UAE law and construction contracts

It is usual for construction and infrastructure projects in the UAE to be procured under FIDIC-based construction contracts, with varying degrees of amendment. Although FIDIC (International Federation of Consulting Engineers) contracts are generic and internationally recognized standard form construction contracts, they require amendment for use in the UAE market under the UAE construction law.

A common and often costly mistake by new entrants to the UAE construction market, whether employers, contractors, consultants or funders, is to assume that all provisions of a FIDIC contract, or any other form of contract entered into, will be fully enforceable under UAE construction law.

This is not the case, as the UAE has various mandatory laws that cannot be contracted out of, and which alter what the contracting parties consider to be the agreed risk allocation.

This article provides a snapshot of some key issues that you need to be aware of when carrying out a construction project in the UAE. The key issues the authors have focused on are payment, damages, liability and termination.

UAE construction law key issues

Payment. Payment is the lifeblood of any construction project. Construction contracts in the UAE employ various different pricing and payment mechanisms but it is important to note that, unlike in some other jurisdictions, there is nothing under UAE construction law that prevents parties from agreeing to what are often known as “pay when paid” payment regimes. In other words, a main contractor is not required to pay a subcontractor, including for variations, until it has received payment from the employer for the subcontract works for which payment is being claimed.

The phrase “pay when paid” is not legally recognized in the UAE. Accordingly, any pay when paid payment regime needs to be carefully drafted to ensure enforceability.

Unlike some other Middle Eastern jurisdictions, the UAE construction law does not allow subcontractors to bring a claim directly against the employer, unless the main contractor has assigned its entitlement to payment for the relevant subcontract works from the employer to the subcontractor, which is unusual.

Damages. The starting principle under UAE construction law is that contractual obligations should be specifically performed, and that damages will only be awarded by a court if it is no longer possible for the underlying obligation to be performed.

If damages are awarded, which is not uncommon, the measure of damages is designed to compensate the injured party for the actual loss that it incurred from the breach in question. To claim damages the injured party must substantiate its loss. Although UAE construction law does not formally recognize any express duty of mitigation, courts usually expect the injured party to have taken reasonable steps to mitigate, or reduce, their losses arising from a breach. Damages can be revised downwards if this is not the case.

The concepts of “indirect” and “consequential” losses have no defined legal meaning under UAE construction law. Contracting parties must expressly refer to the precise categories of loss that they are seeking to recover, or, on the other hand, to exclude liability for, and not simply refer to, indirect and consequential loss.

Limits on liability. Although UAE construction law recognizes that parties can limit their liability under construction contracts (and construction contracts often include caps on liability), a contractually agreed liability regime is not set in stone.

Upon the request of either party, the court may increase or decrease the agreed damages so that the compensation equals the actual loss suffered.

The party seeking to have damages reassessed has the burden (which can be significant) of demonstrating that the agreed compensation should be adjusted. This becomes particularly relevant in the context of liquidated damages. Although there is no prohibition on the rate of liquidated damages having a punitive effect, an unduly onerous liquidated damages rate can be susceptible to challenge.

Additionally, there are certain categories of loss in respect of which liability cannot be excluded, including liability for death and personal injury, as well as decennial liability.

Decennial liability provides that both the contractor and supervisor are jointly and severally liable to the employer for any total or partial collapse of a permanent structure, as well as for any defects that threaten the structure’s stability or safety. Decennial liability is a strict liability regime that holds the contractor and supervisor liable for a period of 10 years.

Termination. Construction contracts are characterized as a muqawala, (i.e., a contract for works), and UAE construction law provides that a contract of muqawala may terminate “upon completion of the work agreed or upon cancellation of the contract by consent, or by order of the court”.

In practice, contractually agreed termination rights are respected in the UAE, including termination for convenience (notwithstanding the fact that this ground for termination is not referred to in any UAE laws). However, unless the requirement for a court order has been expressly waived by bespoke drafting, the court is required to review and, if appropriate, ratify the termination through the issue of a court order.

A further important point is that UAE construction law provides contractors with a legal entitlement to retain possession of the site following termination of the construction contract if the contractor believes that sums are owed to it.

If a contractor elects to exercise this right, the employer could be prevented from accessing the site, and therefore from completing the project, until the contractor’s entitlements have been finally determined. This can incur a significant amount of time, as well as cost.

Construction contracts are complicated and bind the parties for significant periods of time. It is therefore prudent for all stakeholders to ensure that they are fully aware of, and if appropriate seek to negotiate, the risks to which they are exposed before putting pen to paper.