Construction Arbitration

Last verified on Wednesday 24th June 2020

Construction Arbitration: United Arab Emirates

Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Pinsent Masons

Legal system

1. Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?

United Arab Emirates

The UAE is a civil law jurisdiction based on codified laws and regulations. There is no system of binding precedence created by past legal decisions as is the case in common law jurisdictions. The UAE's civil law system is inspired by the Egyptian civil law, which is itself derived from the Roman and French civil law systems.

The UAE is a federation of seven Emirates (Abu Dhabi, Dubai, Sharjah, Ajman, Fujairah, Umm Al Quwain and Ras Al Khaimah). The Constitution is the primary law in the UAE legal system. It provides the principles on which the UAE is constituted and its fundamental bases.

The UAE's Constitution determines jurisdiction and authority at both federal and local level by setting out the matters within the jurisdiction of the federal government. Under the Constitution, the individual Emirates retain sovereignty with respect to all matters within their respective territorial borders not exclusively specified in the Constitution as being within the jurisdiction of the federal government.

Under this framework, the Constitution grants each Emirate the authority to establish its own legislative bodies and judicial authorities. Accordingly, there are two main court systems in the UAE: federal and local. Federal and local courts consist of civil courts (which hear civil and commercial claims), criminal courts and Sharia courts. For example, Dubai, Abu Dhabi and Ras Al Khaimah have opted out of the Federal Court system and maintain independent judicial systems (see question 43), although pursuant to article 99 of the UAE Constitution, the Federal Supreme Court retains jurisdiction to decide certain matters.

The principle of constitutional supremacy is preserved in the UAE Constitution. In the case of conflict between federal and local laws and regulations, Federal legislation will prevail over the legislation and regulations issued by the individual Emirates.

The primary source of law is UAE Law No. 5 of 1985, the Civil Transactions Law (often referred to as the UAE Civil Code). There are a number of other laws that are relevant to the UAE construction market, however, and these include: Federal Law No. 18 of 1993 – the Law of Commercial Transactions (often referred to as the UAE Commercial Code), Federal Law No. 11 of 1992 – the Law of Civil Procedure (often referred to as the UAE Civil Procedure Code), Federal Law No. 10 of 1992 – the Law of Evidence in Civil and Commercial Transactions, Federal Law No. 3 of 1987 – the UAE Penal Code and Federal Law No. 6 of 2018 – the Arbitration Law.

If there is no applicable codified law, UAE courts must pass judgment in accordance with the Islamic Sharia law based upon guidance provided by scholars of the four schools of Islamic jurisprudence explaining the application of Sharia. However, in civil and commercial matters, as a matter of practice, UAE courts will generally not apply Sharia outside the Sharia principles as codified. As a civil law jurisdiction, judges are not bound by previous (or higher) court judgments but higher courts' judgments will have a persuasive effect.

The third source of law in the UAE is derived from the customs and principles of natural and comparative laws, provided these customs and principles are not in conflict with Islamic Sharia law or to principles of public order and morality.

Generally, new laws do not come into force until they are published in the Official Gazette. A law will come into force either at the date of its publication or a few months after publication as expressly stated in the law itself. Some new laws may come into force from the date they are issued. Unless the law specifies otherwise, new laws do not have a retrospective effect.

Within the UAE there are a number of free zones that have their own laws and regulations. The most notable and comprehensive of these are the Dubai International Financial Centre (DIFC), which is a financial free zone administered by the government of Dubai, and the Abu Dhabi Global Market (ADGM), a free zone established in Abu Dhabi. The DIFC has its own body of commercial laws with an independent judicial authority. Likewise, the ADGM also has its own court system and has adopted many of the commercial laws of England. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Contract formation

2. What are the requirements for a construction contract to be formed? When is a "letter of intent" from an employer to a contractor given contractual effect?

United Arab Emirates

The fundamental requirements for any contract to be formed are offer and acceptance (article 130 of the UAE Civil Code). In addition, the subject matter must be adequately defined and the basic elements should be mutually consented to by all parties to the contract (article 129 of the UAE Civil Code). The purpose of the contract cannot be contrary to UAE law. These requirements apply equally to a construction contact.

The UAE Civil Code also provides further specific provisions that apply to construction contracts or Muqawala contracts (see articles 872 to 896 of the UAE Civil Code). These provisions provide that a valid and binding construction contract must contain a clear description of the subject matter of the contract, the work to be carried out, the time and manner for performance, and the contract price (article 874 of the UAE Civil Code). While there is no express requirement for a construction contract to be in writing, it is easier for a party to demonstrate the above requirements have been made if the contract is written. It should also be noted that, pursuant to article 7(1) of the UAE Arbitration Law, any arbitration agreement between the parties must be in writing otherwise it shall be invalid. 

For a letter of intent to have contractual effect as a construction contract, it must satisfy the basic requirements of a contract and a construction contract as set out above. The courts will uphold a letter of intent where these requirements have been satisfied. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Choice of laws, seat, arbitrator and language

3. Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?

United Arab Emirates

(a) Yes. As per article 257 of the UAE Civil Code, contracting parties are free to agree and will be bound by what they have agreed to do under the contract. As such, UAE law recognises the principle of freedom of contract such that they are free to agree upon a foreign law to govern their contract. However, a local court may elect not to apply foreign laws on public policy grounds and, in practice, foreign law is rarely applied. In addition, parties will not be free to contract out of matters that are subject to mandatory national laws and regulations (eg, real estate, employment and government contracts).

(b) Yes, as per article 257 of the UAE Civil Code (see above). Article 2(1) of the Arbitration Law also appears to implicitly allow parties to choose the law governing the arbitration agreement

(c) Yes. Article 2(1) of the Arbitration Law indicates that parties are free to choose the procedural law that governs the arbitration, provided there is no conflict with the public order and morality of the state, and article 28 allows parties the freedom to choose the seat of the arbitration and the physical venue for hearings. Within the UAE, it is most common for arbitrations to be seated in either Dubai or Abu Dhabi. If the parties wish to have the arbitration seated in the UAE it is advisable to state the specific city within the Emirate, and where the parties wish to have the seat in a free zone with its own arbitration law (ie, the DIFC or ADGM) this should be explicitly stated to avoid ambiguity. Outside of the UAE, London, Paris, Geneva and Singapore are often specified as the seat of arbitration by parties based in the UAE.

(d) Yes, as per article 23 of the Arbitration Law, the parties are free to agree on the procedural arbitral rules that will govern the arbitral proceedings.

(e) As per article 10 of the Arbitration Law, arbitrators shall be natural persons who may not be minors or the subject of a court order. In addition, arbitrators may not have been convicted of a criminal offence or declared bankrupt unless they have undergone formal rehabilitation, with the exception of crimes involving moral turpitude or breach of trust, for which rehabilitation does not allow for appointment as an arbitrator. Furthermore, an arbitrator cannot be on the board of trustees or the administrative body of the applicable arbitration institution responsible for administering the Arbitration in the UAE (if applicable). There are no restrictions on the gender or nationality of arbitrators, unless otherwise agreed upon by the parties. However, there is some uncertainty created by article 58(2) of the Arbitration Law, which suggests that the Minister of Justice will produce a list of arbitrators for appointments under article 11 of that law. This list is yet to be issued and it is presently unknown whether that list is intended to be an exclusive list, or merely a list to facilitate the making of appointments by the court of arbitral institutions. Under both the DIFC Arbitration Law 2008 and the ADGM Arbitration Regulations 2015, there are no such restrictions on who can sit as arbitrator, other than that arbitrators must be independent and impartial.

(f) Yes. It is always advisable to explicitly state the language in the arbitration agreement, as parties may otherwise be faced with a language they would not choose. For example, where the UAE is the chosen seat, the language of the arbitration will be Arabic unless it has been otherwise agreed (as per article 29 of the Arbitration Law).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Implied terms

4. How might terms be implied into construction contracts? What terms might be implied?

United Arab Emirates

As discussed above, UAE law recognises the principle of freedom of contract. However, it is important to note that UAE law also imports certain statutory implied terms that cannot be excluded by contract. For example, article 246(1) of the UAE Civil Code states that a contract must be performed in accordance with the requirements of good faith. The principle of good faith is widely interpreted and could arguably imply terms in relation to, for example, a requirement that any services detailed in the construction contract be performed with reasonable skill and care.

Further, article 246(2) of the UAE Civil Code provides that parties must embrace obligations by virtue of UAE law, customs or the nature of the transaction. The scope of this article could potentially cover a wide-reaching set of implied terms, including, for example, those regarding the quality of the work and materials delivered under the construction contract.

As construction contracts are Muqawala contracts there are also a number of terms that are implied into them by virtue of the Muqawala section of the UAE Civil Code. By way of example, these include an implied term that a contractor shall be entitled to fair remuneration, together with the value of the materials he has provided as required by the work, if the consideration for the work is not specified in the contract.

It is also worth noting that, in the context of contracts containing agreed or liquidated damages, while article 390 of the UAE Civil Code recognises the freedom of the parties to agree liquidated damages provisions, it also allows a judge (upon application by one of the parties) to vary the amount of the liquidated damages (either up or down) so as to make the compensation equal to the damage caused.

Given the potential wide-reaching nature of these provisions, there is a potential risk that, while the principle of freedom of contract exists, the terms of a contract may be supplemented and reinterpreted by the courts in various circumstances. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Certifiers

5. When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?

United Arab Emirates

The parties to a construction contract are bound by any certificates issued under the terms of the contract by an authorised party; to the extent that such certificates are issued in compliance with the terms of the contract. Typically, the certifier in a construction contract will be the employer’s representative or the engineer.

A construction contract is generally only between two parties (eg, the employer and the main contractor). Therefore, the contractor cannot take direct action against the certifier as there is no direct contractual relationship between the contractor and the certifier. Any dispute in relation to the performance of the contract is between the contractor and the employer only, in the same way as privity of contract would operate in common law legal systems (save for a situation in which a claim could be brought between two non-contracting parties under the tort-related provisions of the UAE Civil Code (articles 124 and 282 through to 298)). 

While UAE law is silent on the impartiality of a certifier, article 246 of the UAE Civil Code provides that all contracts must be performed in accordance with their contents and in a manner that is consistent with the requirements of good faith. Accordingly, an employer could be held accountable if the certifier/engineer does not act impartially as the certifier or engineer is viewed as a representative of the employer under UAE law.

In practice, any certificate issued by an engineer will be binding on the employer as the engineer is the employer's representative under UAE law (save for in cases of fraud). That said, the court retains discretion to review and revise certificates at the request of the contractor.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Competing causes of delay

6. If an employer would cause (eg, by variation) a two-week critical delay to the completion of the works (which by itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (eg, defective work) would cause the same delay, is the contractor entitled to an extension?

United Arab Emirates

The starting point would be to consider the extent to which the issue is dealt with in the agreed wording of any extension of time clause in the contract. Any issues, such as entitlement to liquidated damages, will also be relevant considerations (see question 7). 

If the contract is silent or ambiguous, the position under UAE law is less clear. While the issue of competing causes of delay and concurrency are not expressly addressed in the UAE Civil Code, it is generally understood that various principles of UAE law favour an apportionment approach, where liability for the delay is apportioned between the parties in accordance with their respective degrees of fault. This approach is consistent with articles 246, 290 and 291 of the UAE Civil Code, which emphasise "good faith" and the importance of persons taking responsibility for any harm they have themselves caused.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Disruption

7. How does the law view "disruption" to the contractor (as distinct from delay or prolongation to the completion of the works) caused by the employer’s breaches of contract and acts of prevention? What must the contractor show for a disruption claim to succeed? If an entitlement in principle can be shown (eg, that a loss has been caused by a breach of contract) must the court or arbitral tribunal do its best to quantify that loss (even if proof of the quantum is lacking or uncertain)?

United Arab Emirates

While the concept of disruption is not expressly recognised under UAE law, provisions exist to assist contractors with claims associated with breaches of contract and acts of prevention by the employer. In order to establish a claim for damages or loss suffered as a result of actions by the employer that have hampered the completion of the contractor’s works, the contractor must establish a basic claim for damages. Under UAE law, a claim for damages includes establishing the following:

  • a breach by the employer of its contractual obligations (ie, an event of disruption);
  • the damages that have been suffered by the contractor; and
  • that the damages were caused by the employer’s breach.

The claimant, in this example the main contractor, is required to establish its right to claim damages or losses, or both, suffered as a result of the employer’s disruption. This includes quantification by the claimant, not the court or tribunal, of the damage or loss suffered by the contractor as a result of the employer’s disruption. The court will assess and finally determine the quantum of damage or loss suffered by the claimant based on the claimant's quantification of its loss.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Acceleration

8. How does the law view "constructive acceleration" (where the contractor incurs costs accelerating its works because an extension of time has not been granted that should have been)? What must the contractor show for such a claim to succeed? Does your answer differ if the employer acted unreasonably or in bad faith?

United Arab Emirates

As with a number of other concepts referred to above, there is no recognised principle of “constructive acceleration” under UAE law. It is therefore necessary to consider any such claim by reference to the terms of the contract and the usual basic principles of UAE law.

On this basis, UAE law would require the contractor to demonstrate that there was an express or implied instruction to accelerate the works from the employer or the employer’s representative. An argument from the contractor that the mere absence of an extension of time required the contractor to incur acceleration costs in the absence of an instruction is unlikely to succeed. The presence of bad faith or unreasonable behaviour may assist the contractor in establishing the basis of a claim, but it is likely that such conduct would need to have “caused” the contractor to act in the way it did to succeed. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Force majeure and hardship

9. What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?

United Arab Emirates

There are a number of different provisions in the UAE Civil Code, which are of relevance and are set out below.

Article 287 of the UAE Civil Code

A party may defend liability by applying article 287. in the event that it can establish and prove that an event arising from extraneous circumstances caused a loss and it will not then be bound to make good the loss, providing it was not involved in the event (and in the absence of a legal provision or agreement to the contrary). Article 287 of the UAE Civil Code gives various examples of extraneous circumstances, including force majeure, natural disasters, sudden incident, fault of the aggrieved party or act of a third party.

Article 273(1) of the UAE Civil Code

Article 273(1) provides that, "In contracts binding on 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." As such, where a force majeure event makes performance impossible, the contract will be automatically terminated and the parties will be returned to their pre-contractual positions and damages potentially awarded to achieve this (see question 11 for further comments regarding impossibility).

Article 273(2) of the UAE Civil Code

Further, in cases where only part of the contract is impossible to perform, the impossible part of the contract is extinguished. However, article 273(2) also provides that the contractor is permitted to terminate the entirety of the contract provided the employer is made aware of this.

Article 893 of the UAE Civil Code

There is also an express provision in the Muqawala section of the UAE Civil Code that deals with impossibility of performance. Article 893 of the UAE Civil Code provides that, if "any cause arises that prevents the performance or completion of the contract, either of the parties under the contract may require it to be cancelled or terminated.

Article 894 of the UAE Civil Code

Article 894 provides that if a contractor commences performance of a Muqawala contract and then becomes incapable of completing it for a cause in which the contractor played no part, the contractor shall be entitled to the value of the work it has completed and to the expenses it has incurred in the performance of the contract, up to the amount of the benefit the employer has derived therefrom.

Article 249 of the UAE Civil Code

A judge or arbitrator is allowed, after weighing up the interests of each party, to reduce an "onerous" contractual obligation to a "reasonable level" if there are "exceptional circumstances" of a public nature that could not have been foreseen, and as a result the obligation becomes "onerous" (not necessarily impossible to perform) and the person with the obligation is threatened with "grave loss".

In summary:

  • extraneous circumstances may lead to relief. These include force majeure events, natural disasters, sudden incident, fault of the aggrieved party or act of a third party; such events must not have been possible to predict or avoid; and
  • in addition to agreed terms in the contract defining the scope of force majeure events and associated relief, the UAE Civil Code implies numerous relevant provisions as discussed above.

Relief for force majeure and hardship is available where only some contractual obligations are affected, subject to the provisions of article 249 of the UAE Civil Code being satisfied. Furthermore, relief such as termination of the contract may apply where partial impossibility of contract terms is evidenced.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

10. When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?

United Arab Emirates

As a general principle, UAE law does not allow parties to avoid express contractual obligations without a very good reason. Accordingly, and as addressed in question 9, it will be difficult for a contractor to claim an entitlement for further payment on the basis that the completion of the works has become unduly expensive. This may be an issue, for example, where the price of materials (eg, rebar or concrete) has increased and the risk of escalation in the cost of materials under the contract rests with the contractor.

However, as stated above, article 249 of the UAE Civil Code may provide the contractor with a basis for relief. There are four elements that must be established under article 249 of the UAE Civil Code:

(a) there must be general exceptional circumstances; (b) which could not have been foreseen; (c) which were unavoidable; and (d) as a result, the execution of the works by the contractor became oppressive and this exposes the contractor to "grave loss" beyond its control.

As such, article 249 of the UAE Civil Code may provide the contractor with a remedy whereby the judge reduces the impact of the oppressive obligation so that the loss is shared between the contractor and the employer. For example, in circumstances of price escalation, the contractor may argue that an appropriate remedy is to renegotiate the price of the contract works.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Impossibility

11. When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?

United Arab Emirates

If the contractor is unable to achieve a particular aspect of the specification imposed upon the contractor in the contract, the contractor will prima facie be in breach of its contractual obligations and the employer will be entitled to damages for the breach.

If the contract is a Muqawala contract (ie, a construction contract), article 877 of the UAE Civil Code may also provide relief to the employer, as it states (in part):

If it appears that he (the contractor) is carrying out what he contracted to do in a defective manner or in a manner in breach of the agreement, the employer may require that the contract be terminated immediately if it is impossible to make good the work, but if it is possible to make good the work it shall be permissible for the employer to require the contractor to abide by the conditions of the contract and to repair the work within a reasonable period.

Further, the employer could potentially seek the cancellation of the contract under article 893 of the UAE Civil Code, which states that "if any cause arises preventing the performance of the contract or the completion of the performance thereof, either of the contracting parties may require that the contract be cancelled or terminated as the case may be."

If the impossibility is caused by the employer’s failure to perform its obligations, the contractor may be able to seek relief under article 247 of the UAE Civil Code, which provides in part that "if the mutual obligations are due for performance, each of the parties may refrain from performance of his obligations if the other contracting party does not perform that which he is obliged to do."

Under article 894, if the impossibility arises from a cause "in which he played no part," the contractor "shall be entitled to the value of the work he has completed and to the expenses he has incurred in the performance up to the amount of the benefit the employer has derived therefrom".

UAE law also expressly addresses the issue of impossibility caused by force majeure type risks (see question 9). 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Clauses that seek to pass risks to the contractor for matters it cannot foresee or control

12. How effective are contractual provisions that seek to pass risks to the contractor for matters it cannot foresee or control, for example, making the contractor liable for: (a) a specified event of force majeure; (b) ground conditions that no reasonably diligent contractor could have foreseen; or (c) errors in documents provided by the employer, such as employer's requirements in design and build forms?

United Arab Emirates

UAE law recognises the principle of freedom of contract. This includes the right to agree to impose obligations on a contractor in respect of specified events of force majeure or, to a certain extent, in respect of ground conditions.  

Article 287 of the UAE Civil Code expressly recognises the right to agree allocation of such risks. It provides that:

If a person proves that the harm arose out of an extraneous cause in which he played no part such as a natural disaster, sudden incident, force majeure, act of a third party, or act of the person suffering harm, he shall not be bound to make it good in the absence of a provision of the law or an agreement to the contrary.

UAE law thereby expressly recognises a right to impose the risk and cost onto the contractor to rectify the consequences of certain matters by agreement. That being said, where such a contractual clause operated in a highly prejudicial manner, a contractor may be able to seek relief under article 246 of the UAE Civil Code, which provides as follows:

  • The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.
  • The contract shall not be restricted to an obligation upon the contracting party to do that which is contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the disposition.

In this context and in the particular case of ground conditions, an agreement requiring the contractor to do whatever is necessary to overcome unfavourable ground conditions is likely to be outside the bounds of what would be reasonable in the circumstances and may amount to an abuse of right. Under article 106 of the UAE Civil Code, a person shall be liable for the unlawful exercise of a right if the right sought to be exercised is disproportionate to the harm that will be suffered by others, or if it exceeds the bounds of usage and custom.

Furthermore, it is worth noting that decennial liability (see question 13) also extends to ground conditions and is mandatory. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Duty to warn

13. When must the contractor warn the employer of an error in a design provided by the employer?

United Arab Emirates

Many construction contracts carry an express obligation on the contractor to advise the employer of an error in a design provided by the employer. If the contract is silent, the contractor should still seek to warn the employer given the contractor’s potential liability under article 878 of the UAE Civil Code and the decennial liability provisions of article 880 of the UAE Civil Code.

In this regard, article 878 provides that "the contractor shall be liable for any loss or damage resulting from his act or work whether arising through his wrongful act or default or not, but he shall not be liable if it arises out of an event which could not have been prevented".

Article 880 of the UAE Civil Code also provides that, if the design is prepared by an architect (whether or not on behalf of the employer) with the intention that the contractor would carry out the works under the architect’s supervision, "they shall both be liable for a period of ten years to pay compensation to the employer for any total or partial collapse of the buildings they have constructed…" Accordingly, it is in the contractor's interest to warn the employer of errors in the design to avoid possible subsequent liability under article 880. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Good faith

14. Is there a general duty of good faith? If so, how does it impact upon the following (where they are otherwise permitted under the construction contract): (a) the level of intervention in the works that is allowed by the employer; (b) a party’s discretion whether to terminate or suspend the contract; or (c) the employer’s discretion to claim pre-agreed sums under the contract, such as liquidated damages for delay?

United Arab Emirates

The UAE Civil Code imposes an obligation on contracting parties to abide by the terms of their agreement (article 243 of the UAE Civil Code) and that they must discharge their respective obligations in a manner that is consistent with the requirements of good faith (article 246 of the UAE Civil Code). There is no prescription on what the requirements of good faith entail; it is a matter of judgment for the court to decide based on relevant facts and circumstances.

The court may decide whether a party has acted contrary to the requirements of good faith by looking at article 106 of the UAE Civil Code, which provides, among other things, that the exercise of a party's rights will be unlawful if:

  • it intended to infringe the rights of another party;
  • the outcome is contrary to the rules of Islamic Sharia, the law, public order, or morals;
  • the desired gain is disproportionate to the harm that will be suffered by the other party; or
  • it exceeds the bounds of custom or practice.

Issues of good faith may be relevant in terms of ascertaining whether a party was justified in seeking to suspend or terminate the contract, levy liquidated damages and the like (see below for further detail on these topics). 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Time bars

15. How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 ("otherwise in connection with the contract")? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?

United Arab Emirates

While the UAE Civil Code gives primacy to the parties’ freedom of contract, civil law jurisdictions such as the UAE will not always uphold notice provisions that operate to bar recovery to claims that would otherwise be valid or just, even where the requirement to give notice is clearly intended to operate as a condition precedent to recovery. 

Clause 20.1 of the FIDIC Red Book 1999 relates to the contractor’s claims for extensions of time for completion or additional payments, or both, with reference to specific notification limitations in relation to the grounds for such claims. Under UAE law, however, there is scope to argue that a claim will not be prevented due to it being brought outside the time limits specified in the contract.

Specifically, article 473 of the UAE Civil Code provides that:

A right shall not expire by the passage of time but no claim shall be heard if denied after the lapse of fifteen years without lawful excuse, but having regard to any provisions relating thereto.

Further, article 487(1) of the UAE Civil Code states that:

It shall not be permissible to waive a time-bar defence prior to the establishment of the right to raise such defence, nor shall it be permissible to agree that a claim may not be brought after a period differing from the period laid down by law.

Accordingly, articles 473 and 487(1) of the UAE Civil Code give scope to allow a tribunal or court to rule that a clause that seeks to extinguish a contractor’s otherwise valid claims solely on grounds of non-compliance with specific notice provisions can be determined as void and, as such, allow the contractor’s claims to proceed.

It is also possible to argue that the engineer is not entitled to refuse to determine the contractor’s claim under clause 20.1 of the FIDIC Red Book on grounds of lack of notice (especially if the engineer was already aware of the delaying event) in circumstances where to do so would be contrary to the employer’s obligation to perform the contract in a manner consistent with the requirements of good faith (see article 246(1) of the UAE Civil Code).  Further, and as noted in question 12, this may also be contrary to article 106 of the UAE Civil Code on the basis that the right sought to be exercised by the employer (ie, the time bar) is disproportionate to the harm that will be suffered by the contractor.

Regarding claims based on employer-caused events, as discussed in question 6, UAE law will generally be applied in favour of apportionment of liability. Therefore, if a claim arises due to the default of the employer, but is raised outside the prescribed time limit specified in the contract, a court or tribunal applying UAE law could potentially act to nullify any agreement seeking to impose a limitation period for bringing a claim on the basis that such a limitation would be contrary to public order. 

It is worth noting that FIDIC has published an updated 2017 version of the Red Book, as well as others in the FIDIC suite, which modifies the regime for claims and notice under clause 20.1 of the 1999 Red Book. These new forms have yet to see much take-up in the UAE. An amended form of the FIDIC Red Book 1999, and on occasion the 1987 edition, are still commonly used in construction contracting in the UAE.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Suspension

16. What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor’s (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer’s (non-) performance?

United Arab Emirates

In the absence of express contractual rights of suspension, article 247 of the UAE Civil Code may allow a party to a contract to suspend performance of its obligations if the other party has failed to perform its own obligations.

Contractors may, for example, be able to suspend the contract if the employer has failed to make payments in accordance with the contract and relative to the works performed. However, caution should be advised as a court or tribunal is likely to consider the magnitude of the breach and the extent to which the act of suspension was commensurate to the breach. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Omissions and termination for convenience

17. May the employer exercise an express power to omit work, or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?

United Arab Emirates

See question 18 in respect of termination of contracts under UAE law. In summary, with regard to construction contracts (or Muqawala contracts under UAE law), article 892 of the UAE Civil Code provides that: "A contract of Muqawala shall terminate upon the completion of the work agreed or upon cancellation of the contract by consent or by order of the court."

Within the general provisions on contracts, article 267 of the UAE Civil Code provides that: "If the contract is valid and binding, it shall not be permissible for either of the contracting parties to resile from it, nor to vary or rescind it, save by mutual consent or an order of the court, or under a provision of the law."

It is, therefore, arguable that if there is an express contractual term permitting termination for convenience, the employer has the right to terminate the contract for convenience. This is consistent with the principle of freedom of contract codified in article 257 of the UAE Civil Code.

In practice, in the case of Muqawala contracts, the UAE courts may, adopting the position under the Egyptian Civil Code, permit the employer to terminate for convenience provided that compensation is paid (for the value of the work up to termination plus loss of profits). This could potentially include termination for the purpose of appointing another contractor to undertake the same work for a cheaper price although the amount of compensation to be paid to the contractor is likely to undermine termination for that purpose.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Termination

18. What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?

United Arab Emirates

As discussed above, the principle of freedom of contract is codified in article 257 of the UAE Civil Code. As such, parties are permitted to enter into contractual agreements and the courts will uphold these agreements. However, as with most jurisdictions, limits have been placed on the application of this principle within the UAE, including some mandatory provisions that take precedence over contractual provisions. A contractual provision that deals with anything prohibited by law, or contrary to public order or morals, shall be void under UAE law.

Mandatory provisions in relation to termination of contracts exist under UAE law in section 5 of the UAE Civil Code (dissolution of contracts). Article 267 of the UAE Civil Code provides that: ‘If a contract is valid and binding, it shall not be permissible for either of the contracting parties to resile from it, nor to vary or rescind it, save by mutual consent or an order of the court, or under a provision of the law.’

"Mutual consent" under article 267 of the UAE Civil Code extends to the parties agreeing to mutually revoke the contract after it is concluded (articles 268–270) and also permits parties to agree contractual mechanisms for termination (ie, consent at the time of entering into the contract such that specific consent is not required at the time of termination). The latter is reflected in article 271. 

Article 271 of the Civil Code provides as follows:

It shall be permissible to agree that a contract shall be regarded as being cancelled spontaneously (automatically) without the need for a judicial order upon non-performance of the obligations arising thereout, and such agreement shall not dispense with notice unless the contracting parties have expressly agreed that it should be dispensed with.

It has been established by the UAE courts, however, that this right to cancel the contract unilaterally without order of the courts must be expressly stated in the contract (ie, the contract must expressly state that no court order is required for termination). Where there is such a contractual mechanism and the obligee cancels the contract and where the obligor disputes the fact of non-performance, the role of the court will be limited to determining the fact of non-performance and either affirming the decision to cancel (if non-performance is made out) or the existence of the contract (if non-performance is not made out).

As detailed in questions 9 and 11, a contract may also be terminated in part if termination relates to the partial impossibility of a contract term.

Termination is also covered under article 272 of the UAE Civil Code, which provides that, if one party fails to discharge its obligations under the contract, the other party may, after giving notice to the obligor, require that the contract be performed or cancelled. Article 272(2) of the UAE Civil Code envisages the court considering the merits of any termination and may, at its discretion (as appropriate), order the obligor to perform the contract forthwith, defer performance to a specified time, or order that the contract be cancelled and compensation paid or deny the application for cancellation.

A party’s right under article 272 of the UAE Civil Code is not automatic and a contract can only be terminated by order of the UAE courts. As a matter of practice, this can be prospectively (ie, prior to any termination of the contract being communicated as between the parties) or retrospectively (ie, following a party's purported termination of the contract). It is worth noting, however, that under article 272, termination takes effect as per the order of the court (not the date of any purported termination). 

Additionally, in accordance with article 892 of the UAE Civil Code, a Muqawala contract can be terminated upon completion of the work agreed or upon cancellation of the contract by consent or by order of the court. This provision is consistent with both articles 267 and 271 of the UAE Civil Code. As noted in question 17, in the case of Muqawala contracts, in practice, the UAE courts may rely upon provisions of the Egyptian Civil Code to permit the employer to terminate for convenience provided that compensation is paid.

In summary, under the UAE Civil Code, a construction contract can be terminated in the following circumstances:

  • by mutual consent;
  • by court order;
  • by operation of law; or
  • upon completion of the works.

The financial consequences of termination will turn on the manner in which termination has been effected. For example, article 274 of the UAE Civil Code provides that, if a contract is cancelled automatically, by the agreement of the parties, or pursuant to an order of the court, the parties are to be restored to their pre-contractual position. If this is not possible, then a court or tribunal may order that compensation be paid. In making its determination and in awarding any damages, if any, a court or tribunal in the UAE will take into account the facts of the case by reference to the party at fault in causing the termination of the contract. Pursuant to article 292 of the UAE Civil Code, loss of profit may also be recoverable as compensation.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

19. If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?

United Arab Emirates

As detailed above, a party to a contract may apply to court to request an order for termination of the contract (see question 18).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

20. What limits apply to exercising termination rights?

United Arab Emirates

There are a number of considerations that limit a party's entitlement to exercise termination rights, including:

(a) courts may grant a party extra time to perform if termination is sought via the court system (article 272 of the UAE Civil Code); (b) termination clauses must be implemented in good faith (see question 14); (c) termination clauses must be made with the mutual agreement of both parties to expressly allow automatic termination without need for an order of the court, otherwise it may be necessary to seek a court order to enforce any termination rights (article 267 of the UAE Civil Code).

It is therefore important to ensure that any termination provisions are properly drafted and make it explicitly clear that the provision has the mutual consent of both parties and that no order of the court is required. In addition, a party wishing to terminate the contract must also give notice to the other party unless the contract expressly agrees otherwise (article 271 of the UAE Civil Code).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Completion

21. Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?

United Arab Emirates

Many standard construction contracts contain provisions allowing the employer to take-over parts of the works prior to practical completion (eg, clause 10.2 of the 1999 FIDIC Red Book). These clauses tend to operate to deem completion to have occurred on the date of beneficial takeover, which has implications for the defects liability period, completion and performance testing, obligations regarding the care of the works and, significantly, delay damages. If the contract is silent or ambiguous, however, the position under UAE law is unclear as the issue is not expressly addressed in the UAE Civil Code.

It is possible, however, that certain principles of UAE law would operate to provide the contractor with relief or compensation in the event that the employer took beneficial possession of the works and then sought to rely on a later date as being the date of completion. Arguably, such an action would be contrary to the fundamental principle of good faith under article 246 of the UAE Civil Code. If the employer has commenced early commercial operation in respect of the works it may also support an application under article 390(2) for a court or tribunal to adjust any agreed compensation (eg, delay liquidated damages) to reflect the actual loss suffered (see question 25).

It should also be noted that under articles 884 and 885 of the UAE Civil Code, an employer is obliged to take delivery of completed contract works in circumstances where there is no valid reason for an employer not to take possession and the risk or care of the completed works shall be deemed to be transferred to the employer. Subject to any specific procedures and conditions for handing over and taking delivery of completed works, which are often specified in construction contracts (for example, clauses 48 and 10 of the 1987 and 1999 FIDIC Red Book conditions, respectively), this transfer of risk and care is likely to be interpreted by the UAE courts as being at the end of the delay damages period, the date of transfer of insurance obligations and the date that retention monies should be released.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

22. Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?

United Arab Emirates

See question 21. Some subsequent complaints are barred (such as the imposition of delay damages for periods after the employer took possession of the works), though other types of complaints may still be permitted. For example, the employer may still have an entitlement to claim that part of the works were incomplete or non-compliant unless the employer has performed some unequivocal act that demonstrates that it does not intend to exercise such an entitlement. Again, this will usually depend on the terms of the construction contract between the parties.

In addition, article 880 of the UAE Civil Code imposes mandatory decennial liability obligations whereby the contractor is jointly liable (with the design architect, engineer or supervising architect or engineer, as the case may be) to the employer for the structural integrity of the building or installation for a period of 10 years from the date of handing over, unless such building or installation is intended to remain for less than 10 years. This is a strict liability that does not require the employer to show negligence or default on the part of any of the liable parties. Under article 883, an employer has three years from the total or partial collapse of the building or installation, or the discovery of structural defects in the building or installation, to seek compensation from the liable parties. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Liquidated damages and similar pre-agreed sums ('liquidated damages')

23. To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?

United Arab Emirates

As discussed above, the principle of freedom of contract is recognised under UAE law. As such, parties can agree to include a provision entitling an employer to liquidated damages in the event of delays to the completion of the works.

The extent to which a liquidated damages clause will operate as an exhaustive remedy will depend on the specific drafting and interpretation of the particular clause. Unlike common law jurisdictions, there is no prohibition on liquidated damages provisions being ‘penal’ in nature and the courts have upheld attempts by parties to claim liquidated damages and general damages if the wording of the contract allows such recovery. For example, contracts often contain provisions allowing recovery of extended consultant supervision fees or other damages in addition to liquidated damages. Such clauses are generally enforceable under UAE law but it is important that the clause is drafted in such a manner so as to avoid ambiguity or uncertainty of terms (see also question 25).

Liability for acts of fraud, wilful misconduct, recklessness or gross negligence can generally not be excluded or limited by contractual terms. For example, article 296 of the UAE Civil Code provides that any provision that exempts a party from a harmful act will be void. Likewise, any limitations made by reference to a criminal liability, such as fraud, can also not be limited by the parties in the contract. 

Further, article 390(2) of the UAE Civil Code allows a court or arbitral tribunal – upon application by one of the parties – to override a contractually agreed compensation arrangement and adjust the agreed compensation to make it equal to the actual loss that has been suffered (see question 25).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

24. If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no "sweep up" provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?

United Arab Emirates

The UAE does not recognise the "prevention principle", whereby time is said to be "at large" when the contract fails to provide for the situation where the employer causes critical delay. In common law jurisdictions, which do recognise the prevention principle, the effect of this situation is that the employer can no longer rely upon the liquidated damages mechanism to recoup any damages for delay from the contractor such that the employer must prove that the contractor was responsible for the events causing delay and the damage caused as a result of that delay.

As discussed above, however, a contractor may be able to argue that an employer claiming liquidated damages when it was itself responsible for the delay is contrary to principles of good faith. Instead, liability for liquidated damages may be assessed and determined by courts and tribunals in the UAE by reference to apportionment of fault (see questions 6, 12 and 14). In practical terms, courts will also look at the principle in article 287 and 290 of the UAE Civil Code to reduce to amount of damages to take into account contribution by the injured party (ie, the employer).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

25. When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?

United Arab Emirates

As noted above, pursuant to article 390(2) of the UAE Civil Code, a court or arbitral tribunal may override a contractually agreed compensation arrangement and adjust the agreed compensation to make it equal to the actual loss that has been suffered. The party seeking to have the level of liquidated damages adjusted will need to demonstrate the actual loss suffered. Damages must also arise as a natural result of the contractual breach (as provided for by article 292 of the UAE Civil Code). The majority of reported cases in the UAE are restricted to adjusting the level of liquidated damages downwards.

Additionally, the court may in practice rely on the principle in article 287 and 290 of the UAE Civil Code to reduce to measure of actual damages to account for contributions by the injured party (ie, the employer).

A court or tribunal is unlikely to adjust liquidated damages by reference to substandard works, as such matters tend to be dealt with separately under most construction contracts. Where the contractor performs its obligations in a defective manner or contrary to the terms of the contract, article 877 of the UAE Civil Code allows the employer to either request the immediate termination of the contract (if it is not possible to remedy the defect) or, if the defect is remediable, to request that the contractor abide by the terms of the contract and remedy the defect within a reasonable period of time, failing which the employer may ask the court to rescind the contract or permit the engagement of another contractor at the cost of the former contractor (see also question 28).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

26. When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?

United Arab Emirates

See question 25.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Assessing damages and limitations and exclusions of liability

27. How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?

United Arab Emirates

Under UAE law, the ordinary rules regarding damages for breach of contract apply. As such, contract damages can be awarded to compensate a party for monetary loss suffered. This can include an award for the costs or liabilities that the claimant has incurred to a third party that it would not have incurred but for the breach, and profits the claimant has lost that it would have earned but for the breach. The loss must, however, arise naturally from the breach (article 292 of the UAE Civil Code).

As above, parties are free to specify limitations on the monetary compensation in the terms of their contract. However, such agreement can be subject to review by a court or tribunal in the UAE (see question 25).

Furthermore, article 389 of the UAE Civil Code provides that, if the amount of compensation has not been fixed in the contract or at law, the court will assess the damage suffered by the party at the time the damage was caused. The claimant must, therefore, demonstrate to the court or tribunal that it has incurred the costs it claims. It is therefore possible, to the extent that the loss of profits can be evidenced, that a claim for loss of profits may be recovered.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

28. If the contractor’s work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?

United Arab Emirates

The employer can require the contractor to rectify the works as long as it is possible for the contractor to do so (see article 877 of the UAE Civil Code). The law is silent on whether rectification can be avoided if the cost is disproportionate. Provided that the agreement is valid and the clauses or provisions are correctly and clearly worded, the parties are free to agree on a stricter rectification regime.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

29. If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer’s rights to claim for any defects appearing after the DNP expires?

United Arab Emirates

The DNP is a period in which the contractor retains liability under the contract for dealing with and rectifying any defects that manifest themselves during this period. This is also referred to as the rectification period or the defects liability period.

During the DNP, the contractor is liable to rectify any defects that arise in relation to its scope of works under the contract. It is typical for the DNP to run from the date of substantive completion of the contractor’s scope of works under the contract, usually indicated by the issuance by the employer or the employer’s representative of the taking-over certificate or initial completion certificate, for a limited period, usually 365 days.

For example, under the FIDIC Red Book 1999, clause 11.1 details the provisions regarding completion of the contractor’s works and notifications for remedying defects during the DNP. In summary, the contractor is required to complete any works outstanding at the date of the taking-over certificate and execute all work required to remedy defects or damage, as notified by the employer on or before the expiry of the DNP.

The existence of a DNP does not prevent the employer from claiming damages, including the cost of rectification works if required, for defects arising after the DNP has expired. Article 880 of the UAE Civil Code also provides the employer with specific protection in relation to those defects that fall under the decennial liability regime. This article imposes two key obligations:

  • the contractor and the architect are liable for damages for any total or partial collapse or serious defects affecting the stability or safety of a fixed structure regardless of whether or not the collapse or defect was in the design or in the construction; and
  • the employer can sue either the contractor or the architect, or both, for a period of 10 years from the time of delivery of the work (provided the architect had an obligation to supervise the work). It is not necessary for the employer to identify who is at fault  or to prove any fault on the part of the contractor or the engineer; the existence of the damage itself is sufficient to impose liability. However, it is understood that the local courts will take the approach of apportionment between the contractor and any architect or consultant in accordance with the contribution by each of them to the default that resulted in the damage.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

30. What is the effect of a construction contract excluding liability for “indirect or consequential loss”?

United Arab Emirates

It is common in the UAE for construction contracts to include clauses that limit and exclude liability for consequential loss, loss of production and loss of revenue. Such clauses are, in principle, enforceable under UAE law. The drafting of such clauses should be as specific as possible as to the exact losses excluded, to avoid disputes. Further, the parties are free to agree and limit the extent to which the employer is entitled to claim for damages by reference to the specific breaches agreed in the clause.

The extent to which such clauses operate as an exhaustive remedy depends on the specific drafting and interpretation of the particular clause. Such clauses should be specific and drafted to cover particular breaches, such as delay to the completion of the works by the contractual completion date or delays prior to the contractual completion date.

Depending on the drafting of the contract, such clauses may act as an exhaustive remedy for a specific breach and prevent the employer from recovering additional general damages. It is also possible under UAE law for a construction contract to provide for a pre-agreed amount of damages, liquidated damages, to be imposed on the contractor, as a pre-estimate of the loss.

Article 390(1) of the UAE Civil Code allows the parties to agree on a fixed amount of damages in advance. As noted previously, however, article 390(2) of the UAE Civil Code allows the court, upon application by a party, to increase or decrease the amount of agreed damages in order to reflect the actual loss suffered. The court will require substantive evidence to support an application to increase or decrease the amounts agreed in a liquidated damage clause. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

31. Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?

United Arab Emirates

As detailed in question 30, parties are free to agree limitations and exclusions to liability under the contract. Such clauses will typically limit the amount of compensation to which a party is entitled. However, it is important to note that such clauses are not effective in relation to tortious acts, such as fraud, wilful misconduct, recklessness or gross negligence (see articles 296 and 383(2) of the UAE Civil Code).

Further, article 282 of the UAE Civil Code states that: "Any harm done to another shall render the actor, even though not a person of discretion, liable to make good the harm."

Unlike the common law concept of liability for negligence, where liability only arises where a party owes a duty of care to another party and fails to take reasonable care, under UAE law, liability can be found to apply to a larger field of persons (ie, there is no need for a duty of care to exist) and with reference to a wider range of conduct (ie, the test of "reasonable" care is not applicable and liability can arise in relation to any act or omission that causes harm).

In terms of causation between behaviour and the loss for harmful or tortious acts, article 283 of the UAE Civil Code states:

  • Harm may be direct or consequential.
  • If the harm is direct, it must unconditionally be made good, and if it is consequential there must be a wrongful or deliberate element and the act must have led to the damage.

Article 283 is intended to limit "‘the actor's" liability for consequential harm to circumstances where "the actor" has acted in a wrongful and deliberate way, and such acts have led to the damage. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Liens

32. What right does a contractor have to claim a lien (or similar) in the works it has carried out? If so, what are the limits of the right if, for example, the employer has no interest in the site for the permanent works? How is the right recognised and enforced?

United Arab Emirates

Article 879(1) of the UAE Civil Code allows a contractor to claim a lien in the works only if his or her work produces a beneficial effect on the property (ie, when the works increase the value of the property). Conversely, article 879(2) provides that, if the works produce no beneficial effect on the property, the contractor is not allowed to claim a lien in the works.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Subcontractors

33. How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?

United Arab Emirates

Pay-when-paid clauses are commonplace in the construction market in the UAE. Subcontracts between a main contractor and its numerous subcontractors will regularly include pay-when-paid provisions. Such provisions mean that the contractor is not liable to pay the subcontractor until it has received payment for the works from the employer.

Despite such clauses being accepted under UAE law, the principles of good faith, as specified in article 246 of the UAE Civil Code, will underpin the pay-when-paid clause and limit its enforceability under UAE law. For example, it is contrary to the principle of good faith for a contractor to take advantage of such a pay-when-paid clause under its subcontract if the contractor is in default.

In the UAE, there is no distinction between "pay-when-paid" and "pay-if-paid" clauses, in that they are taken by the courts to have the same effect. The UAE courts have held that these types of conditional payment clauses create a condition precedent in that the obligation on the contractor to pay only arises if and when the contractor receives the funds from the employer.

To successfully rely on a pay-when-paid clause, however, the contractor has to demonstrate that it has actively pursued the subcontractor’s claims against the employer. In this regard, the maximum expectation that the subcontractor can have is for the contractor to file a legal action against the employer.

Notably, in accordance with article 885 of the UAE Civil Code, pay-when-paid clauses are arguably no longer enforceable by the contractor on its subcontractors once the works contracted for have been handed over (a position which has been upheld by the Dubai Court of Cassation).   

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

34. May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor’s claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?

United Arab Emirates

Article 891 of the UAE Civil Code provides that: "A subcontractor shall have no claim against the employer for anything due to him from the first contractor unless he has made an assignment to him against the employer."

As explained in questions 39 and 40, UAE law recognises the principle of freedom of contract such that parties are free to agree upon a foreign law to govern their contract. However, there may be certain mandatory laws that would apply. Further, a local court may choose not to apply foreign laws on public policy grounds.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

35. May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?

United Arab Emirates

UAE law recognises and upholds the right of a party to enter into an arbitration agreement to govern disputes that arise under the contract. If there is no arbitration agreement between the contractor and the subcontractor, the subcontractor cannot be bound to join in arbitral proceedings between the contractor and the employer (see article 22 of the Arbitration Law), unless the subcontractor (and all other parties) agrees to be bound by the arbitral proceedings.

In the same vein, the contractor cannot require the employer to join an arbitration procedure with its subcontractors. If the contractor made an application to a court or tribunal for the employer to be joined in its arbitration with a subcontractor, absent consent of all parties and the inclusion of an appropriate consolidation and joinder provision in the subcontract, such an application would be rejected. Further, where an arbitration agreement exists in the main contract, the contractor cannot require litigation between itself, the employer and the subcontractor. Owing to the existence of an arbitration agreement, the local courts of the UAE do not have jurisdiction. The relevance of the seat of arbitration in another jurisdiction will have no effect on this.

As such, it is common for parallel proceedings to exist between the contractor and the employer, and between the contractor and its subcontractor. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Third parties

36. May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?

United Arab Emirates

Article 252 of the UAE Civil Code provides that a contract may not impose an obligation on a third party; however, it also provides that a contract may create a right for a third party. As such, a third party can enforce a term of the contract if the term infers a benefit on the third party.

In terms of the third party’s connection with the employer, article 250 of the UAE Civil Code provides that:

The effects of the contract shall extend to the contracting parties and their general successors without prejudice to the rules relating to inheritance, unless it appears from the contract or from the nature of the transaction or from the provisions of the law that the effects were not to extend to a general successor.

As such, a third party who is a successor to the employer may bring claims against the contractor in respect of both delays and defects. Such claims will be subject to other terms of the contract, such as limitations of liability. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

37. How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?

United Arab Emirates

UAE law recognises the concept of a separate legal personality for companies. A separate legal personality means that a company is capable of, among other things, suing and being sued in its own name. The shareholder, directors and employees of the company have no direct claim on the assets and no exposure to the company’s losses, beyond the share capital invested.

Managers and directors are liable for and obliged to comply with various requirements in relation to the corporate compliance of a company. Furthermore, numerous provisions exist under UAE law relating to a manager’s liability towards a company, its shareholders or third parties for all acts of fraud, abuse of power, and violation of the company’s memorandum of association and for mismanagement. This includes, for example, an obligation that the manager does not sign documents that contain false obligations. Managers and directors acting in breach of their duties or acting fraudulently or with gross misconduct will be personally liable to the company, shareholders and third parties for their acts (article 84 of the Commercial Companies Law No. 2 of 2015 (the Commercial Companies Law)). As the definition of manager is broad, this would capture any person who plays an active role in company decision making, even if they are not formally appointed as a manager or director. This could potentially include directors of the company’s shareholder.

Article 144 of UAE Law No. 9 of 2016 on Bankruptcy also includes provisions in relation to the liability of managers and directors in the event of bankruptcy of the company. Managers or directors who are found to have acted in breach with the Commercial Companies Law in connection with a company that is declared bankrupt, could be held personally liable for its losses. 

There are some exceptions to the limited liability of shareholders in limited liability and joint-stock companies in the UAE. For example, article 328 of the Commercial Companies Law provides that if a foreign company or its office or branch is active in the UAE without the necessary trade licence, all persons who performed this activity shall be personally and jointly liable for their actions. In such situations, the separation of the personality of a company and its shareholders may not be maintained; meaning the veil of incorporation is lifted. Regardless, lifting the corporate veil is rare in the UAE.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Limitation and prescription periods

38. What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?

United Arab Emirates

There are a number of statutory limitation periods under several of the UAE’s codified laws that may determine a party’s right to claim.

An action is commenced by lodging a notice of claim in the appropriate court or service of a Request for Arbitration. Generally, a party’s contractual claim will be time-barred after 15 years unless a specific provision states otherwise. Many exceptions exist to the general rule found in several statutes. The following may be applicable to claims for construction work or design services:

(i) 10 years for claims arising from commercial transactions that are governed by the Commercial Code;  (ii) five years for claims for professional fees; and (iii) three years for acts causing harm (torts).

In addition, as detailed in questions 13, 22 and 29, UAE law contains provisions in relation to decennial liability. Article 880 of the UAE Civil Code provides that claims must be brought against the contractor and architect within three years of discovery of any defect that threatens a building’s stability or safety, and no later than 10 years from the date of delivery of the works. In theory, the contractor and architect are therefore potentially liable for 13 years.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Other key laws

39. What laws apply that cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

United Arab Emirates

As discussed in question 2, the UAE recognises the principle of freedom of contract. Contracts are formed by mutual consent of the contracting parties and the contract will be binding on them. However, this freedom is limited by mandatory laws. Mandatory laws that parties cannot set aside in their contracts are those related to public order and many other issues, such as:

  • labour law (covers housing of workers, summer midday shutdown, payment and conditions, and possibly Ramadan hours);
  • prohibitions against the use of the site for unauthorised purposes;
  • criminal laws;
  • environment, health and safety rules (including directives from municipalities);
  • building permit compliance;
  • licensing of main contractor and subcontractors to perform works in the jurisdiction; and
  • architect of record requirements (and municipality compliance with submission and sign-off of construction drawings).

In addition, public order matters are potentially very wide reaching. Article 3 of the UAE Civil Code provides that:

Public order shall be deemed to include matters relating to personal status such as marriage, inheritance, and lineage, and matters relating to systems of government, freedom of trade, the circulation of wealth, rules of individual ownership and other rules and foundations upon which society is based.

Further, as discussed above, article 390(2) of the UAE Civil Code permits a court or arbitral tribunal – upon application by one of the parties – to override a contractually agreed compensation arrangement and adjust the agreed compensation to make it equal to the actual loss that has been suffered (see question 25).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

40. What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?

United Arab Emirates

Parties are free to agree a foreign law to be the governing law of their contract, but mandatory provisions of UAE law will still apply (see question 39). Additionally, it is important to note that the UAE courts are normally reluctant to apply foreign laws on public policy grounds. The principle of public policy has been widely construed by the courts and, therefore, can lead to uncertainty as to its applicability.

In summary, if matters are referred to the local courts, a UAE court may decide not to apply foreign law to a contract and instead apply UAE law if, for example, such foreign law is contrary to public policy grounds, Sharia law or the examples of mandatory provisions set out above.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Enforcement of binding (but not finally binding) dispute adjudication board (DAB) decisions

41. For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?

United Arab Emirates

Historically, dispute adjudication boards (DABs) have been rarely used in the UAE but this trend has recently seen some change. The FIDIC suite of contracts incorporates a DAB process, but it is typically deleted via the particular conditions of a contract, leaving the remaining dispute resolution process as a two-step system of negotiation or amicable settlement followed by arbitration.

The FIDIC DAB process provides an interim resolution, subject to either party referring the issue to arbitration. In the event that neither party seeks to challenge the DAB decision, it will be final.

While the UAE courts may uphold the terms of a multi-tiered dispute resolution, including the use of a DAB, under the recognised principle of freedom of contract, it remains uncertain how the local courts in the UAE, who have traditionally been unwilling to recognise partial awards (whether final or not), would approach enforcement of a decision of a dispute board on an interim issue such as entitlement to progress payments (or the enforcement of an arbitral award attempting to uphold such a decision). 

The Arbitration Law appears to address this issue, with article 39(1) now recognising a tribunal's authority to issue an interim or partial award prior to rendering the final award and the ability to enforce interim awards at least by way of a court order. However, while article 39(2) expressly states that interim awards are enforceable by way of an application to the Chief Justice of the Court of Appeal, the means by which partial awards are to be enforced is not made clear. It remains to be seen how the UAE courts will approach article 39(1) of the Arbitration Law.

In regard to interim relief, article 21 of the Arbitration Law now allows an arbitral tribunal to grant interim or precautionary measures, either at the request of a party or on its own initiative. These include, but are not limited to, measures: (i) for the preservation of assets out of which a subsequent award may be satisfied; (ii) to maintain the status quo pending the determination of the dispute; or (iii) in relation to the taking of action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process itself. Interim measures are capable of enforcement through the UAE courts. Although not expressly stated as being an exhaustive list, courts may be reluctant to enforce measures beyond those stated in article 21 of the Arbitration Law (eg, such as requiring payment of a sum awarded by the DAB pending an arbitral award).   

Further, as was seen in the Singaporean Persero cases, a party faced with an unfavourable dispute board decision was able to use the drafting of FIDIC 1999 to frustrate and delay enforcement of dispute board decisions for many years. Although FIDIC has now amended the wording of its contracts in its 2017 editions to address this drafting issue (eg, clause 21.7 of the Yellow Book) the new suite may not see adoption in the UAE for some time. It is uncertain how the UAE courts would approach Persero type arguments in relation to DAB decisions under a FIDIC 1999 contract.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Courts and arbitral tribunals

42. Does your jurisdiction have courts or judges specialising in construction and arbitration?

United Arab Emirates

No, the local onshore courts in the UAE do not have specialist construction or arbitration judges. The DIFC Courts in Dubai, however, have opened a Technology and Construction Division although it is yet to see significant adoption for construction disputes. The DIFC Court rules governing the Technology and Construction Division (Part 56) are based closely on the rules of the Technology and Construction Court in England.

In the local onshore courts in the UAE, judges have the power to appoint specialist experts to assist them with their determination of the cases before them. Such experts are usually either of an engineering or accountancy background and are appointed from a list of court-appointed experts. The court-appointed expert is appointed by the judge to give an expert opinion in relation to the factual or technical issues referred to him or her by the judge.

For example, if the case relates to the payment of outstanding payment certificates, the court may ask the court-appointed expert to give an expert opinion on whether the claimant is entitled to receive payment of the amounts claimed by reviewing the evidence presented by the claimant and any defence put forward by the respondent.

Once the expert has prepared and filed its report in court, a date is fixed for the parties to comment on the report. While the expert’s report does not bind the judge, the court is generally likely to adopt the expert’s findings. The expert provides independent advice to the court and does not represent the interests of any party. 

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

43. What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?

United Arab Emirates

The UAE judiciary functions within a three-tier civil court system and includes hierarchically: the Court of First Instance, the Court of Appeal and the Court of Cassation or the Federal Supreme Court at the federal level. The Emirates of Sharjah, Ajman, Umm Al Quwain and Fujairah have within their territory a Court of First Instance and a Court of Appeal, and appeals from judgments issued by these courts are heard by the UAE Federal Supreme Court located in Abu Dhabi. Dubai, and more recently Abu Dhabi and Ras Al Khaimah, have opted out of the federal court system. Each of these Emirates has a three-tier court system, with the highest court being the Dubai Court of Cassation, the Abu Dhabi Court of Cassation and the Ras Al Khaimah Court of Cassation, respectively, although pursuant to article 99 of the UAE Constitution, the Federal Supreme Court retains jurisdiction to decide certain matters.

Each tier of the court system is divided into three separate categories: civil and commercial, criminal and Sharia. Generally, construction disputes will be dealt with in the commercial courts of the UAE.

Under the Arbitration Law, applications for the ratification and enforcement (or annulment) of an arbitral award, are now made directly to the Court of Appeal (as opposed to the Court of First Instance) in order to streamline the enforcement process. Applications for interim relief and injunctions as part of arbitration proceedings can be sought in the local courts (see article 18 of the Arbitration Law). Again, such applications are to originate in the Court of Appeal.

The decisions of the Court of First Instance and the Court of Appeal in the UAE are not published. However, generally, most of the decisions from the Federal Supreme Court and the Court of Cassation in Dubai, Abu Dhabi and Ras Al Khaimah are published. Such publications are available in Arabic through the official judicial departments of each of the relevant Emirates or the Federal Ministry of Justice at the federal level.   

The doctrine of binding precedent does not apply in the UAE, however, the decisions of the higher court are persuasive, where relevant, over the decisions of a lower court.

In addition to the above, the DIFC Courts and ADGM Courts have been constituted in both Dubai and Abu Dhabi Financial Free Zones respectively with a fully independent common law framework and judiciary system and which operate in English. See question 42 in relation to the DIFC Court's new Technology and Construction Division.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

44. In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?

United Arab Emirates

A UAE court can only provide a judgment in relation to matters that the parties have raised before the court and on which the parties have asked the court to make a determination.

Articles 169(4) and 173(f) of the UAE Civil Procedure Code both provide that a party to a dispute may raise a challenge against the court’s ruling, if the ruling is made with reference to a matter that the parties did not ask the court to determine.

In arbitration, article 53 of the Arbitration Law states that one of the grounds for setting aside an arbitral award is a scenario wherein the arbitral award contains decisions on matters not falling within the terms of the submission to arbitration or that are beyond its scope, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award that contains decisions on matters not submitted to arbitration may be set aside.

In the UAE, it is possible to request a preliminary decision from a tribunal in relation to, for example, specific issues such as the tribunal’s jurisdiction (article 19 of the Arbitration Law), a party’s compliance with the preconditions to arbitration or measures relating to the conservation of goods that form part of the subject matter of the dispute (article 21 of the Arbitration Law).  

Furthermore, parties often adopt institutional rules which impliedly permit Tribunals to make their own observations, provided that the parties have an opportunity to address these. This "natural justice" requirement is also codified in the Arbitration Law (see, eg, articles 30(3) and 32(1)). In addition, article 58 of the Arbitration Law refers to a Code of Professional Conduct for arbitrators that, while yet to come into effect, may deal with this issue as a matter of ethics and conduct.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

45. If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?

United Arab Emirates

It is possible for a party to arbitral proceedings, such as the employer, to bring parallel proceedings in the local courts of the UAE. By way of example, the employer may bring a jurisdictional challenge before the local courts on the basis that:

  • The arbitration agreement is not valid because, for example, it was not signed by a properly authorised party and does not comply with article 4 of the Arbitration Law. 
  • The employer considers that the contractor has failed to comply with the preconditions to arbitration required by the contract before a party is entitled to commence arbitration. If the employer has such concerns it may make an application to the local courts to make a declaration that the tribunal has no jurisdiction or may request a stay in the arbitral proceedings until the preconditions to arbitration are carried out.
  • The arbitrator(s) have not been appointed in accordance with the Arbitration Law.
  • The matters in dispute are beyond the jurisdiction and scope of arbitration, such as fraud or other crimes.

In such cases, the arbitrator should stop the arbitral proceedings until a final decision from the courts is issued (article 43 of the Arbitration Law).

It is then up to the responding party to object to such proceedings being heard by the local court on the basis that the matter is subject to arbitration proceedings. Although the court should refuse to hear the matter, under the former arbitration law this was not always the case. The new Arbitration Law enshrines the principle of competence-competence, empowering arbitral tribunals to decide on the admissibility of claims, and thereby, their jurisdiction to hear such claims. While there is an appeal right to the national courts from preliminary awards on jurisdiction, there is a 15-day time bar that applies to such applications.

It is also possible for an employer, if relevant, to make an application for interim relief (see comments above), or for a precautionary attachment order to provide security over any counterclaim it may have against the contractor (see question 55 and 56) although see question 46 in this regard.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

46. If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?

United Arab Emirates

The Arbitration Law does not deal with whether a party loses its right to arbitrate if it applies to a foreign court for interim or provisional relief.

Article 18 of the Arbitration Law does, however, provide that the Court of Appeal will have supervisory jurisdiction over the arbitral proceedings including to order interim or conservatory measures. Article 18(3) expressly provides that such action shall not stay the arbitral proceedings nor amount to a waiver of the arbitration agreement. The Arbitration Law does not deal with the position if interim or provisional relief were sought in a foreign court.

As interim awards (see question 43) are now enforceable in the UAE under the Arbitration Law, the need to resort to foreign courts may now not be necessary.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Expert witnesses

47. In your jurisdiction, are tribunal- or party-appointed experts used? To whom do party-appointed experts owe their duties?

United Arab Emirates

Yes. In the UAE it is common for tribunal or party-appointed experts to be used in arbitration.

The purpose of a tribunal-appointed expert is to assist the tribunal with its determination. The tribunal-appointed expert will provide independent advice to the tribunal and should not represent the interests of any party. This is governed by article 34 of the Arbitration Law.

As regards party-appointed experts, parties will often make reference in the arbitration clause or the terms of reference to institutional arbitration procedural rules to govern the arbitral process, including the appointment and use of party-appointed experts (eg, articles 27 to 30 of the DIAC Arbitration Rules 2007, and the Chartered Institute of Arbitrators’ Protocol for the Use of Party Appointed Expert Witnesses in International Arbitration and article 25(3) of the ICC Arbitration Rules 2012 and 2017). An expert’s opinion should be impartial, objective, unbiased and uninfluenced by the pressures of the dispute resolution process or by any party involved.

Pursuant to article 257 of the UAE Penal Code, experts, translators and investigators may be guilty of a criminal offence and sentenced to imprisonment if they act in contravention of the requirements of integrity and impartiality. The law does not make a distinction between experts being appointed by a court, tribunal or party and this provision may, therefore, apply to party-appointed experts (or translators) in arbitration but the position remains unclear. 

Further, article 236 of the UAE Penal Code was recently amended by law 24 of 2018 to bring experts and arbitrators alike within the ambit of the anti-bribery and anti-corruption rules applicable to all public servants. This may, therefore, apply to tribunal or party-appointed experts.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

State entities

48. Summarise any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer).

United Arab Emirates

The National Financial Circular No. 16 of 1975 and the Federal Ministerial Resolution No. 20 of 2000 regulate administrative contracts made through public tenders. In addition, new Federal Procurement and Warehouse Management Regulations were recently issued (Cabinet Resolution No. 4/2019), which set out rules for contracts entered into with the government (Cabinet Resolution No. 32/2014 on the Federal Procurement regulations has now been repealed).

In general, contractors participating in public tenders must be either UAE nationals or a company where the national partner’s share is not less than 51 per cent of the share capital of the company. That said, the Foreign Direct Investment Law (Law No. 19 of 2018 (FDI Law)) now permits foreign investors in certain industries to incorporate an entity without a 51 per cent UAE shareholder. The FDI Law and its implementing regulations permit construction and civil engineering projects to be up to 100 per cent foreign owned if they relate to a large infrastructure project or to sports facilities or projects exceeding 450 dirham million in value (although there appears to be an exception for "other specialised construction activities"). Governments at emirate level also have the ability to determine their own ownership percentages. As such, this may have an impact on the ownership or composition of contractors in the UAE.

At an emirate level, contracts with government entities in Dubai are subject to Dubai Law No. 6 of 1997. In Abu Dhabi, they are subject to Abu Dhabi Law No. 6 of 2008 regulating government purchases, tenders, bids and warehouses in Abu Dhabi, and related guidelines for the application of Abu Dhabi Law No. 6 of 2008, issued by the Department of Finance, and Abu Dhabi Law No.1 of 2017 regulating the financial system of the Abu Dhabi Government. The other emirates typically also their own procurement regulations.

In addition, in 2015 Dubai enacted Law No. 22 of 2015 (the Dubai PPP Law) regulating public private partnerships throughout the emirate and in 2019, Dubai Law No. 6 of 2011 regulating the engagement of the private sector in electricity and water production in Dubai. In Abu Dhabi, Law No. 2 of 2019 provides the legal framework for governing public private partnerships in Abu Dhabi (the Abu Dhabi PPP Law). However, the enabling regulations of both laws have yet to be issued.

Contracts entered into with the UAE governments usually include exceptional and unusual conditions which give greater contractual power to the contracting government, such as the right to modify the contractual obligations at their sole discretion, the right to terminate for convenience or to impose penalties on the contractor for breaching its obligations without resorting to the court. 

The government of Dubai, and the departments and institutions thereof, are prohibited, under Dubai Order dated 6 February 1988, from submitting to any laws other than "local legislation" to govern contracts, unless an exemption from compliance to these rules is ordered. Similarly, under another Dubai Order of the same date (amended 15 March 1988), contracts to which the government of Dubai or any of its departments or corporations are party may not provide for arbitration outside Dubai or for the referral of disputes concerning arbitration and related proceedings to any laws or regulations other than the applicable laws and regulations of Dubai. The same principles are recorded in Dubai Law No. 6 of 1997, and it should be noted that such entities may be granted specific exemptions from the application of these restrictions by order of HH the Ruler of Dubai. Article 24 of Dubai Law No. 6 of 2011 regarding the contribution of the private sector in electricity and water production, also stipulates that contracts made between the private sector and electricity or water authorities or with other local government authorities shall be governed by the applicable laws of the emirate. This same principle is repeated in the Dubai PPP Law, Law No. 22 of 2015, regulating partnerships between the public and private sector, which stipulates that UAE law is the governing law and that these contracts may not provide for arbitration outside the UAE (the same restrictions are not included in the Abu Dhabi PPP Law).

There is no proper administrative law in the UAE regulating any conflict between the public and the private sectors. However, it is possible to commence claims and disputes against the government of the UAE or government-related entities in accordance with the general laws in force. Alternative dispute resolution, such as arbitration, may be chosen by the parties to resolve their disputes; however, the UAE Civil Procedure Code prohibits seizing property owned by the state of the UAE or by one of the Emirates (article 247) making enforcement of any award against a governmental entity potentially difficult.

In Dubai, if a party wishes to commence proceedings against the Dubai government or any Dubai government department, in addition to the agreed dispute resolution process, pursuant to Government Lawsuit Law No. 3 of 1996 (as amended) and the law establishing the Department of Legal Affairs for the Government of Dubai (Law No. 32 of 2008), any claims must first be submitted to the Government of Dubai Legal Affairs Department for a period of amicable settlement of two months. The Legal Affairs Department is authorised to manage any claims or disputes to which the Dubai government or any Dubai government department entity is a party, however, article 3 bis of Dubai Law No. 3 of 1996 expressly provides that no debt or financial obligation against the ruler or the government of Dubai may be collected by means of detainment, public auction, sale or possession by any other legal procedures.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Settlement offers

49. If the seat of the arbitration is in your jurisdiction, on what basis can a party make a settlement offer that may not be put before the arbitral tribunal until costs fall to be decided?

United Arab Emirates

In common law jurisdictions, there is a recognised mechanism whereby a party can make a settlement offer that cannot be disclosed until costs fall to be decided. This is generally conducted by making an offer on a "without prejudice save as to costs" basis.

The common law principle of without prejudice does not exist in the UAE. As such, a party must be aware that labelling a commercial offer as without prejudice or without prejudice save as to costs will provide no protection and the fact of the settlement offer and/or its details may be disclosed to a UAE court and/or, potentially, arbitrators qualified and practising in the UAE. 

The absence of such a concept under UAE law has a number of consequences. Primarily, it makes settlement significantly harder as discussions tend to be less forthright. One way to overcome this is to ensure that confidentiality agreements are in place between the parties in respect of such offers and their disclosure in certain circumstances and to mark such offers as confidential. According to UAE law, any commercial offer of settlement will not be considered as binding on both parties unless it has been signed by them agreeing on its terms.

The position is different in the common law free zones of the DIFC and the ADGM, where the concept of without prejudice and without prejudice save as to costs offers are recognised.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Privilege

50. Does the law of your jurisdiction recognise "without prejudice" privilege (such that "without privilege" communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?

United Arab Emirates

As detailed above, UAE law does not recognise the common law principles of without prejudice privilege. A different approach is likely to apply if the governing jurisdiction is stated to be the DIFC or the ADGM as they have separate and independent legal systems and laws and where the common law is applied.

In the UAE the concept of legal professional privilege does not exist as such, but the lawyer-client confidentiality principle does; providing some protection against having to disclose communications between lawyers and their clients.

There is no compulsory disclosure obligation in the UAE unless under limited circumstances as provided by law. For instance, under article 18 of the UAE Law of Evidence in Civil and Commercial Transactions, during judiciary proceedings, an expert appointed by the court has wide powers to review the parties' documentation.

Therefore, unless the parties have entered into a separate confidentiality agreement as discussed in question 49, there is no legal obligation preventing the disclosure of without prejudice communications, such as letters or emails detailing potential settlement matters, although any agreement on settlement will only be enforceable if the requirements of a contract have been met as discussed in question 2.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

51. Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterised as substantive or procedural law?

United Arab Emirates

As discussed above, UAE law does not recognise the common law principle of without prejudice. There is also no process of discovery and inspection of documents unless agreed to as part of arbitration or in circumstances where a court-appointed expert requests examination of certain documentation. However, the process of disclosure under UAE law is very restricted in nature and, as such, the need for concepts such as legal professional privilege, as recognised under common law, is less pronounced.

If the governing jurisdiction for the dispute is stated to be the DIFC or the ADGM, the position under the common law is likely to be upheld (see question 50).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Guarantees

52. What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?

United Arab Emirates

The form of any UAE law guarantee should be in accordance with the UAE Civil Code and the Commercial Code. Articles 1056 to 1105 of the UAE Civil Code include various provisions governing the operation of guarantees in the UAE. Article 1056 defines a guarantee (suretyship) as "the joining of the liability of a person called the surety with the liability of the obligor in the performance of his obligations".

Article 1057 of the UAE Civil Code states that a guarantee may arise through the use of words indicating a guarantee but the convention is that guarantees are made in writing and this is strongly advised (both from a general evidentiary perspective but also to evidence compliance with particular articles of the UAE Civil Code and Commercial Code. For example, see below in relation to guarantees for unlimited amounts and limitation periods for claiming under guarantees).

Where the guarantee is to be granted by a UAE company and the Commercial Companies Law applies to that company, regard should also be had to de facto restrictions such as article 154, which prohibits entering into a loan agreement for a term of more than three years unless authorised in the constitutional documents of the company (and this prohibition is generally considered to apply to guarantees as well as loans).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

53. Under the law of your jurisdiction, will the guarantor’s liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee’s wording affect the position?

United Arab Emirates

Under UAE law, a guarantor is mutually liable with the debtor. Therefore, the guarantor’s liability is limited as per that of the party to the underlying construction contract. Additionally, there is uncertainty under UAE law regarding the effectiveness of an “all monies” or “unqualified” guarantee (ie, one that simply refers to “all the obligations of the primary debtor” without financial limit). Article 1061 of the UAE Civil Code provides that a guarantee should be for a specified debt or certain amount. However, UAE courts have ruled in favour of the enforceability of “all monies” guarantees but as there is no principle of stare decisis under UAE law, the enforceability of an “all monies” guarantee would be considered on a case-by-case basis and therefore carries certain risk.

In general, there are no financial limits on companies giving guarantees, provided that the constitutional documents of the relevant guarantor do not limit the giving of guarantees (see previous question) and necessary corporate approvals are obtained. Although there are no such financial restrictions per se on giving corporate guarantees, creditors should take into account that the enforceability of guarantees may be subject to evidencing that:

  • granting that guarantee conferred a corporate benefit upon the company giving the guarantee (and thus the prudent course of action for a beneficiary would be to insist that the company giving the guarantee obtains shareholder approval);
  • under article 8 of the Commercial Companies Law, the officers of the company giving the guarantee had due regard to the general requirement to pursue profit for the company; and
  • under article 22 of the Commercial Companies Law, the officers of the company duly considered whether giving the guarantee furthers the objects of the company.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

54. Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee’s wording affect the position?

United Arab Emirates

The Commercial Code provides that a guarantor is mutually liable with the debtor and, in the case of an unqualified guarantee, the guarantee’s obligation follows that of the principal obligor. As such, any discharge of the principal debtor’s obligations may, therefore, result in the guarantee also being discharged. Consequently, it is common to include various waivers in a guarantee that provide that the guarantor’s liability is not extinguished by certain actions including waivers granted to the principal debtor.  However, as a result of the generality of the provisions of the UAE law governing guarantees, enforceability of any contractually agreed waivers by the guarantor is uncertain in local courts. 

Under article 1092 of the UAE Civil Code, a guarantor is deemed to be discharged from their liability if the creditor (ie, the beneficiary of the guarantee), does not make a claim against the guarantor within six months of the debt falling due. There is case law that this limitation only applies to civil transactions (as opposed to commercial transactions) but, for the reasons mentioned above, there is some uncertainty as to the application of this article. As a consequence, written UAE law guarantees will seek to specifically dis-apply this six-month limitation period in respect of the guaranteed liabilities. Assuming this specific six-month limitation period does not apply, the general limitation period under UAE law is 10 years.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

On-demand bonds

55. If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.

United Arab Emirates

An on-demand and unconditional bond, by its very nature, obliges the bank providing the bond to honour the terms of the bond in favour of the beneficiary, as and when the beneficiary presents the bond and demands payment of the same from the bank.

It is possible but difficult to obtain orders from UAE courts that interfere or prevent a bank from honouring a beneficiary’s demand for payment of an on-demand and unconditional bond.

To do so, a party would need to first submit an application to the local courts for a precautionary attachment order. Precautionary attachment orders are akin to an application for injunctive relief in a common law jurisdiction. A party can make an application to the local court to either restrain the bank from paying out against the call or freezing any monies already paid out if the applicant considers that the party has made an unlawful call of an on-demand bond.

Article 252 of the UAE Civil Procedure Code provides that a party’s assets can be seized to ensure the satisfaction of a judgment in circumstances where there is a justifiable risk that such assets will be disposed of prior to final judgment. Article 253 of the UAE Civil Procedure Code allows for a precautionary attachment order to be placed on movable assets.

Alternatively, the court may impose a precautionary attachment order against the on-demand bond by reference to article 417 of the Commercial Code. This provision states that the equivalent of an interim injunction is possible where the contractor, the principal debtor under the on-demand bond, requests an injunction on serious and exceptional grounds, in the opinion of the courts. It is arguable that the court may consider serious and exceptional grounds to be a significant breach of the construction contract by the employer, including, for example, breach by the employer of its payment obligations under the contract. For such an application to be successful, the contractor must fully detail its position and demonstrate that there are no previous judgments in favour of it against the employer relying on the same documentation.

Article 255(2) of the UAE Civil Procedure Code requires the party that has obtained a successful precautionary attachment order to file its substantive case within eight days of the precautionary attachment application. If the parties have agreed to refer their disputes to arbitration, an application is made to the local court for the precautionary attachment order to be stayed pending the final award in the arbitral proceedings.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

56. If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts that the employer is entitled to (such as sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction’s law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?

United Arab Emirates

See question 55. As discussed above, there are limited circumstances in which a court or tribunal in the UAE will interfere with the call and payment of an on-demand bond. However, if a party makes a successful precautionary attachment application to the court (detailed above), the court may prevent the on‑demand bond from being encashed if it considers that the basis for the bond call was wrongful (eg, the contractor establishes in its application that the employer owed the contractor a considerable number of payments under the contract and was itself in contractual default at the time of making the on-demand bond call, and as such, the bond call was a wrongful encashment).

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

Further considerations

57. Are there any other material aspects of the law of your jurisdiction concerning construction projects not covered above?

United Arab Emirates

Particular issues that are relevant to construction projects and disputes in the UAE are the enforcement of arbitral awards in the UAE Courts and the Arbitration Law.

The enforcement of domestic and international arbitral awards in the UAE has been a matter of much debate. It has been well known in the market that enforcement of both domestic and international arbitral awards could be a time-consuming and sometimes uncertain process. Prior to the Arbitration Law, parties needed to have ensured compliance with all mandatory procedural provisions in former articles 203 to 218 of the UAE Civil Procedure Code. Those provisions were in some cases very strict. Now parties will have to ensure that none of the grounds for nullification exist as set out in article 53 of the Arbitration Law (including, for example, that there is no valid arbitration clause, that the parties were unable to present their case, that the arbitration procedures were breached and affected the award or that the tribunal exceeded its jurisdiction). The approach of the local courts to the application of the Arbitration Law and in enforcement and nullification proceedings under the Arbitration Law is still relatively untested at present, but article 53 provides less opportunity for nullification as compared to the previous provisions of the UAE Civil Procedure Code.

With regard to international arbitral awards, the UAE signed the New York Convention in 2006 and the UAE Courts regularly enforce international arbitral awards. Procedurally, UAE Cabinet Decision 57 of 2018 regarding the Executive Regulation of the UAE Civil Procedure Law issued welcome clarifications on the procedural rules applicable to the enforcement of foreign arbitral awards.

As a result of decisions of the DIFC Courts in 2013 and beyond, it was anticipated that enforcement of awards from foreign and Dubai domestic (onshore) arbitrations (ie, those seated in Dubai but not in the DIFC) would be possible through the DIFC Courts, in effect creating a “conduit” jurisdiction through the DIFC common law courts and thus avoiding any uncertainty regarding enforcement in the local UAE courts. However, this potential conduit jurisdiction of the DIFC Courts for the enforcement of both foreign and domestic (ie, onshore) arbitral awards appears to now be limited as a result of decisions of Dubai's Joint Judicial Committee, which was established to rule on conflicts of jurisdiction between the DIFC and Dubai Courts. As such, recent decisions of the Joint Judicial Committee should be considered if foreign or domestic awards are sought to be enforced via the DIFC Courts.

Answer contributed by Mark Raymont, Melissa McLaren, Faisal Attia, Angus Frean and Ahmed Bobat

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