Construction Arbitration: United Arab Emirates

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 legal system of the United Arab Emirates is based on a number of sources, including the Federal Constitution, federal legislation, local emirate laws and regulations, Islamic sharia law, and custom and practice. The laws in the UAE are based on the Egyptian and French civil legal systems. There are also separate ‘Offshore’ jurisdictions, which are based on a common law regime, including the Dubai International Financial Centre and Abu Dhabi Global Market.

Federal laws are drafted by the relevant Ministry(s) and the Minister of Justice. The draft law then undertakes a review process involving the Federal National Council and the Council of Ministers and once approved, is submitted to the President for review and to the Supreme Council for ratification. It is then signed by the President of the UAE.

Pursuant to article 111 of the UAE Federal Constitution, laws are published in the Official Gazette of the Union within two weeks of their signature (unless otherwise stated in the law). Article 112 of the UAE Federal Constitution provides that a law shall not have retrospective effect. However, there are exceptions and an individual law may stipulate such retrospective effect, for example, when it concerns matters of public policy.

Separate from the federal laws, each emirate is permitted to maintain its own legislative body, which may legislate within its jurisdiction. The laws passed by each emirate also have legal effect within the jurisdiction. Emirates are not permitted to legislate on certain specific matters that remain within the jurisdiction of the federal authorities, for example, matters pertaining to public health, defence, education.

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

Article 131 of Federal Law No. 5 of 1985 herein referred to as the UAE Civil Code throughout, UAE Civil Code provides that a contract (including those relating to construction) will be formed if there is (i) an offer, (ii) an acceptance of the offer and (iii) any special conditions provided in the law (which may relate to the subject matter of the contract) are met. Article 132 of the UAE Civil Code recognises that contracts may be formed orally or in writing.

The UAE Civil Code does not specifically refer to letters of intent. The Civil Code determines that a valid contract is formed if: (i) it contains the parties’ agreement on the essential terms of the contractual obligations as well as other terms that the parties consider essential to the agreement; (ii) the contract relates to a permissible subject matter that is clearly defined, or is capable of being defined; and (iii) there is a lawful purpose for the obligations arising out of the contract (eg, the parties’ agreement cannot be to facilitate something that is illegal in the UAE). A letter of intent that satisfies the above criteria, may be contractually binding, unless otherwise stipulated. For example, it cannot contain a provision invalidating it if an agreement on any outstanding terms is not reached.

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

Pursuant to article 257 of the UAE Civil Code, the general principle in the UAE is that the parties are free to determine the terms of the contract and are therefore free to agree the above provisions.

Whilst the parties are generally able to agree a foreign law to govern their contracts, article 19(1) of the UAE Civil Code provides that there are certain instances pertaining to construction contracts where the governing law must be that of the UAE:

• where the property or project is located in the UAE; and
• the construction contract is with a government (or quasi-government) body of the UAE.

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

United Arab Emirates

The UAE Civil Code recognises and implies a number of concepts into contracts governed under UAE Law.

For example, article 246 of the UAE Civil Code recognises and codifies the overriding concepts of good faith and custom, into all contracts governed by UAE law.

Accordingly, parties are obliged to act in a manner consistent with good faith. Under this principle, and as an example, a time bar provision may not be relied upon by an employer if the employer was made aware of the contractor's intention to submit a claim in accordance with the contract, but later argued that the contractor did not meet the contractual time frame. This argument can be referred to as "constructive notice", that is, in circumstances where the employer was already aware of the events it now says it should be notified of, the serving of a notice would serve no purpose and accordingly, consequences of failing to serve the notice said to flow from such a breach, such as the barring of a claim, would not be enforced.

In addition, article 106 of the UAE Civil Code, codifies and implies the principle of a prohibition of the unlawful exercise of a party’s rights, into contracts governed by UAE law. A party is prevented from exercising and therefore enforcing its legal right if: (i) it intended to infringe the rights of another party; (ii) the outcome is contrary to the rules of Islamic sharia, the law, public order, or morals; (iii) the desired gain is disproportionate to the harm that will be suffered by the other party; or (iv) it exceeds the bounds of custom or practice.

As with good faith, determining whether the exercise of a right is unlawful is also a matter of judgment for the court or arbitral tribunal to decide based on relevant facts and circumstances, as evidenced by the contractor.

The principles of good faith and the unlawful exercise of a party’s right constitute an overriding legal obligation on the parties to act fairly in the performance of the contract. Under these codified legal principles, an employer may be prohibited from exercising his otherwise contractually valid right on the basis that it is unlawful for the contractor's otherwise meritorious claim to be disallowed due to a purely technical breach. Contractors advancing such an argument may also argue that rather than a strict timeline by which liability is discharged, the sole purpose of the notification requirement is simply to ensure the early notification of circumstances giving rise to a potential claim, the obligation of which is released if the employer or engineer knew of the event, albeit not necessarily by way of the contractually required notice.

Article 318 of the UAE Civil Code codifies the legal principle against unjust enrichment of one party at the expense of another in circumstances that the law treats as unjust, as interpreted by the court or arbitral tribunal.

Pursuant to article 318 of the UAE Civil Code, an employer may be prevented from relying on a time bar provision to evade payment to the contractor for works performed from which the employer has benefitted from, particularly if the only reason for withholding payment is a technical one relating to the contractor's claim submission.

article 70 of the UAE Civil Code states “[n]o person may resile from what he has (conclusively) performed.” This codifies the legal principle of estoppel which is implied in contracts governed by UAE law.

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 obligations of a certifier are not dealt with under the UAE Civil Code. The obligation to act consistent with the principle of good faith would be implied into the construction contract; however, the certifier is not usually a party to the construction contract. Depending on the contractual terms, it may be specified that the engineer (certifier) is to be the independent agent carrying out supervision over the construction and quality of work, and this may impose contractual obligations to act fairly and impartially.

Pursuant to article 885 of the UAE Civil Code, “[t]he employer shall be obliged to pay the consideration upon delivery of the property contracted for, unless there is an agreement or a custom to the contrary.” A claimant usually bears the burden of proving the existence of the debt, for example, the amount contained in any certificate, for which a debt claim may then be commenced.

In respect of payment certificates, however, there is case law from the Dubai Court of Cassation to suggest that the judiciary may in some circumstances treat payment as being due if included in a payment certificate issued by a certifier (see judgment of the Dubai Court of Cassation No. 167/1998 dated 6 June 1998).

Due to privity of contract, the contractor is unlikely to be able to pursue an action directly against the certifier, unless a contractual structure has been set up specifically to allow for this. An agent-principal relationship may be established between the engineer and employer under which the employer is bound by the acts of the engineer, unless it is proven that the engineer exceeded its mandate or committed fraud. This may provide the contractor with recourse against the employer for acts of the engineer, for example, in relation to certification.

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 UAE Civil Code does not expressly deal with matters of competing causes of delay and concurrency and there are no statutory rules to allocate risk and responsibility in the event that concurrent delay occurs.

That said, arguably, UAE law codifies a number of general principles that can be said to favour an apportionment approach, where liability for the delay is allocated between the parties in accordance with their perceived degrees of fault.

Articles 287, 290 and 291 of the UAE Civil Code have previously been applied by the courts and it is often argued that these articles read together, permit the court or arbitral tribunal, to assess the different and competing causes of delay and apportion liability between the parties. A court or arbitral tribunal would also likely consider the codified principles of the UAE Civil Code implied into all contracts, namely, good faith (article 246(1)), the prohibition on the unlawful exercise by a party of its rights (article 106) and the generally accepted provision to prevent unjust enrichment (article 318).

The issue of concurrent delay will also have to be considered in light of the agreed contractual provisions dealing with the extension of time claims. Assuming the contract has no such provisions, a court or arbitral tribunal may choose to apply the apportionment approach and decide that the parties are equally responsible for the two-week delay and neither party is entitled to be made good under the contract (ie, the contractor is not entitled to an extension of time for completion and the employer is not entitled to levy liquidated damages).

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

The concept of disruption is not expressly recognised under UAE law. If a contractor wishes to claim ‘disruption’ for breaches of contract and acts of prevention by the employer, it must successfully establish a tortious claim for damages or loss suffered as a result of actions by the employer. Essentially, the contractor must establish the three elements required for a claim for damages:

• a breach of the contractual obligations by the employer;
• that damages have been suffered by the contractor; and
• causation, namely that the damages were caused by the employer's breach.

The contractor is required to establish both its right to claim damages and to then quantify its claim. There are no provisions of UAE law that would oblige a court or arbitral tribunal to seek to quantify a loss if the contractor had failed to prove quantum.

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

The concept of constructive acceleration is not recognised under UAE law. As such, a contractor who incurs costs accelerating work to mitigate an employer-caused delay, without an engineer’s instruction to do so, will not automatically be entitled to recover those costs.

There is also no recognised concept of mitigation under UAE law; however, it is expected that a party will take reasonable steps to reduce its losses.

If a contractor intends to pursue a claim of constructive acceleration, it should ensure compliance with all claim and notice requirements to establish its extension of time for completion claims for variations and keep detailed contemporaneous records of the cost associated with any acceleration and mitigation measures.

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

Article 273 of the UAE Civil Code deals with force majeure and provides that if the performance of a contract becomes impossible then it will be automatically terminated. Article 273(2) states that if an event causes partial or temporary impossibility, only the impossible part of the contract will be extinguished; however, the provision does allow the party claiming force majeure to choose to terminate the entirety of the contract.

There is no definition of a force majeure event under UAE law. However, judgments of the courts have provided guidance on the application of article 273 of the UAE Civil Code. Unsurprisingly, the courts have interpreted force majeure restrictively. For example, the Abu Dhabi Court of Cassation (No. 13/2010), stated that force majeure must be an external event that makes performance of obligations entirely impossible by all parties. It is not sufficient for performance of the obligations to simply become more burdensome.

A force majeure event must have been both unforeseeable and unavoidable. The courts will therefore consider whether the event was unforeseeable from formation of the contract and whether the event was out of the non-performing party’s control. The courts are also likely to consider whether that party can be said to have reasonably assumed the commercial risk for the event under the terms of the contract. 

If the contract is subject to UAE law, then article 273 of the UAE Civil Code cannot be excluded. 

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

Depending on the circumstance of the difficulty in performance or increased cost, there are a number of potentially relevant provisions of the UAE Civil Code which deal with such issues in construction contracts.

Article 893 provides either party with a right to terminate, if ‘any cause’ prevents performance or completion. The cause does not need to render performance impossible nor does it need to be extraneous or unforeseeable to allow the parties to exercise the right to terminate.

Article 894 provides a right of compensation, but not termination, to a contractor who becomes incapable of completing works for a reason it played no part in. The contractor is entitled to the value of the work completed and to the expenses incurred in the performance up to the amount of the benefit the employer has derived from such performance.

Where an unforeseen emergency occurs rendering performance “onerous”, not impossible, a court or arbitral tribunal can adjust the contractual obligations (pursuant to article 249). For example, where a contractor suffers increased cost due to price escalations as a result of the pandemic, it may be able to invoke article 249, to force a renegotiation of the contract price (subject to a decision that the pandemic was an unforeseen emergency).

In addition, article 287 of the UAE Civil Code states ‘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.’ Accordingly, provided the contractor did not cause the extraneous event, it is not bound to make good the loss suffered.

If the contract is subject to UAE law, then the above provisions cannot be excluded. 

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 a contractor fails to achieve the contractual specification, it will be in breach of the contract – a situation it will want to avoid!

Article 893 of the UAE Civil Code provides either party with a right to terminate, if ‘any cause’ prevents performance or completion. The cause does not need to render performance truly impossible, nor does it need to be extraneous or unforeseeable to allow the parties to exercise the right to terminate.

Article 894 of the UAE Civil Code provides a right of compensation, but not termination, to a contractor who becomes incapable of completing works for a reason it played no part in (ie, bears no responsibility for the cause that makes completion impossible). The contractor is entitled to the value of the work completed and to the expenses incurred in the performance up to the amount of the benefit the employer has derived from such performance.

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

Pursuant to article 257 of the UAE Civil Code, the general principle in the UAE is that the parties are free to determine the terms of the contract and are therefore free to agree to allocate risk as they see fit. However, the UAE Civil Code does offer contractors some relief from unduly harsh consequences of a contract in certain circumstances.

For example, in relation to a force majeure event, article 273 of the UAE Civil code, a mandatory provision applicable to all contracts governed by UAE law, provides that if a contract is deemed impossible to perform then it will be automatically terminated, irrespective of contractual allocation of risk.

Unsurprisingly, the courts have interpreted force majeure restrictively. A force majeure event must have been both unforeseeable and unavoidable. The courts will therefore consider whether the event was unforeseeable from formation of the contract, whether the event was out of the control of the other party and whether that party can be said to have reasonably assumed the commercial risk for the event under the terms of the contract.

Regarding unforeseeable ground conditions, the majority of projects in the region are based on standard forms, often containing complex provisions dealing with the apportionment of the risk relating to unforeseen ground conditions. If the contract does contain provisions dealing with this risk encountered prior to completion of the project, the agreed contractual terms will govern which party bears the risk.

A contractor who faces undue hardship as a result of unforeseen ground conditions, may seek to avail itself of a statutory provision of the UAE Civil Code to find relief. For example, under article 246(1) of the UAE Civil Code, which recognises and codifies the overriding concepts of good faith and custom, into all contracts governed by UAE law. Parties are obliged to act in a manner consistent with good faith, which may assist a contractor otherwise facing the burden of overcoming adverse ground conditions if it can demonstrate that the apportionment of risk under the contract amounts to performance in bad faith.

Similarly, the contractor may seek to refer to article 106 of the UAE Civil Code, which prohibits the unlawful exercise of a right, for example by an employer requiring a contractor to overcome unforeseen ground conditions at its own cost. The contractor may be able to demonstrate that this is unlawful if the employer’s benefit from requiring the contractor to settle the costs of remediation are disproportionate to the harm that would be suffered by the contractor in doing so.

In relation to errors in documentation provided by the employer, articles 185 and 186 of the UAE Civil Code state that where limited or misleading information is provided by one of the parties to a contract, the same may be deemed a misrepresentation. Accordingly, where an employer provides misleading or deliberately missing documentation as part of the tender, if the contractor is able to prove that the employer was aware of the error, or had deliberately withheld information that would have allowed the contractor to become aware of the error and the contractor relied upon the information in entering into the contract, the employer may be liable for misrepresentation and the contractor able to have the contract cancelled. This will not assist the contractor where pursuant to contractual obligations, the contractor should have carried out its own review or investigations and discovered the error.

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

United Arab Emirates

The UAE law does not provide a general, express duty on the contractor to warn the employer. However, the contractor will usually be subject to contractual obligations in this regard, for example, in a contract for the performance of work, the duty to warn of defects in design generally arises from the implied obligation on the contractor to act with reasonable skill and care.

The contractor should be aware that when considering the matter of damages for a design defect, for a contract governed by UAE law, the court has the discretion to apportion damages and may choose to allocate jointly and severally between the designer or engineer and the contractor.

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

Pursuant to article 246 of the UAE Civil Code, parties are subject to a duty to perform their contractual obligations in good faith. This duty extends beyond the express terms of the contract and may be implied by virtue of custom and the nature of the transaction. Good faith is not defined but would include, in broad terms, cooperation between the parties and not to seek an unfair advantage over the other.

Where a level of intervention by the employer is permitted by the contract, the principle of good faith could not be used to alter a party’s contractual obligations. It would normally be the case that the courts would award compensation when they decide there has been a breach of a contractual term or another law, and the contractor can also demonstrate an act of bad faith or an unlawful exercise of a party’s rights.

Where a party wishes to withhold or suspend performance of its works or services, for instance, the other party must have already failed to perform its corresponding obligations under the contract, in accordance with article 247 of the UAE Civil Code. A party can rely on this provision to suspend its works but must be able to show its response was proportionate and exercised in good faith.  

Employers will typically include a right of termination for convenience within construction contracts. Should an employer wish to rely on this express provision, it should only do so in circumstances that do not give rise to performing the contract in bad faith.

Pre-agreed compensation clauses such as liquidated damages for delay, are permitted in the UAE. However, the courts can vary the parties’ agreement (to increase or decrease the pre-agreed sum) to reflect the actual loss suffered in accordance with article 390(2) of the UAE Civil Code.

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

Parties are required to perform their obligations under the contract and where the wording is clear in the contract, this cannot be departed from in order to interpret the intention of the parties (articles 243(2) and 265(1) of the UAE Civil Code).

The general limitation period for contractual claims in civil matters is 15 years (article 473 of the Civil Code) and 10 years when the dispute relates to structural defects under a construction contract (article 880(1) of the Civil Code). 

Generally, the courts are reluctant to interfere with the parties’ contractual agreement, such as the parties' contract using the FIDIC form including sub-clause 20.1, which deals with contractor claims, setting out both a procedure for the notification and substantiation of those claims and the mechanics of the decision-making process to be adopted by the engineer. However, where a strict interpretation of the contract will seriously prejudice a party, they may request the court to take a different approach. For instance, the court may be referred to the parties’ duty to act in good faith (article 246(1) of the UAE Civil Code), or that a party’s otherwise meritorious claim should not be denied on a procedural technicality (article 106(1) of the UAE Civil Code). Article 318 of the UAE Civil Code, which is commonly understood to prevent the unjust enrichment of a party, may also prevent an employer from relying on a time bar provision to evade payment to the contractor for works performed from which the employer has benefitted from, particularly if the only reason for withholding payment is a technical one relating to the contractor's claim submission.

In addition, where a party can show it entered into a contract on the other party’s standard terms that contain unfair contractual provisions. The court may remove or vary such clauses in the interests of justice in accordance with article 248 of the UAE Civil Code. This is a mandatory provision that cannot be excluded from the contract.

The UAE Civil Code does not directly address the time taken for completion but does recognise this as a fundamental requirement of a construction contract. Where time-related provisions have not been set in the contract, the courts have taken the approach (although only persuasive), that the time for completion will derive from custom, the nature of the transaction and any relevant circumstances between the parties in accordance with article 246(2) of the UAE Civil Code.

Similarly, the UAE Civil Code does not specify the circumstances that give rise to extension of time claims or a challenge of any penalty provisions. However, the courts do have various equitable-based powers such as, to extend the time for performance (article 272(2)), vary provisions concerning compensation (article 390(2)) and alter unfair contractual terms as stated above.

If a contractor wishes to claim damages for breaches of contract and acts of prevention by the employer, it must successfully establish a tortious claim for damages or loss suffered as a result of actions by the employer. Essentially, the contractor must establish the three elements required for a claim for damages:

• a breach of the contractual obligations by the employer;
• that damages have rightfully been suffered by the contractor; and
• causation, namely that the damages were caused by the employer's breach.

The contractor is required to establish both its right to claim damages and to then quantify its claim.

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

The source of an employer’s or contractor’s right to suspend performance under the contract may arise pursuant to the contract or law.

Article 247 of the UAE Civil Code recognises the legal right of either party to refrain from performing its contractual obligations if the mutual obligations of the other party have not been performed, provided it is not excluded in the contract. The obligations must be mutual and due for performance before the other party can withhold its performance under the contract.

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

Termination for convenience is recognised under UAE law. It is a ground of termination that typically only the employer can rely upon and should be included as an express provision within the contract. 

Where the works undertaken by the contractor are defective or in breach of the conditions of contract, the employer may instruct the contractor to rectify the works within a reasonable period where performance has not become impossible. Failing which, the employer can request the court to terminate the contract or grant it permission to employ a new contractor in order to complete the works, at the original contractor’s expense, in accordance with article 877 of the UAE Civil Code.

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

United Arab Emirates

Construction contracts are subject to general principles of UAE law, including article 267 of the UAE Civil Code in relation to termination of a contract, and are regulated specifically under articles 872 to 896 of the Civil Code concerning muqawala contracts (contracts to build). Under article 892 of the Civil Code, construction contracts can be terminated upon completion of the agreed works, by mutual agreement or by order of the court.

Parties are free to stipulate the circumstances in which unilateral and/or bilateral termination is permitted under the contract.

Where there are no express provisions for termination and a party is failing to perform its obligations under the contract, the terminating party, after serving a formal notice on the defaulting party, may request the court to order performance or terminate the contract pursuant to article 272 of the Civil Code. 

A construction contract can also be terminated by a provision of law pursuant to article 267 of the Civil Code. This may include, for example, a force majeure event or ‘any cause’ that prevents performance or completion of the works under articles 273 and 893 of the UAE Civil Code respectively.

It is vital that a party has the right to terminate before undertaking this action and notice procedures are followed, which are commonplace in the FIDIC suite of contracts. Otherwise, the terminating party could be subject to a damages claim for ineffective or wrongful termination. In addition, where termination is disputed, under UAE law, the contractual obligations remain valid until the court has decided the matter. 

UAE law does not expressly deal with termination in part. It is not uncommon in certain circumstances for an employer to descope a section(s) of the work, pursuant to the terms on the contract, entitling the contractor to claim loss of profit.

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

A party may request an order from the court to terminate a contract for non-performance by the other party in the absence of any termination provisions within the contract. The court can then either: order the defaulting party to perform its obligations, provide it with additional time to perform, or terminate the contract and order compensation to be paid to the non-defaulting party in accordance with article 272(2) of the UAE Civil Code.

A party can also rely on provisions of UAE law that give a right of termination, such as a force majeure event or “any cause” that prevents performance or completion of the works.

Article 273 of the UAE Civil Code deals with force majeure and provides that if the performance of a contract becomes impossible then it will be automatically terminated. Article 273(2) states that if an event causes partial or temporary impossibility, only the impossible part of the contract will be extinguished; however, the provision does allow the party claiming force majeure to choose to terminate the entirety of the contract. Practically, this means the obligor is no longer entitled to expect performance of the obligations under the contract.

In terms of financial implications, consideration will be given by the courts to the contract, and any pre-agreed allocation of risk, before deciding on any entitlement as a result of force majeure.

Article 893 of the UAE Civil Code provides either party with a right to terminate, if “any cause” prevents performance or completion. Under article 894, if a contractor becomes incapable of completing a construction contract for a cause in which it played no part, it will be entitled to the value of the work it has completed and the expenses it has incurred, up to the amount of value that its counterparty has derived from the incomplete performance.

20. What limits apply to exercising termination rights?

United Arab Emirates

In general, a contract may be terminated in three ways: (i) following completion of the agreed works or services; (i) by mutual consent; or (iii) by court order (article 267 of the UAE Civil Code).  

In the absence of an express contractual provision, if a party wishes to terminate a contract unilaterally, a court order may be required for such termination to be enforceable. However, parties may agree that contracts are automatically terminated without the need for a court order in the event of non-performance in accordance with article 271 of the UAE Civil Code.

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

UAE law is silent on this point, and accordingly the parties must look to the terms of the contract in respect of assessing the consequences of an employer taking beneficial possession of, and using, the works.

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

If the approval relates to the taking-over certificate, then the employer retains a right to claim for defects for the duration of the defects liability period under articles 878, 882 and 882 of the UAE Civil Code. Once the final completion certificate has been issued following the completion of the defect liability period, the employer is generally barred from raising a complaint subject to the terms of the contract.

Acceptance is not defined under UAE law, and accordingly will be interpreted in accordance with the contract in accordance with article 877 of the UAE Civil Code. Likewise, whether taking over the work by the employer constitutes acceptance and bars a subsequent complaint will depend on what is agreed by the parties under the applicable contract. 

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

If the contractually agreed liquidated damages do not adequately compensate an employer for its losses, the employer is permitted to make an application to the court or arbitral tribunal to increase the level of damages to equal the amount of loss suffered under article 390 of the UAE Civil Code. This would include losses arising from a contractor’s fraud wilful misconduct, recklessness or gross negligence if such losses can be evidenced. 

It is not possible to exclude liability for personal harm or injury (article 299 of the UAE Civil Code) or liability for fraud or gross error (article 383(2) of the UAE Civil Code). These principles are not defined under UAE law.

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

In principle, an employer would be permitted to still claim liquidated damages under the contract. However, the court or arbitral tribunal does have the power to apportion liability, including in cases of employer delay (articles 287, 290 and 291 of the UAE Civil Code).

Further, a contractor may be able to rely on the provisions relating to the unlawful exercise of rights (article 106 of the UAE Civil Code), good faith (article 264(1) of the UAE Civil Code) and unjust enrichment (article 318 of the UAE Civil Code) as possible defences to an employer’s entitlement to claim liquidated damages in circumstances of an employer delay.  

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

If the level of actual loss suffered is less than the liquidated damages, the court or arbitral tribunal may reduce the level of liquidated damages under article 390 of the UAE Civil Code at the request of either party.

The party requesting the adjustment bears the burden of evidencing that the actual loss suffered is not reflective of the liquidated damages.

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

If the level of actual loss suffered is more than the liquidated damages specified in the contract, the court or arbitral tribunal may increase the level of liquidated damages at the request of either party under article 390 of the UAE Civil Code. The burden of proof falls on the requesting party. In our experience, it is rare for a court or arbitral tribunal to increase the level of liquidated damages.

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 concepts of direct damages, loss of profits, loss of opportunity, interest and moral damages are all recognised remedies for a breach of contract claim.

In the case of direct damages, and regardless of the parties’ agreement, a court or arbitral tribunal has the power to adjust the level of liquidated damages to equate to the actual loss suffered (article 390 of the UAE Civil Code).

Loss of profits may be awarded but the occurrence of damage should be certain and not hypothetical or speculative.

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

Under article 257 of the UAE Civil Code, the general principle in the UAE is that the parties are free to agree contractual provisions provided that the contractual terms do not conflict with UAE law and are not contrary to public order or public morals.

If a contractor is able to sufficiently evidence that the rectification costs are disproportionate to the level of harm suffered by the employer due to the non-compliant works, the contractor may be able to mitigate its liability by claiming that the employer is exercising its rights unlawfully (article 106(c) of the UAE Civil Code).

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

For commercial contracts, article 95 of the UAE Commercial Transaction Law (Federal Law No. 18 of 1993) provides for a 10-year statute of limitations for bringing breach of contract claims running from the date on which the obligations are due.

However, any claims brought against a contractor by an employer more than three years after the date of collapse or discovery of the structural defect will, in all probability, be time-barred (article 883 of the UAE Civil Code).

The principle of decennial liability is also applicable here, and is covered at question 38.

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

United Arab Emirates

Contractual provisions that exclude liability for indirect or consequential loss are generally enforceable under UAE law, subject to certain statutory terms that cannot be excluded. For example:

• a court or arbitral tribunal can, regardless of any agreement to the contrary, override contractually agreed compensation and amend the level of compensation to make it equal to the loss suffered (article 390 of the UAE Civil Code); and
• contractors, architects and other designers are subject to “decennial liability”, meaning liability for 10 years following completion and handover of the construction works for dangerous or structural defects in, or total or partial collapse of, buildings and other structures (articles 880 to 883 of the UAE Civil Code). 

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

Limitation of liability clauses are commonplace in the UAE and are generally enforceable, subject to mandatory provisions of UAE law which cannot be excluded.

Tortious liability cannot be excluded, and any provision which purports to exempt a guilty party from tortious liability will be voided (article 296 of the UAE Civil Code).

Further, it is not possible to exclude liability for personal harm or injury (article 299 of the UAE Civil Code) or liability for fraud or gross error (article 383(2) of the UAE Civil Code).

Parties are also not permitted to exclude liability for decennial liability (as discussed in further detail at question 38).

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

A contractor is permitted to retain property if the work of the contractor has produced a beneficial effect on the property, until the consideration is paid (article 879 of the UAE Civil Code). To evidence a beneficial effect, the contractor is generally required to demonstrate that it has increased the value of the property or otherwise improved the property. Failure to do so may result in a contractor being liable for damages and other penalties under UAE law.

In practice, contractors in the UAE rarely exercise their rights under article 879 in the event of non-payment and this right remains largely untested. Further, there is very little judicial authority and guidance in the UAE on the application of article 879. 

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 generally enforceable under UAE law, whilst pay-if-paid clauses are generally unenforceable.

In accordance with the principle of good faith, the contractor would be expected to make reasonable efforts to pursue the employer for payments and/or entitlements due to a subcontractor under the pay-when-paid provisions.

The UAE courts have held that where an obligation is dependent on a condition precedent that is provided for the benefit of an obligor (such as a pay-when-paid clause), the condition precedent shall cease to be effective if the obligator defaults on its duty to act in good faith. In this instance, a contractor may be obliged to make payment to a subcontractor, regardless of whether it had received payment from the employer.

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

A subcontractor cannot claim directly against the employer for sums due from the contractor unless the right has been assigned to the subcontractor from the contractor (article 891 of the UAE Civil Code). There are possible exceptions to this rule, such as where the contract between the employer and contractor has been terminated.

Further, if a contractor fails to exercise its rights against the employer to seek payments due under the main contract, a subcontractor may commence proceedings against the employer in the name of the contractor (articles 392 and 393 of the UAE Civil Code).

A court or arbitral tribunal is entitled to respect a contractor’s right to withhold payment, subject to the mandatory provisions of UAE law that may apply.

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

While the doctrine of privity of contract is respected under UAE law, it is possible for a third party, who is not a signatory to the relevant contract, to become involved in proceedings. Further, a court or arbitral tribunal has discretion to order a third party to join proceedings in the interests of justice. 

It would also be necessary to consider the applicable procedural rules governing the arbitration and the terms of the relevant contracts.

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

As a starting point, UAE law recognises privity of contracts, meaning a third party who is not a party to a contract generally does not enjoy any rights arising out of the contract.

It is possible for parties to contractually agree performance for the benefit of a third party and, in such circumstances, the third party will acquire directly enforceable rights under the contract (article 254 of the UAE Civil Code).

Limitations of liability will be enforceable, subject to the mandatory and overriding provisions of the UAE law.

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

It is rare for construction claims to be brought against individuals related to a contractor in their personal capacity, such as affiliates, directors or employees. As such, it is not common practice to include relevant limitations of liability in construction contracts.

Any claims against an individual usually arise in circumstances where an individual has provided a personal guarantee under the relevant contracts.

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

Decennial liability is a key principle under UAE law and provides that designers (such as engineers and architects) and contractors are jointly liable to pay compensation for any total or partial collapse of a building and/or any defect affecting the stability or safety of a structure (article 880 of the UAE Civil Code). The liability runs from the date of delivery of the works.

The rules on decennial liability are substantive law and parties are prohibited from contracting out of decennial liability. Subcontractors are not liable for decennial liability, unless there is a direct contractual relationship between the employer and subcontractor. 

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

Article 31 of the UAE Civil Code provides that a mandatory provision of law shall ‘take precedence over a contractual stipulation’, such as article 246 of the UAE Civil Code, which imposes a positive duty on a party to perform its obligations under a contract in a manner consistent with the principle of good faith.

Specifically, in respect of construction contracts, the obligations and liabilities of a contractor and architect are set out at articles 875 to 883 of the UAE Civil Code. In particular:

• article 878 provides that the contractor shall be liable for any loss or damage resulting from his act or work ‘but he shall not be liable if it arises out of an event which could not have been prevented’;
• article 880 provides that a contractor and architect shall be jointly liable for 10 years ‘for any total or partial collapse of the building they have constructed or installation they have erected, and for any defect that threatens the stability or safety of the building’; and
• article 882 states that ‘any agreement the purport of which is to exempt the contractor or the architect from liability, or to limit such liability, shall be void.’

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

Article 19(1) of the UAE Civil Code provides that parties have the freedom to agree the governing law of the contract. This is not permissible, however, when the contract relates to property in the UAE or if the contract is made with a UAE governmental body or quasi-governmental entity. Article 27 of the UAE Civil Code provides that foreign law can only be applied insofar as it is compliant with public order, public moral requirements and Islamic sharia.

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

Yes. Article 39 of the UAE Arbitration Law (Federal Law No. 6 of 2018) confers on the arbitral tribunal an express power to render interim awards that are enforceable before the courts.

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

United Arab Emirates

The UAE does not have a specialist construction or arbitration court.

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

Disputes arising out of construction contracts may be dealt with at any level of court including the Court of First Instance, the Court of Appeal and the Court of Cassation. The UAE Arbitration Law designates the UAE Court of Appeal to deal with onshore UAE arbitration matters. Decisions are published in Arabic and summaries of select cases are available in English. There is no doctrine of binding precedent. Decisions of higher courts are persuasive but not binding.

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

Judges and arbitrators subject to the UAE Arbitration Law, are confined to adjudicating only on the issues put before them by the parties. They also owe a duty of independence and impartiality to the parties. Accordingly, if either were to indicate their preliminary views on the merits of the dispute or raise matters not addressed by the parties, this could be used as a basis for challenging any judgment or award made.

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

An employer may attempt to initiate substantive proceedings before the courts to circumvent the arbitration agreement, however, such an action will likely be dismissed by the courts pursuant to article 8(1) of the UAE Arbitration Law, provided that:

• the contractor challenges the courts’ jurisdiction on the basis that an arbitration agreement exists between the parties; and
• the arbitration agreement itself is valid and enforceable.

An employer can also request interim measures from the courts for existing or potential arbitration proceedings in accordance with article 18(2) of the UAE Arbitration Law.

The courts typically apply preconditions to arbitration very strictly and accordingly, where preconditions have not been satisfied by the parties it is likely that the courts will find that the proceedings have been brought prematurely.

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

An application for interim measures made by a contractor will neither suspend any ongoing arbitral proceedings nor be considered a waiver of an arbitration agreement between the parties in accordance with article 18 of the UAE Arbitration Law. Therefore, a contractor will not lose its right to arbitrate having applied to a foreign court for interim relief.

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

United Arab Emirates

Both arbitral tribunal and party-appointed experts may be used in arbitration. Article 33 of the UAE Arbitration Law provides that parties may engage party-appointed experts. Article 34 of the UAE Arbitration Law provides that unless the parties agree otherwise, the arbitral tribunal may also appoint one or more experts to submit a report. In proceedings before the courts, experts are typically court-appointed. Party-appointed experts owe their duty to the court or arbitral tribunal.

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

When an employer is a state entity or public authority, certain procedures may need to be followed before commencing proceedings. For instance, an action against a Dubai government entity requires the complainant to submit a statement of case with accompanying documents to the Dubai Legal Affairs Department, in accordance with the Government Lawsuit Law No. 3 of 1996 and Dubai Law No. 32 of 2008 setting up the Legal Affairs Department of the Government of Dubai.

Abu Dhabi Law No. 2 of 2019 regulating the Public-Private Partnership and Dubai Law No. 12 of 2020 concerning Contracts and Warehouse Management in the Dubai Government, enable entities of both governments to agree to resort to arbitration when entering into contracts with private entities.

Although government bodies can be sued in the UAE, when enforcing any arbitral award or judgment, no public property of the UAE or any emirate can be seized for enforcement purposes in accordance with article 106 of the Cabinet Resolution No. 57 of 2018 concerning the UAE Civil Procedures Law.

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

The common law concept of “without prejudice” inter-party communications, is not recognised under UAE law. In principle therefore, a party to an arbitration is not prevented from adducing settlement offers and negotiations as evidence of admissions against the interest of the party that made them. It would then fall within the discretion of the arbitral tribunal to determine the admissibility and weight to be given to such evidence, in accordance article 33(8) of the UAE Arbitration Law.

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

The concept of “without prejudice” is not recognised. However, parties to settlement discussions may agree that they are confidential and that damages are payable for breach of such confidentiality obligations.

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

The concept of privilege as understood in most common law jurisdictions is not a recognised concept in the UAE. However, an attorney is required to keep all communications with a client confidential. In particular, article 42 of the UAE Advocacy Law (Federal Law No. 23 of 1991) states that an attorney is to keep confidential the communications made in furtherance of their professional representation of a client, unless such disclosure is required to prevent the perpetration of a crime.

In-house lawyers are not bound to the same confidentiality rules relating to lawyer-client representations set out above. However, in-house lawyers are deemed to be employees and accordingly, have a duty to treat information relating to their employers confidential. In particular, the following substantive law may be applicable:

• article 905(5) of the UAE Civil Code states that an employee must keep confidential the business or trade secrets of his or her employer;
• article 16(4) of the UAE Labour Law requires an employee to maintain confidentiality of the information and data to which he or she has access by virtue of his or her work; and
• article 379 of the UAE Penal Code provides that it is a crime for a person to use a third party's information without consent, or for its own or another's advantage, where that information was gained as a result of that person exercising a profession, position, craft or art.

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

United Arab Emirates

Under article 1057 of the UAE Civil Code, a guarantee, in general terms, is made by an offer of the guarantor, as accepted by the debtor. The guarantee is invalid if its performance is rendered optional at the choice of the guarantor (article 1059 of the UAE Civil Code). However, the guarantee itself can be contingent on the occurrence of an appropriate condition or condition precedent (article 1060 of the UAE Civil Code).

Under article 411 of the UAE Commercial Code (UAE Federal Law No. 18 of 1993), a bank guarantee is an undertaking by a bank to pay the debt of a customer to a third party, as based upon the underlying guarantee deed.

While the UAE Civil Code does acknowledge the validity of oral contracts under Article 132, and the UAE Commercial Code does allow any form of evidence to be presented to assert a commercial obligation under article 94, it is not customary for parties to rely solely on oral guarantees that have not been reduced to writing.

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

As the obligation of a guarantor is ancillary to that of the debtor, the view of UAE law is that the liability will not exceed that of the debtor under article 1061 of the UAE Civil Code and article 411 of the UAE Commercial Code.

That being said, the UAE Civil Code acknowledges that expenses or costs relating to debt (eg, fees or costs for attachments, registrations, and releases) may form part of the debt, unless the parties agree otherwise (article 1067).

Since the guarantee will probably be based on an underlying debt, it is unlikely that the liability of the guarantor will exceed this. However, the UAE law allows for freedom of contract, and, in principle, the courts should acknowledge any agreement entered into by and between the parties.

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

Article 1089 of the UAE Civil Code provides that if the principal debtor becomes bankrupt, the creditor must prove its debt in the bankruptcy; otherwise, it will lose its right to claim or recourse against the guarantor to the extent of the loss sustained by them not having done so.

Article 1092 of the UAE Civil Code provides that ‘the creditor should claim the debt within six (6) months from the date when the debt fell due, and otherwise the guarantor shall be deemed to have been discharged.’

Article 1099 of the UAE Civil Code provides for termination of the guarantee in the following circumstances:

• discharge of the debt;
• force majeure;
• cessation of the underlying contract between the creditor and principal obligor;
• if the obligee discharges the surety from his suretyship or the principal obligor from the debt; or
• death of the obligor.

Moreover, article 1101 of the UAE Civil Code, provides that if the obligor(s), obligee(s), and guarantor(s) record a settlement concerning 'part' of the total debt, then the guarantee will finally terminate, and the balance debt will be waived.

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

Article 417 of the UAE Commercial Code states that in ‘exceptional’ cases the court may issue an attachment order where an obligor relies for his claim on ‘serious and sure grounds’. The law does not define or otherwise elaborate on what such grounds may be. Generally, the bar for an attachment order in respect of a bond call is quite high in the UAE. For example, clear evidence of fraud is one instance where courts may intervene and issue an attachment order.

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 above.

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

United Arab Emirates

No.