This article examines a range of issues relating to construction contracts in the UAE and sets out practical steps which should be considered by parties entering into such agreements.
The article examines the interaction between international and UAE provisions applicable to construction contracts, including in relation to the choice of dispute resolution mechanisms in construction contracts, the possibility of enforcing foreign judgments and arbitral awards and key concepts of UAE construction laws that can assist employers, engineers, contractors and subcontractors in setting out their respective rights and obligations.
However, domestic law considerations should not be ignored. It is true that, in principle, the UAE courts recognise and accept the standard terms and conditions set out in the FIDIC contracts. However, there are several UAE law principles that have a direct impact on the parties’ contractual terms and prevail over such terms in some cases.
As the UAE is a civil law jurisdiction, UAE law principles are mainly codified in the Civil Transaction Law No. 5 of 1985, as amended by Federal Law No. 1 of 1987 (Civil Code) and in the Commercial Transactions Law No. 13 of 1993 (Commercial Code).
Other provisions are rules of public order, which means that parties cannot contract out of these rules when they seek enforcement in the UAE, even where a foreign law is applicable to their contract and/or a foreign court or arbitration tribunal is competent to rule on a dispute arising from the contract.
Therefore, opting for the application of a foreign law to a construction contract, or for the submission of disputes to a foreign court or to an arbitration tribunal, does not make the construction contract immune from being subject to certain rules of UAE law.
Understanding the legal framework applicable to construction contracts in the UAE requires shedding light on what the parties can and cannot agree in their contract. To this end, this article outlines:
The UAE, and in particular Dubai, has emerged as one of the leading regional commercial hubs, attracting foreign investors from all over the world. Therefore, it is understandable that parties to a contract based in the UAE commonly elect a foreign law as the law applicable to their contractual relationship, even where contracts are executed or performed in the UAE. However, it is crucial to understand the consequences of choosing a foreign law.
UAE law applies to procurement contracts with governmental and quasi-governmental entities, and parties cannot agree to a different choice of law. At the federal level, Ministerial Decision No. 20 of 2000 concerning the government procurement rules (Federal Procurement Regulations) and Cabinet Resolution No. 32 of 2014 set out requirements for contracts concluded with the UAE federal government, ministries and federal agencies.
In addition, certain specific laws apply to the procurement and tendering activities of certain public authorities. For example, the Dubai Procurement Law applies its own laws and regulations. Most public authorities have a set of standard procurement contracts and documentation for the provision of contracting work, services and supplies, among others.
Consequences of choosing a foreign governing law
This issue does not arise if the dispute is referred to arbitration. Parties are free in arbitration to elect their own choice of governing law. as local courts looking at enforcing foreign awards in the UAE will apply the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), which only provides for very limited grounds for refusing the enforcement of an international arbitral award (for example, where the foreign award violates a rule of public order in the country in which enforcement is sought). If it is a domestic arbitral award, the procedure under the new UAE Arbitration Law will apply. This is discussed further below.
Enforcement of foreign judgments and arbitral awards
The new UAE Arbitration Law. Following the entry into force on 15 June 2018 of the first stand-alone UAE federal arbitration law, No. 6 of 2018 (New Arbitration Law), the process of enforcement of arbitral awards under this new law has been simplified, providing for a more arbitration-friendly framework.
Under Article 55 of the New Arbitration Law, enforcement proceedings of an award before the UAE courts are now shorter and can commence directly in a federal or local Court of Appeal. The party seeking to enforce an arbitral award must file a request for ratification and enforcement of the award to the Chief Justice of the Court of Appeal, which must order the award to be enforced within 60 days from the date of the enforcement request, unless the Chief Justice finds one or more grounds for setting aside the award (listed in Article 53 of the New Arbitration Law). This evidences the fact that the UAE courts now have a positive obligation to enforce an arbitral award, unless they can find a ground for annulment under Article 53. After the court renders its decision to enforce the award, the award debtor has the opportunity to file an objection before the competent Court of Appeal within 30 days from the date following notification of the order of enforcement of the award (Article 57, New Arbitration Law).
The Court of Appeal hearing the action to set aside can suspend the setting aside proceedings for up to 60 days if deemed appropriate, at the request of a party, to give the arbitral tribunal the opportunity to take any measures which would eliminate the grounds for setting aside the award without affecting the substance of the award (Article 54(6), New Arbitration Law). This was also provided for under the now-repealed Article 214 of the CPC under which the setting aside proceedings would be suspended for 90 days.
On the other hand, on 1 October 2017 in case No. 889/2016, the Dubai Court of Cassation annulled an award on the basis that the arbitration clause had been signed, on behalf of the party seeking the annulment, by a person who was not the “official” director of the company as stated in its trade licence and that therefore, the person who signed the contract lacked the legal capacity to bind the company to the arbitration agreement. The court rendered this decision even though the party seeking the annulment had fully participated in the arbitration and was duly represented by counsel. In addition, at no point throughout the proceedings did the party seeking the annulment raise any objection as to the non-capacity of the signatory to the contract.
In the absence of express contractual rights of suspension, Article 247 of the UAE Civil Code allows a party to a contract to suspend performance of its obligations if the other party has failed to perform its own obligations. This right can be exercised without an order from the court. The test however remains as to who breaches the contract first. A party cannot seek suspension of its obligations if it had breached the contract first.Contractors can, for example, suspend the contract if the employer has failed to make payments under the contract. 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 proportionate to the breach.
Subcontracting is permitted under UAE law, unless the contract between the employer and the contractor expressly prohibits subcontracting (Article 890, Civil Code). The contractual relationship between the contractor and subcontractor is limited to these two parties and does not extend to the employer. The contractor remains responsible to the employer for the works performed by the subcontractor. “Pay when paid” or “back-to-back” clauses are valid under UAE law and can be used in favour of the contractor, when the contractor has not been paid by the employer. The subcontractor can request payment from the employer directly if the contractor has assigned its right to do so (Article 891, Civil Code).
- Agreements must be kept (pacta sunt servanda). In commercial transactions, the contract is the primary source of obligation, provided that it does not contravene UAE imperative laws. Parties must therefore respect the terms of their contract and perform their contractual obligations, or will otherwise be held liable for breach of contract. A person who seeks performance or a right prematurely will be penalised by being deprived of such performance or right (Article 69, Civil Code). This is relevant in construction contracts when, for example, parties do not respect the notice requirements. In addition, UAE law applies where an agreement is silent. If the law is silent, then local custom will apply. If these are silent, international customs must be considered, provided that they do not contravene public order and public morals (Article 2, Commercial Code; Articles 50 and 51, Civil Code). FIDIC contracts are recognised under UAE law and by the UAE courts as custom.
It may be possible to secure the appointment of experts via the courts in certain circumstances, to issue reports in support of a claim, even where no proceedings (whether domestic or foreign) have been commenced. Parties should consider with local counsel other local interim measures in support of their case, even if proceedings are conducted abroad. These can include: