Contracts and insurance

Construction contracts

What standard contract forms are used for construction and design? Must the language of the contract be the local language? Are there restrictions on choice of law and the venue for dispute resolution?

The predominant standard form suite of contracts used in the UAE is the International Federation of Consulting Engineers (FIDIC) suite. For traditionally procured projects (design–bid–build), the FIDIC 1999 Red Book is the most common form, whereas for design-and-build projects, the FIDIC 1999 Yellow Book is employed. Infrastructure and engi­neering procurement construction (EPC) projects do, in some cases, utilise the FIDIC 1999 Silver Book form; however, bespoke contracts are more common for infrastructure and EPC projects.

While the FIDIC suite is dominant, the standard FIDIC risk allocation is almost always adjusted through particular conditions that allocate more risk to the contractor and remove obligations usually imposed on the engi­neer or employer. The risk adjustment is often so significant that it creates what is effectively a ‘bespoke’ contract with a FIDIC badge.

In addition, the Emirate of Abu Dhabi has its own construction contract templates for use on Abu Dhabi projects. Abu Dhabi Executive Decision 1 of 2007 introduced two forms of construction contracts for public construction: a construction works contract based on the FIDIC 1999 Red Book, favourable to the employer, and a design-and-build contract based on the FIDIC Yellow Book. These forms are mandatory when the private sector is contracting with the government of Abu Dhabi.

There is no overarching legal requirement in the UAE for contracts to be drafted in Arabic, and English is the more common contractual and business language. However, in some sectors, federal and local government tenders may stipulate that certain contractual documents must be produced in both Arabic and English and, in such instances, the Arabic version will prevail.

When contracting with certain government entities, there are also laws that prevent or limit parties from referring contractual disputes to arbitration outside the UAE, or a specific emirate, or to submit to laws other than the laws prevailing in the UAE.

While article 19 of the UAE Civil Code recognises the right of parties to agree that foreign law will govern a contract, should parties elect to submit their disputes to the UAE courts, it is most likely that UAE law will be applied in lieu of any chosen foreign law in practice. Conversely, if arbitration is selected, the governing law chosen by the parties will be applied.

Within the UAE there are also a number of free zones that have their own laws and regulations, including the Dubai International Financial Centre and the Abu Dhabi Global Market, which are both common law systems and allow parties to refer matters to them for resolution even where there is no specific connection with these jurisdictions.

Payment methods

How are contractors, subcontractors, vendors and workers typically paid and is there a standard frequency for payments?

Payments on construction projects are most frequently made by electronic funds transfer. Payments by cheque remain more commonplace in the UAE than in other international markets, and cash transactions are reasonably rare on major projects.

While payment frequencies vary, payments to main contractors typi­cally follow a process of monthly claim submission, followed by a third-party certification and valuation process with the obligation for payment accruing thereafter. Usually, 14 to 40 days are provided for the certification process, and a further 30 to 45 days for payment following certification of the contractor’s claim. Accordingly, the time frame, from the submission of a monthly claim to the receipt of funds, can be between 45 and 90 days.

‘Pay when paid’ clauses are enforceable and are often incor­porated into subcontracts in the UAE. However, the principle of good faith enshrined in article 246 of the UAE Civil Code may limit the enforceability of these clauses.

Contractual matrix of international projects

What is the typical contractual matrix for a major project in your jurisdiction in terms of the contractual relationships among the various construction project participants?

Owners typically award projects by competitive tender and enter into a main contract with one works contractor or design and construction con­tractor. The contractor will then be responsible to the owner for the overall delivery of the project and will enter into separate subcontracts for the provi­sion of specialist works and the supply of materials.

Owners will also typically enter into a consultancy agreement with an engineer or project delivery firm to provide the services of engineers or contract administrators and to manage the main contract effectively on their behalf.

In design–bid–build projects, the owner will also have a direct consul­tancy agreement with the designer for the completion of design works. It is not uncommon for this consultancy agreement to be novated to the design and construction contractor once appointed.

PPP and PFI

Is there a formal statutory and regulatory framework for PPP and PFI contracts?

There is currently no federal PPP law in the UAE. At a local level, Dubai has the PPP Law (Law No. 22 of 2015 Concerning Regulating Partnership Between the Public and the Private Sector in the Emirate of Dubai); however, this law does not apply to electricity and water projects (which remain governed by Dubai Law No. 6 of 2011). Further, its enabling regulations have not yet been issued. Abu Dhabi has a similar law (Law No. 2 of 2019) that is stated as being applicable to all government entities in the emirate, and, as such, would be expected to apply also to the power and water sector under the Emirates Water and Electricity Company; however, again, as the enabling regulations for this law have not yet been issued, this remains to be seen.

To provide guidance to companies in the private sector wishing to enter PPP projects with the federal government, the Ministry of Finance has issued the Federal Government Public-Private Partnership Provisions and Procedure (the Manual). Implementation of the provisions of the Manual is now mandatory for PPP projects between federal and local governmental bodies, or between the private sector and the federal government (including where the federal government acts jointly with a local government entity). In the case of a local government entity-procured PPP project, the application of the Manual is optional.

Joint ventures

Are all members of consortia jointly liable for the entire project or may they allocate liability and responsibility among them?

In circumstances where an unincorporated joint venture (JV) or consortium signs a contract through each of its individual constituent companies (ie, in circumstances where the JV or consortium is not a separate legal entity), each of the signing parties will be liable to the employer under the contract and required to comply with the contractual obligations of the contractor. In these circumstances, it is common for the contract to contain an express ‘joint and several’ clause to this effect.

Members of the JV or consortium will commonly enter into a JV or consortium agreement governing their relationship. These agreements will usually contain indemnities between the parties regarding losses suffered by one or more parties on account of the negligence or failure of another. Accordingly, while the members will typically be jointly and severally liable to the employer, this risk can be effectively addressed through the JV or consortium agreement.

Tort claims and indemnity

Do local laws permit a contracting party to be indemnified against all acts, errors and omissions arising from the work of the other party, even when the first party is negligent?

Generally, UAE law upholds a party’s freedom to contract, so parties are free to agree the limitations of liability providing that they do not conflict with any mandatory provisions of law. However, the UAE courts retain discretion to intervene in the interests of justice, and exclusion of liability for gross negligence or fraud is prohibited pursuant to article 383 of the UAE Civil Code. 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.

More specifically, in the sphere of construction contracts, article 880 of the UAE Civil Code is a mandatory provision that overrides any provisions in a building contract or the professional appointment. Article 880(2) requires the employer to be compensated for any defect in the land that results in the total or partial collapse of a building, or even any defect threatening the stability or safety of the structure. Liability exists for a period of 10 years from the date on which the works were handed over (although the employer must commence proceedings within three years from the collapse or discovery of the defect).

Article 878 of the UAE Civil Code, also in relation to construction contracts, provides that contractors shall be liable for any loss or damage resulting from their act or work, ‘whether arising from their wrongful act or default or not’, but liability will not extend to an unavoidable incident (eg, force majeure).

Liability to third parties

Where a contractor constructs a building that will be sold or leased to a third party, does the contractor bear any potential responsibility to the third party? May the third party pursue a claim against the contractor despite the lack of contractual privity?

In the absence of an express contractual right, there is very limited scope for a lessee or homeowner to pursue a claim directly against a third-party contractor, who will need to look primarily to its contractual counterparty under the lease or contract of sale, usually the developer.

Where a contractor has caused harm to the third party that results in loss or damage, it may be liable in tort under article 282 of the UAE Civil Code. If there is more than one tortfeasor, the court will look to apportion damages on a joint and several basis, with each party being held responsible ‘in proportion to his share’ of the tort, pursuant to article 291.

Insurance

To what extent do available insurance products afford a contractor coverage for: damage to the property of third parties; injury to workers or third parties; delay damages; and damages due to environmental hazards? Does the local law limit contractors’ liability for damages?

The most common form of insurance in construction contracts cover damage to third parties, injury to workers and third parties, delay damages and negligently performed works, design errors (professional indemnity), and decennial liability. Third-party liability insurance and workers’ compensation insurance are very common on construction projects, as is the standard contractors' all risks policy.

Insurance regarding delay damages, decennial liability and contractor negligence in the performance of the works is very rare.

Local law does not limit contractors’ liability for damages; however, it is very common for contracting parties to fix the amount of compensation in the contract or a subsequent agreement. Pursuant to article 390(2) of the UAE Civil Code, the court has discretion to adjust the amount payable to reflect the actual loss suffered.

In cases of structural defects, pursuant to article 882 of the UAE Civil Code, it is not possible to limit or exclude the mandatory decennial liability imposed by article 880 of the UAE Civil Code. Further, tortious acts or losses cannot be excluded within the parameters of article 296 of the UAE Civil Code.

Law stated date

Correct on

Give the date on which the above content was accurate.

6 May 2022