This country-specific Q&A provides an overview to construction law in UAE.
It will cover termination requirements and obligations, permits and licence, procurement, financing and security, and disputes as well as insight and opinion on challenges and opportunities.
This Q&A is part of the global guide to Construction. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/construction/
Is your jurisdiction a common law or civil law jurisdiction?
What are the key statutory/legislative obligations relevant to construction and engineering projects?
The Civil Code (promulgated by Federal Law No.5 of 1985) underpins and governs contracts in the UAE, including construction and engineering contracts. Articles 872 – 890 of the Civil Code deal with ‘Muqawala’ contracts (a contract to make a thing or perform a task). Parties entering into a construction contract must comply with the provisions set out in these articles which include provisions relating to fair remuneration, subcontracting and termination.
Article 880 of the Civil Code deals with ‘Decennial Liability’. This imposes mandatory joint liability on the contractor and the supervising architect for a period of ten years following “delivery of the work” for any “total or partial collapse of the building” and any “defect which threatens the stability or safety of the building”. This liability is not extinguished even if the defect arises out of a “defect in the land itself” or the Employer “consented to the construction of the defective buildings or installations”. Parties cannot contract out of this liability.
Are there any specific requirements that parties should be aware of in relation to: (a) Health and safety; (b) Environmental; (c) Planning; (d) Employment; and (e) Anti-corruption and bribery.
(a) Health and safety;
Federal Law No.8 of 1980 contains an ‘Industrial Safety, Preventative Measures, Health and Social Care for Workers’ section which requires the Employer to ensure the health and safety of their employees, including adopting “all the safety measures prescribed by the Ministry of Labour and Social Affairs”.
Individual Emirates may also have specific regulations that govern the health and safety of labourers; indeed Abu Dhabi and Dubai have published guidelines intended to improve health and safety standards for labourers in the construction sector. In 2016 Abu Dhabi released the Abu Dhabi Building Codes, modelled on those published by the International Codes Council. The codes consider construction safety and environmental protection. Breaches of some health and safety laws can attract criminal liability under the UAE Penal Code.
Most construction contracts oblige the Contractor to ensure the safety and security of the site, with some contracts requiring the implementation of a health and safety system or plan – this is largely dependent on the Employer’s requirements. Commonly, the health and safety obligations are limited to those set out in the FIDIC Red Book 1999 without significant amendment (Clause 6). Sub-Clause 6.2 of FIDIC requires that the Contractor observes standards (of wages and other conditions) which are not lower than the general levels observed locally by other Employers.
Unless the Employer imposes particular requirements, the contractual obligations to the environment typically reflect the standard established in the FIDIC Red Book 1999 – taking all reasonable steps to protect the environment and to limit damage and nuisance to people and property from pollution, noise and other results of his operations (Sub-Clause 4.18).
The Contractor is also obliged to comply with its obligations under the local applicable law; being the Federal Law No. 24 of 1999 for the protection and development of the environment.
In 2016 Abu Dhabi released the Abu Dhabi Building Codes, modelled on those published by the International Codes Council. The codes address a number of green building factors, including, light, ventilation, use of utilities and energy efficiency. The Abu Dhabi Codes also consider construction safety and environmental protection. The Green Building Regulations and Specifications released in Dubai are focussed solely on green building aspects and apply to all buildings in Dubai. These movements are in line with the Abu Dhabi 2030 Vision, and the Dubai Strategic Plan 2015, which each set environmental targets for the UAE, particularly in relation to emissions and sustainable building practices.
Planning law in the UAE is still at the early stages of development. Each Emirate has created its own system for reviewing and assessing applications for new development. Perhaps unsurprisingly, the two most sophisticated systems are those found in Dubai and Abu Dhabi.
Dubai’s vision for the Emirate can be found in the Dubai 2020 Urban Master Plan (the “Dubai Plan”). The Dubai Plan covers the Emirate of Dubai including the offshore areas within 12 nautical miles and the desert and rural areas (excluding the Hatta area).
The plan was developed by the Dubai Municipality in coordination with key government entities and other stakeholders including the development community. The stated objectives of the plan are to ensure the efficient utilisation of existing infrastructure, increasing investments opportunities, creating an integrated land use and transportation/mobility network, protecting key economic assets, preserving the environment and diversifying energy sources.
Although there is no planning law as such, there are a number of Executive Council Resolutions and Decisions which provide some guidance on the way that development is regulated.
In Dubai, no development can be lawfully carried out without the necessary permit. The type of permit required is determined by the development activity being proposed. For example, a demolition permit is require before a building or part of a building can be lawfully demolished. A list of the various permits and the forms required to apply for these permits can be obtained on the Dubai Municipality website.
There is no public register of permits. Therefore, when undertaking property due diligence on the purchase of property and attempting to confirm whether or not the required permits were obtained for the development, these enquiries should be made of the seller.
Abu Dhabi’s strategic plan is outlined in 'Plan Abu Dhabi 2030 - Urban Structure framework Plan' (the “Abu Dhabi Plan”) which was prepared by the Abu Dhabi Urban Planning Council (since merged with the Abu Dhabi Municipality). It provides conceptual solutions to shape the growth of the Emirate addressing the following issues:
- land use
- open space
- image of the capital city.
The Abu Dhabi Plan is supplemented with a Development Code which includes detailed policy criteria and use regulations against which proposed developments are assessed.
It is mandatory for developers to propose master plans in line with the Abu Dhabi Plan. All new master plans go through a rigorous approval process. The details and required documents can be found on the Department of Urban Planning and Municipalities (the “DUPM”) website.
Permit applications must be submitted to the DUPM together with documents, drawings and plans relating to the buildings or the works. Drawings and plans must be approved by an engineering firm. The DUPM is required to determine the application within 30 days of receipt of a complete submission. Should an application be refused, the rejection must be accompanied by reasons. The absence of a decision shall be deemed refusal.
As in Dubai, a building cannot be occupied until such time as a building completion certificate has been issued. There is also no public register of permits and therefore copies of the relevant permits must be obtained from the seller.
Employment is governed by Federal Law No. 8 of 1980 on Regulation of Labour Relations. This law prohibits the employment of non-nationals (i.e. non Emirati) without:
(a) obtaining approval from the Labour Department; and
(b) obtaining a work permit which is in accordance with the requirements of the Ministry of Labour and Social Affairs.
The welfare of labourers is also closely regulated in the UAE (see above at “Health and Safety”).
Construction contracts will typically make the Contractor solely responsible for obtaining and maintaining any required visas, and repatriating individuals (unless these costs are incurred in certain circumstances, i.e. following termination for convenience under FIDIC Red Book 1999).
Working hours are also regulated, with the standard employment being a maximum of 48 hours per week, with exceptions made for management or supervisory roles. During Ramadan, the working day is reduced by two hours. Working hours are also adjusted to take into account the summer heat (see above at “Health and Safety”).
(e) Anti-corruption and bribery.
These types of practices are governed by Federal Law 3 of 1987 (the Federal Penal Code). Articles 234 – 239 prohibit and criminalise bribery by private individuals or public officials.
The Penal Code sets out penalties for those who offer and accept bribes; however the penalty that applies is different for the public and private sectors. In the public sector, an individual can be penalised for offering or accepting a bribe –and in either case, will be required to reimburse the benefit, pay a fine equivalent to the benefit, and may be subject to imprisonment (maximum 5 years for offering and 5 – 10 years for accepting).
What permits/licences and other documents do parties need before starting work, during work and after completion? Are there any penalties for non-compliance?
In order to carry out work within the UAE, companies must establish a limited liability company (an LLC) or a branch office within the UAE. Once established, the entity also has to obtain a trade licence in order to be licensed to carry out the proposed work. The corporate set-up for foreign companies wanting to bid-for or accept work can be daunting.
A building permit must be in place before the project commences, as well as a number of ‘no-objection certificates’ (usually referred to as NOCs) issued by the Civil Defence Authority (in Abu Dhabi, the General Directorate of Civil Defense in Abu Dhabi, and in Dubai, Dubai Civil Defense) and other permits concerning civil works, road access, waste management and utilities. Depending on the project, other NOCs may be required from other entities – i.e. in for an oil related project in Abu Dhabi, ADNOC (the Abu Dhabi National Oil Company) will likely be involved.
During a project, the AOR and any Engineer appointed in relation to the project would carry out inspections of each stage and any complex work. Some contracts may require that an inspection take place before further work is completed. A number of government authorities will also conduct inspections at various stages / for various works – i.e. the foundation and structure as well as the septic tanks and utilities infrastructure.
Upon completion (and, generally prior to being granted the Taking Over Certificate) all the authorities that completed stage inspections of various parts of the project will inspect and provide a final sign off. In addition, it is required that the relevant Civil Defence Authority conduct a final inspection and issue a completion certificate. A certificate permitting occupation of the building may also be required for some projects.
Is tort law or a law of extra contractual obligations recognised in your jurisdiction?
Articles 282 – 298 of the Civil Code deal with “harmful acts” (i.e. tort law).
Article 296 states that “…any condition purporting to provide exemption from liability for a harmful act shall be void”.
Therefore it is clear that this liability cannot be limited or excluded by contract. A tort based claim must be made within three years “…from the day on which the victim became aware of it”.
Contractors sometimes rely on these articles of the Civil Code when asserting that the Employer or Engineer is acting unfairly. This is often coupled with the argument that the Employer is in breach of its obligation to act in good faith (Article 246 of the Civil Code).
Who are the typical parties to a construction and engineering project?
The FIDIC “rainbow suite” as well as other template and bespoke contracts are commonly used in the UAE. As a result, the parties typically involved in a construction project in the UAE are the same as you would expect in other FIDC friendly jurisdictions – Employer, Engineer, Contractor, Subcontractors and Suppliers.
Notably, in the UAE, a large number of the Employer/Clients are government owned.
What are the most popular methods of procurement?
The traditional procurement method is by far the most commonly used in the UAE. Under this method, the Employer will instruct a professional team to carry out the design and provide the technical specification for the project. A separate tendering process is usually then run to appoint a Contractor. The Contractor is responsible for constructing the works to the specification provided.
There are a number of other procurement methods available and used in the UAE. Of these, the most frequently used are:
- “design and build” - where the Contractor takes on the design responsibility for the project (i.e. FIDIC Yellow Book); and
- “EPC” or “turnkey” - where the Contractor is responsible for engineering, procuring and constructing the project. This method requires minimal Employer input beyond setting the performance parameters for the finished project. The Contractor is then responsible for handing over the project such that it is ready-for-use at the required performance level from the date of completion (i.e. FIDIC Silver Book). The Silver Book is most commonly used for power projects – where the functionality of the project is critical to the success of the project.
What are the most popular standard forms of contract? Do parties commonly amend these standard forms?
The FIDIC suite provides the basis for most standard forms of contract in the UAE. However, it is common for these standard forms to be heavily amended.
The balance of negotiating power usually lies with Employer and, therefore, it is common to see the standard forms amended in their favour. This balance of power is also a reason why the 1987 version of the Red Book is still widely used as it is perhaps more “Employer-friendly” than the 1999 version and, therefore, requires fewer particular conditions.
Some Government Authorities and major land developers have generated their own standard forms of contract (usually heavily amended versions of the FIDIC suite), which are used as a template from which further amends are made.
While FIDIC remains the preeminent standard form of contract in the UAE, other international standard forms are also used such as the NEC family of contracts.
Are there any restrictions or legislative regimes affecting procurement?
The UAE Federal Government Contracts Regulations (as amended) are relevant when contracting with the Federal Government. The UAE’s two most active Emirates (Abu Dhabi and Dubai) have also issued their own legislation that applies to contracts with local Emirate Government Authorities. These broadly follow the Federal Regulations.
The Government of Abu Dhabi has issued several iterations of the “Purchases, Tenders, Auctions, and Warehouses Manual” pursuant to Law No. 6 Year 2008. This provides some ground rules by which Government Authorities and those hoping to contract with them must play. Included in the Manual are rules governing the tender procedure, bonds, limits on the amount of liquidated damages that can be levied, variation procedures, and Contractor registration requirements.
Dubai Law 22 of 2015 (the “PPP Law”) provides similar guidance to Dubai Government Authorities and those tendering for contracts in the Emirate. The PPP Law was introduced to encourage the use of PPP models in Dubai. It contains similar guidance to that included in the Abu Dhabi “Manual” in relation to tender scoring, bid terms, and bonds. Where the PPP Law is silent, or another method is adopted, Law No. 6 of 1997 (the Procurement Law of Dubai) shall apply.
Do parties typically engage consultants? What forms are used?
The majority of larger projects in the UAE follow the traditional procurement method, which means an Employer will normally have a full professional team supporting it.
Typically, an Employer will have an architect, civil/structural engineer, and mechanical/electrical engineer among its professional team. It is common for one of these parties to adopt the “Engineer” role under the FIDIC suite and take on the contract administration and project management responsibilities as well, although Employer’s can engage specialists to fulfil these non-design roles.
It is a legal requirement for a project to have an “architect of record”. As a result, key consultant appointments such as the architect and engineering positions are usually contracted on comprehensive standard forms; the FIDIC White Book is popular.
Is subcontracting permitted?
Subcontracting is generally permissible (and utilised) in most projects in the UAE.
In addition to the particular contractual requirements that parties may agree to, Articles 890 and 891 of the Civil Code regulate subcontracting in the UAE.
Article 890 expressly permits subcontracting the whole or part of the works to another party unless the contract expressly prevents subcontracting. It also provides that the first Contractor shall remain liable to the Employer.
Article 891 simply establishes that the subcontractor shall have no right to claim against the Employer unless rights against the Employer have been assigned directly to the subcontractor.
How are projects typically financed?
Public authority and Government-backed projects tend to be self-financed.
For other projects there are a number of financing options available. Commonly, an SPV or joint venture will be established that will obtain a long-term senior bank loan, which will provide the bulk of the finance. This has the added benefit of keeping the borrowing costs off of the parent company’s accounts. The land owner or developer may also provide some of the finance itself. In order to recoup this investment, projects are frequently structured in a way that the developer/land owner is able to generate income before completion.
Short-term “bridge” loans are available, especially in capital intensive phases of construction but these can be costly and are usually avoided unless absolutely necessary.
Finally, some banks in the UAE have been prepared to finance projects, especially prestigious ones, in return for the association generated with the project, although this is not a widespread practice.
What kind of security is available for employers, e.g. performance bonds, advance payment bonds, parent company guarantees? How long are these typically held for?
Employers in the UAE typically have a significant bargaining power advantage and can, therefore, include favourable conditions in contracts to secure their position.
Performance bonds are almost universally required and the majority of these are “on demand” rather than conditional, giving an Employer significant financial protection should the Contractor default on its obligations. Performance bonds are generally required to be in place throughout the term of the contract and are usually between 5-10% of the contract value.
FIDIC Red Book 1999 sets out the circumstances in which the Employer using that form of contract can call on the performance bond. Some Employers may attempt to exclude these clauses so that the Employer has unconditional access to the bond and to avoid scope for a claim by the Contractor.
In addition, Employers can require further bond guarantees from the Contractor. Bid bonds, which can be called if the Contractor reneges on its tender proposal before a performance bond is in place, and advance payment bonds feature in a many forms of procurement. Whereas the bid bond is usually superseded by the performance bond after the contract is signed, the advance payment bond generally stays in place throughout the term of the contract. The value of the advance payment bond will typically reduce in accordance with the remaining liability of the Contractor to repay the advance payment. Normally an advance payment bond can only be called-on to satisfy the liability of the Contractor to repay the advance payment – not against a general failure to perform.
Depending on the corporate structure of the Contractor, parent company guarantees may be required by an Employer. However, due to the “on demand” nature of most performance bonds, parent company guarantees are less common. Parent company guarantees will typically only be offered as a means of guaranteeing performance, or offering step in rights prior to termination, as opposed to unconditional financial security.
Is there any specific legislation relating to payment in the industry?
If the Employer and Contractor do not agree on the payment for the construction works, Article 888 of the Civil Code states that the Contractor “…shall be entitled to fair remuneration, together with the value of the materials he has provided as required by the way.”
Similar provisions are provided in respect of work carried out by consultants. Article 889 of the Civil Code states provides that, if a fee has not been agreed with the consultant who has “…designed the building and supervised the construction” then the consultant shall be entitled to fair remuneration which is in accordance with the “custom”. If completion does not occur, then the consultant will be entitled to “fair remuneration for the work undertaken”.
Unless the parties have agreed otherwise, a party who has carried out work is due to be paid on completion of the works (Article 885 of the Civil Code).
Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?
Pay-when-paid clauses are commonly used in the UAE and are enforceable.
Employers often include provisions within the construction contract which require the Contractor to verify that all resulting payments have been made to subcontractors, or to permit the Employer to examine the financial records of the Contractor.
Do your contracts contain retention provisions and, if so, how do they operate?
Retention is commonly used in the UAE and is generally applied at each level (i.e. the Employer retains against the Contractor and the Contractor retains against subcontractors).
The retention provisions operate by permitting the Employer to retain a percentage of the value of each amount certified for payment in a payment certificate (typically no more than 10%). The Contractor is obliged to identify this amount in an application for payment.
The retention is retained while the works are being carried out and increases as the value of the work does the same. Upon taking over, most contracts provide that half of the retention money will be certified for payment to the Contractor. Ideally the Contractor’s obligations to its subcontractors are ‘back to back’ and the obligation for it to release a subcontractor’s retention only arises once the Contractor is paid by the employer.
The remainder of the retention is usually released once the Performance Certificate has been issued. In some contracts, the Employer may require that a retention bond be provided against release of some of the retention, or in lieu of a percentage of retention being taken (i.e. 5% cash retention, and a bond from the start of the works which increases in value with each payment to the Contractor).
Do contracts commonly contain delay liquidated damages provisions and are these upheld by the courts?
Most contracts contain delay liquidated damages clauses. These usually apply from the date for completion defined by the contract and are payable on a daily basis until completion is achieved.
It is relatively common to see a cap on the amount of delay damages which can be applied – typically 10% of the contract price.
The entitlement to set the sum is prescribed by Article 390(1) of the Civil Code which permits parties to fix an amount of compensation in advance.
However, Article 390(2) expressly notes that the court is entitled to vary such agreement to make the compensation equal to the loss, and thereby void the prior agreement on the fixed compensation. The means that either party may apply to the court to vary the amount set in the contract, if compensation is payable. The amount may be revised up or down.
Are the parties able to exclude or limit liability?
Most contracts will contain a clause which expressly excludes liability for indirect and consequential loss (reflecting FIDIC Red Book 1999 Sub-Clause 17.6) but will not operate to exclude liability under the indemnity provisions or in relation to payment on termination (for the Employer’s default).
While employers will typically attempt to exclude this provision, most Contractors will try to negotiate that the limitation of liability contained in FDIC Red Book 1999 (Sub-Clause 17.6) remain in place. This limits the Contractor’s ultimate liability to the value of the contract price, except in the case of fraud, deliberate default or reckless misconduct. This limit also does not typically apply to indemnities, IP rights and infringements, and liability arising in connection with the provision of materials or utilities.
These provisions notwithstanding, the Civil Code could intervene to impose liability in relation to ‘acts causing harm’. Article 296 of the Civil Code provides that “any condition purporting to provide exemption from liability for a harmful act shall be void”. The provision empowers the court (and indeed an arbitral tribunal) to intervene and potentially award damages of the type which would have been contractually excluded. (See question 5 above)
Are there any restrictions on termination? Can parties terminate for convenience? Force majeure?
Most contracts provide for the same types of termination you would expect to see in a FIDIC based contract – termination for either parties’ default and termination for convenience.
Article 892 of the Civil Code provides that a Muqawala can only be terminated upon:
(a) completion of the work agreed;
(b) cancellation of the contract by consent; or
(c) an order of the court.
It is not well settled what is required to constitute “cancellation by consent”. Most contracts take the approach that a contractual right to terminate (consented to by the parties by virtue of having executed the contract) is sufficient to constitute consent. Contracts commonly expressly state that the parties agree that an order from the court is not required when terminating under the contractual provisions on termination.
Most contracts also contain force majeure type clauses. A number of provisions of the Civil Code address force majeure type events.
Article 893 of the Civil Code identifies a specific right in relation to extraneous causes which could affect Muqawala contracts, providing:
“If any cause arises preventing the performance of the contract of the completion of the performance thereof, either of the contracting parties may require that the contracted be cancelled or terminated as the case may be”.
The general right to seek relief where performance of a contract is compromised by a force majeure event is covered by Article 273 of the Civil Code:
“In contracts binding upon both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled.”
Unlike FIDIC, both of these provisions provide for cancellation or termination of the contract, as opposed to being “excused from performance” and being entitled to seek time and cost relief (FIDIC Red Book 1999 Sub-Clauses 19.2 and 19.4).
Relevantly, Article 287 of the Civil Code also states that a party shall not be bound to make good loss that arises as a result of an “extraneous cause” in which a person “plays no part” (e.g. a natural disaster or unavoidable accident or force majeure), unless there is an agreement to the contrary.
Article 249 also provides that it is permissible for a judge to reduce oppressive obligations to a reasonable level where “exceptional circumstances of a public nature which could not have been foreseen” mean that performance of an obligation becomes oppressive.
What rights are commonly granted to third parties (e.g. funders, purchasers, renters) and, if so, how is this achieved?
If funders or lenders are involved with a project, they may have rights to step in (prior to termination by the Contractor for an Employer’s breach) or to have the contract (and the relevant securities) assigned to it under the construction contract. Lenders may also gain the benefit of a collateral warranty, if one is required by the contract.
These rights are typically set out in the contract itself – the Contractor may agree:
(a) that the contract can be assigned to certain parties;
(b) to enter into a tripartite agreement with a lender; or
(c) to provide a collateral warranty to the lender once the works are complete (or once the works commence).
As many of the construction projects are self-funded, lender involvement with contracts is not particularly common in the UAE.
Renters and subsequent purchasers have no rights as against the Contractor under the construction contract. The Contractor is rarely a party to, or otherwise involved with any sales or letting of the project.
Do contracts typically contain strict provisions governing notices of claims for additional time and money which act as conditions precedent to bringing claims? Does your jurisdiction recognise such notices as conditions precedent?
As most contracts are modelled on FIDIC, they generally require that timely notice be given in relation to any claim for an extension of time or additional cost. Notices are also required where the Contractor intends to claim any other type of relief in relation to particular events.
Many Employers impose shorter notice periods and then rely on the non-provision of notices to refuse a Contractor’s claim for relief. A contractor may seek to rely on provisions of the Civil Code to seek relief if the contractual provisions are preventing a claim.
This notwithstanding, Contractors are strongly advised to make every effort to comply with notice provisions, but failure to give timely notice may not, in itself, always be determinative of whether the Contractor will be successful in making a claim.
What insurances are the parties required to hold? And how long for?
The law requires that all employees are given health insurance by their Employer. This would not usually be expressly identified in a construction contract.
The law also makes express provision for the payment of benefits (upon repatriation) and for compensation in the event of injury at work. To protect against these liabilities, most construction Contractors will have a worker’s compensation policy in place.
Most parties model their insurance requirements on those laid out by FIDIC and may add specific requirements as necessary (i.e. marine cargo, or vehicular).
How are construction and engineering disputes typically resolved in your jurisdiction (e.g. arbitration, litigation, adjudication)? What alternatives are available?
Construction and engineering disputes are typically resolved by way of arbitration or in the local courts. Arbitration is the preferred dispute resolution mechanism for resolving complex construction and engineering disputes, especially those involving an international party. However, where one of the parties is a governmental organisation, the generally accepted position is that the local courts will resolve any disputes.
Arbitration remains popular because, unlike in the local courts, proceedings and awards are confidential; the relative ease of enforcing awards (especially internationally); and the winning party is often awarded its legal fees. Specifically, for complex construction and engineering disputes, arbitration offers the parties flexibility and control over proceedings, including the selection of the arbitration tribunal, that is suited to the dispute in question. By comparison, the local courts do not offer specialist construction judges and therefore rely on court appointed experts to effectively decide technical aspects of the case. The DIFC courts have, however, sought to address the apparent lack of expertise by launching the Technology and Construction Division of the DIFC courts at the end of 2017.
The UAE has emerged as a regional hub for arbitration. The UAE offers a wide array of arbitration institutions, the most popular of which include the Dubai International Arbitration Centre (DIAC), Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC), DIFC-London Court of International Arbitration Centre in the DIFC (DIFC-LCIA) and more recently, the International Chamber of Commerce (ICC) which set up a representative office in the ADGM in 2017.
Arbitrations in the UAE can be seated “onshore” or “offshore”. Onshore arbitrations, i.e. where the seat is one of the seven Emirates, are governed by 16 provisions in the UAE Civil Procedure Code. At the beginning of 2018, the UAE Federal Council approved a new Federal Arbitration Law which is loosely based on the UNCITRAL Model Law. It is hoped that the new Federal Arbitration Law will bring the UAE in-line with international best practice and be in place by mid-late 2018.
Offshore arbitrations are those seated in either the ADGM or DIFC which offer their own arbitration legislation: the ADGM Arbitration Regulations 2015 and DIFC Arbitration Law 2008, both of which are based on UNCITRAL Model Law.
The UAE is made up of seven Emirates which operate different court systems. Ajman, Fujairah, Sharjah and Umm Al Quwain operate under the Federal Court system consisting of the Federal Court of First Instance, Federal Court of Appeal and Federal Supreme Court. Abu Dhabi, Dubai and Ras Al Khaima, on the other hand, have their own three-tiered court systems consisting of the Emirate-specific Court of First Instance, Court of Appeal and Court of Cassation. All of the UAE courts, whether Federal or otherwise adopt the UAE Civil Procedure Code which effectively entitles an aggrieved party the automatic right of appeal from the Court of First Instance to the Court of Appeal on points of law or on the merits: appeals to the highest tiered court are only on points of law.
The Emirates of Abu Dhabi and Dubai have parallel court systems operating “offshore” in the ADGM and the DIFC. Each of the ADGM and DIFC courts offer a two-tiered system: the Court of First Instance and Court of Appeal.
Alternative forms of dispute resolution are not as commonly used in the UAE as some other jurisdictions. For cases brought in the UAE Federal Courts, parties are to first refer the dispute to the Mediation and Reconciliation Committees. However, parties can, and often do, opt out of the Mediation and Reconciliation process and simply go direct to the courts: the courts do not penalise parties that go directly to court. In 2009, the Dubai courts set up a similar scheme in the form of the Centre for Amicable Settlement of Disputes where parties can voluntarily refer their dispute to the Centre for non-binding reconciliation.
Some parties to a construction contract agree to adjudicate disputes, often pursuant to the FIDIC Dispute Adjudication Board procedure. However, since there is no statutory recognition of adjudications in the UAE, the enforcement of DAB decisions is difficult with parties having to commence fresh proceedings by way of arbitration or in the local courts to make a DAB decision binding.
How supportive are the local courts of arbitration (domestic and international)? How long does it typically take to enforce an award?
The UAE courts are arbitration-friendly. Domestic awards, i.e. awards rendered from an arbitration seated in the UAE, must be ratified/recognised in the local courts before they can be enforced. Unless the underlying dispute violates public policy, the UAE courts will not re-examine the merits of a case. However, the courts can, and do, set aside awards due to procedural irregularities.
In addition to procedural issues, awards have been set aside for specific breaches of procedure such as arbitration clauses not being signed (even where the underlying contract being signed), arbitration awards not being signed by the arbitrators on each individual page and where a witness did not give evidence under oath. It is hoped that the enactment of the new Federal Arbitration Law (expected mid-late 2018) will bring clarity as to when an award will be set aside for procedural irregularity, and reduce the scope for arbitral awards to be challenged on this basis.
As to the enforcement of international awards, UAE law gives precedence to international instruments over the domestic enforcement regime. Significantly, therefore, the New York Convention on the Recognition and Enforcement of Arbitration Awards, to which the UAE acceded in 2006 without any declarations or reservations, governs the enforcement of foreign awards between Members states.
In terms of timing, the ratification/recognition process passes through the usual three-tiered court system which can take a number of months, and in some cases, years. Once ratified, enforcement usually takes between one and two months.
Are there any limitation periods for commencing disputes in your jurisdiction?
Under UAE law, there is no uniform prescription period. The length of time that a claimant must commence its claim depends on the nature of the contract and dispute in question. Construction contracts can be classified as either commercial transactions (in which case the UAE Code of Commercial Practice applies) or a civil transactions (in which case the UAE Civil Code applies). Which Code applies often depends on whether the employer is acting in its capacity as consumer or in the course of a business.
If the Code of Commercial Practice applies then a claimant has 10 years to commence its claim “from the due date for fulfilment of the obligation”. The prescription period for commercial contracts arises from the due date of an obligation, such as the date of delivery of a project or payment, and not from the date that a breach arises.
In contrast, the prescription period for construction contracts that are not classified as commercial transactions is 15 years from when the right falls due by operation of the Civil Code.
How common are multi-party disputes? How is liability apportioned between multiple defendants? Does your jurisdiction recognise net contribution clauses (which limit the liability of a defaulting party to a “fair and reasonable” proportion of the innocent party’s losses), and are these commonly used?
Multi-party disputes are recognised in the UAE. The UAE Civil Code makes provision for claimants to join third parties to a court case and for defendants to join co-defendants. By contrast, the UAE Civil Code does not specifically recognise multi-party arbitrations. However, various institutional rules, including the DIAC and ADDCAC Rules, offer a procedure for appointing a tribunal where there are multiple parties.
The ADGM Arbitration Regulations and DIFC Arbitration Law address how tribunals are to be constituted where there are multiple parties. The ADGM Arbitration Regulations go a step further and explicitly set out a procedure for joinder of third parties to arbitration proceedings.
Under UAE law, the courts or arbitrators have wide discretion to apportion liability. So far as possible, the courts or arbitrators attribute liability between multiple defendants according to the proportion of their respective liability (rather than on an joint and several basis).
Net contribution clauses are recognised in the UAE and are treated like any other limitation and exclusion clause. They are enforceable to the extent that they do not seek to displace a mandatory provision of law or seek to exclude liability for delicit (tort) or for fraud and gross negligence.
What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?
Value Added Tax (VAT) was introduced in the UAE on 1 January 2018. While the introduction of the tax was a long time coming, many companies that are unfamiliar with such a tax regime are still coming to grips with the additional administration required.
Looking at the sector more broadly, on time payment remains a significant issue (and one that appears to be negatively impacted by the implementation of VAT, at least for the moment). Subcontractors continue to price on narrow margins and are unable to meet employer expectations when cash flow is poor. This is particularly the case on poorly scoped or specified projects where a construction contractor is left to design significant parts of the work on the job – as opposed to being provided with a comprehensive design.
While the industry has stabilised, a number of contractors are still carrying baggage in past projects with small to no margins – or even significant losses. Many are unwilling to pursue claims for fear of being blacklisted by employers, but are also reluctant to declare the loss and move on. This creates uncertainty within the company itself and the wider industry, and means many companies are still ‘buying’ work in order to offset other poorly performing projects.
What types of project are currently attracting the most investment in your jurisdiction (e.g. infrastructure, power, commercial property, offshore)?
A major focus for the UAE in the short term are the projects associated with the World Expo to be held in 2020 in Dubai. In addition to the construction that is taking place at the expo site itself, there are significant infrastructure projects being executed as part of the wider project, including extension of the metro route, and a number of utility and power related projects.
As the governments of the Emirates look to diversify investment portfolios, investment in the construction industry is increasing. At a public level, there is significant investment in power projects throughout the UAE as it looks to invest in new infrastructure and decommission out of service or inefficient sites. Due to their scale and complexity, these projects require and attract foreign Contractors with expertise in this area. Specifically, waste management infrastructure is an emerging and developing market in the region and attracting significant interest from foreign entities.
A steady number of residential projects continue to be introduced to the market. This growth is supported (to an extent) by the growing numbers of units which are made available for purchase by non-Emirati residents who are keen to enter the UAE property market.
How do you envisage technology affecting the construction and engineering industry in your jurisdiction over the next five years?
The region is increasingly using pre-cast structures as part of construction projects and has seen the efficiency and value it in repetitive structures (of which there are many). This trend is likely to continue as this style of construction complements style of building implemented in the UAE, and the (relatively) consistent weather conditions.
Innovation is increasingly important in the UAE as it looks to divest and upgrade existing facilities. At present, it appears the best route toward innovation is knowledge sharing – partnering with foreign companies as a means of sharing resources and knowledge bases and ensuring UAE-based companies gain the requisite knowledge to develop, operate and maintain the projects going forward.
While not yet used much in the UAE or the region more broadly, use of more non-traditional procurement methods will assist in the development of these technologies as the parties work cooperatively towards completion and the benefits of the investment in technology can be more readily seen.
Finally, the national commitment to sustainable development, and the requirement for efficient technology in this space will necessitate a push towards investment and innovate construction technology.