additionally, after taking over, and pursuant to the contract, in most cases, a portion of the retention money is paid back to the contractor and the value of the performance bonds is usually reduced.

Once the works are taken over, the defects liability period commences, and is generally defined in the construction contract as between one to two years (although the duration may be extended for certain aspects of the works by contract).

For any defects discovered during the defects liability period, the contractor has an obligation to remedy these defects or complete outstanding works (including those referred to in the taking-over certificate) in a timely manner. Many construction contracts will provide that the contractor’s failure to comply with its obligations during the defects liability period will entitle calling the performance bonds.

As mentioned in 3.3 Design, the UAE’s mandatory decennial liability provision (Article 880 UAE Civil Code) places joint liability on the contractor and designer for partial or total collapse of the building.

The main types of contract payments are a fixed lump sum or remeasurement contract (where the value of works is calculated on the basis of a pre-determined price schedule or BOQ).

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

Advance payments and interim payments are highly prevalent in UAE construction contracts.

For government contracts, under Circular No 1 of 2019 issued by the Executive Council of the Emirate of Abu Dhabi, payments must be made within 30 days from the invoice. The circular also provides that in case of a dispute, the undisputed amounts must be paid within a 30-day mandated period.

Invoices are typically delivered in hard copies by the contractor to the employer, although some contracts adopt an electronic system (such as ACONEX) to streamline the exchange of documents, including invoices.

The contract documents will define the manner in which the contractor must arrange the planning.

The contract will specify the method through which the contractor develops its planning for the project and provides periodical updates. The use of project management and planning systems such as Oracle’s Primavera is frequently required in the contract. These systems streamline the process, as updates to the programme are entered by the contractor, thereby generating an updated periodical programme which is then shared with the employer.

When an event occurs that is likely to result in delays, the contractor is usually required under the contract to notify the employer of potential delays. The contractor’s notice of potential delay will include details of the expected quantitative impact of the delay on cost and time. The terms of the contract will specify how delays will be resolved, including defining and distinguishing between excusable and non-excusable delays.

This process also applies for time-related costs, where – following agreement on the entitlement to time-related costs – the quantum is determined by reference to specific rates defined in the contract or derived from the BOQ.

Construction contracts in the UAE typically provide that concurrent delays will create entitlements for time extensions, but not to the recovery of time-related costs.

For non-excusable delays caused by the employer, the contractor is entitled to extensions of time and recovery of time-related costs.

For non-excusable delays caused by the contractor, the remedies available to employers include liquidated damages, liquidation of the performance bond and termination of the contract.

The impacted party may also claim damages for breach of contract caused by delay.

Contracts in the UAE will typically define the procedure to be followed by the contractor for requesting time extensions. Requests are usually made by notice from the contractor, within a specific period from the occurrence of the event requiring a time extension. Contracts will usually characterise this notice as condition-precedent for the validity of the entitlement to an extension of time, although UAE courts have diverged in their interpretation of this: when the cause of delay is clearly imputable to the employer, courts or tribunals may consider granting EOT claims even when notice formalities in the contract were not adhered to.

Common reasons for an extension of time include adverse weather, variations to the works by the employer or difficulties encountered on site.

The defence of force majeure releases the obligor from its duty to perform its contractual obligations. However, obligations not affected by the force majeure clause survive and create entitlements in case of the obligor’s non-performance.

Force majeure is recognised under Article 273 of the UAE Civil Code. In order to succeed in an argument for force majeure, a party must normally prove:

• the unforeseeability of the force majeure event;
• the impossibility of performance (not just that performance would be economically more burdensome); and
• that the event was unavoidable and external to the obligor.

Force majeure mostly occurs due to temporary impossibility and the obligor is not fully absolved of its duty to perform. The performance of the obligation in question is suspended till the time the impossibility ceases to exist. However, if performance becomes permanently impossible the contract shall be automatically terminated pursuant to Article 273 of the Civil Code.

Since the UAE laws do not provide an exhaustive list of circumstances that qualify as force majeure, parties may choose to define the circumstances that fall within the ambit of force majeure in the construction contract.

Article 249 of the UAE Civil Code also sets out the relief available in case of an unforeseeable event. Courts and arbitration tribunals can adjust an onerous contractual obligation to a reasonable level if unforeseen exceptional circumstances of a public nature occur. In such a case, the debtor can seek termination of the contractual arrangement because the performance of the contractual obligation has become burdensome as a result of the unforeseeable event.

The risk for unseen circumstances is allocated under the contract. While under the FIDIC Red Book, this risk is borne by the employer, it is common for UAE construction contracts to shift this risk to the contractor.

Concepts of unforeseen circumstances are subject to an overriding mandatory legislation in the UAE as described in 6.1 Exclusion of Liability.

Although the concept of disruption is not expressly recognised under UAE law, general UAE law provisions that exist have assisted stakeholders to claim for extension of time pursuant to the contract, resulting in such claims often being formulated as breach of contract claims.

In order for such claims to be established, a basic claim for damages must be established.

A breach by the employer of its contractual obligations, a disrupting event must be the cause of the damage suffered by the contractor. The contractor must be able to establish its right to claim damages as a result of the employer’s disruption and also be able to quantify its claim. The damage should not be too remote and there should be a causal link between the breach and the damage suffered.

Decennial liability for partial or total collapse of the construction works cannot be excluded or amended. Liability for personal injuries or death, fraud, criminal acts or negligence also cannot be excluded.

The UAE Civil Code recognises the concept of misconduct and negligence, and ascribes legal consequences to them.

Under Article 383(1) of the UAE Civil Code, conduct gives rise to liability when it falls short of that “reasonable” under similar circumstances, while under Article 383(2) gross negligence or fraud always gives rise to liability.

Additionally, Article 296 of the UAE Civil Code exempts parties from avoiding liability for harmful acts.

UAE law recognises the validity of limitation of liability clauses for consequential loss or lost profits or income. 

However, UAE law does not generally recognise clauses that absolutely exclude a guilty party from liability, or where a serious fault has occurred. See also 6.1 Exclusion of Liability.

The contractor usually indemnifies the employer for losses incurred by third parties during the construction works. This is usually indemnified under the contractor’s third-party liability insurance.

UAE construction contracts frequently require insurance to safeguard the employer and the engineer from civil liabilities, including inter alia IP rights infringement, health, safety and environmental liabilities.

Under the typical UAE construction contract, the contractor’s performance is guaranteed by a performance bond issued by a bank.

Refer to 7.1 Indemnities for civil liabilities.

There is also insurance for the personnel/workforce of the engineer and contractor, for equipment as well as insurance for the completed works.

It is common for parties to insert a clause allowing for contract termination if the contractor or employer files for insolvency or is deemed to be insolvent.

Risk sharing between employers and contractors are a common feature in the construction industry in the UAE and the specific allocation of risk is defined in each construction contract. Economic and market conditions at the time of negotiation play an important role in the distribution of risk between the parties. 

Typically, employers bear the risk for the site when it is not in the contractor’s possession and the responsibility for site information provided to the contractor. In addition, the employer is responsible for providing accurate information regarding the scope and specifications of the works.

In turn, contractors are responsible for the construction works (which may in some cases be passed onto the subcontractor), and for occurrences on site during the time they are in possession of the site (which includes liability for injuries on site, as well as pollution and allowing other contractors such as third parties necessary access for completing their own works).

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 on-site 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.

Under UAE law, the contractor may subcontract all or part of the works, unless the parties have agreed otherwise by contract (Article 890(1) of the Civil Code). In the latter case, the employer’s prior consent is required, giving the employer the notice that works are to be executed by a subcontractor. In many instances, the contract will also require that the employer approve the subcontractor. See 2.2 The Contractor on back-to-back contracts.

Given that the contractor usually remains liable for the construction works (including the subcontracted works, under Article 890(2) of the Civil Code), indemnity clauses are included in subcontracting agreements to provide protection to the contractor against the subcontractor’s defaults.

Intellectual property rights (“IP Rights”) form an important part of the construction industry. The construction contracts in the UAE generally require the designer to provide the owner (ie, the party who is procuring the project), an express right to use the design produced by that designer, generally detailed in the definition of “Design Documents”. Additionally, the UAE copyright laws expressly state that ownership of the copyright in architectural design vests in the owner of the property, rather than the original author who created the architectural design (unless otherwise agreed). If agreed otherwise, the use of design documents is granted through licence agreements.

Usually, these contracts will also include an indemnity clause to indemnify the owner against any liability that the owner incurs in the event that the design documents infringe the intellectual property rights of a third party. In cases in which the designer does not hand over ownership but merely licence to the contractor or employer to use the design, exclusivity clauses are often included to prevent the designer from using the same design for other projects.

Often, third parties such as funders, purchasers and key tenants of a project are given access to the designs by the designer. It is common for designers in those cases to provide collateral warranties to the owner.

Under the principle of contractual freedom, parties to construction contracts are free to agree to remedies for breach in the contract, subject to mandatory legal provisions and public policy. For examples of remedies, see 5.3 Remedies in the Event of Delays.

In addition, the legal remedies for breach of contract are available (such as termination or damages).

Under the principle of contractual freedom in general, parties may determine compensation due for breach in advance, including providing for a limitation on the amount of compensation. This right is further expressly recognised under Article 390(1) of the UAE Civil Code. It is therefore common for parties in the UAE, involved in construction projects, to limit remedies, which typically is effectuated through liquidated provisions that cap the amount of compensation available.

However, it should be noted that under Article 390(2) of the UAE Civil Code, UAE courts or arbitral tribunals applying UAE law have discretion to adjust the amount payable to reflect the actual loss suffered, thereby annulling the contractual limitation of liability.

Parties must ensure that any contractual limitation of damages is reasonable, as unreasonable limitations would be struck down by the court, opening the door to the court’s discretionary interpretation of the actual losses sustained by a party. The right to legal recourse should incentivise parties to carefully consider contractual limitation provisions.

Sole and exclusive remedy clauses are frequently included in UAE construction contracts. The most common sole remedy clause is liquidated damages for the breach of certain obligations (for example, time for performance). In certain instances, the contract may require specific performance as an exclusive remedy.

General contract principles apply to determine the validity of such clauses, including the provisions on abuse of right (under Article 106 of the UAE Civil Code) and the legal requirement that compensation be equal to the damage sustained (under Article 390(2) of the UAE Civil Code).

Where a dispute arises in a construction contract including a sole remedy clause, the sole remedy clause will commonly become a contentious issue. Therefore, careful consideration should be given to sole remedy clauses under UAE law.

Contractual clauses that exclude claims for loss of profit, loss of future profits, or indirect or consequential loss are generally enforceable under UAE law, as long as they do not contravene mandatory laws or public policy.

There are, however, certain kinds of damages that cannot be excluded in construction contracts (see 6.1 Exclusion of Liability).

Retention rights of the employer are common in the UAE. Generally, 10% of each interim payment is retained by the employer, of which 5% is released once taking over is complete and the other 5% after the expiration of the defects liability period.

The UAE Civil Code does not expressly recognise the specific concept of suspension, although Article 247 of the Civil Code recognises mutual contractual obligation of each party to fulfil their contractual obligations, failing which, non-performance by one party is allowed pursuant to the legal construct. Given the uncertainty around the entitlement of suspension, parties often incorporate specific provision to that effect in their contract.

In accordance with Article 267 of the UAE Civil Code, a contract can be lawfully terminated in one of three ways:

• where the agreed works or services have been completed;
• rescission of the contract by mutual consent; or
• court order.

Contractual provisions incorporating Article 271 of the UAE allow termination for non-performance of mutual obligation by contracting parties.

Proper notification, either in accordance with the contract or under reasonable conditions, is necessary to give effect to termination of a contract.

In the UAE, construction disputes are adjudicated by UAE local courts (mainland), as well as the offshore courts in the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM).

Courts in the UAE have general jurisdiction over construction disputes when the conditions for personal and territorial jurisdiction are met. The UAE local courts will often appoint a construction and/or financial expert (from a list of accredited court experts) to examine the factual and technical issues.

The DIFC Courts have a specialist construction division for technology and construction disputes.

Other than court litigation (whether in mainland courts or free zone courts), arbitration is a very popular method for resolving construction disputes. Arbitration in the UAE is governed by Federal Law (6) of 2018.

The arbitration institutions in the UAE include:

• Dubai International Arbitration Centre (DIAC);
• Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) ;
• ICC (based in the ADGM); and
• Saudi Centre for Commercial Arbitration (based in Dubai).

Although historically less popular, Dispute Adjudication Boards (DAB) have gained some popularity of late. While decisions of DAB boards are not automatically enforceable, they are considered to have persuasive authority by UAE courts and tribunals.

In addition, mediation is also gaining traction with the enactment in April 2021 of Federal Law No 6 of 2021, on Mediation for the Settlement of Civil and Commercial Disputes and the UAE’s ratification of the Singapore Convention on Mediation in 2022.