Page 1 When International Standards Meet Local Laws.

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Home >Offshore >Corporate/Commercial Law
Last Updated: 27 October 2011
Article byOwen Delaney
Vinson & Elkins LLP
United Arab Emirates: When International Standards Meet Local Laws.
Part 1: Construction Contracts In The UAE And Middle East
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While it is still commonintheUAE for constructioncontracts tobe governedbyEnglish law,
theAbuDhabi governmentpassed LawNo. 21of 2006 tomandateprescribed standardforms
of constructioncontract for projects initiatedbygovernmententities. International contractors
mayhave takenheartatthetimetodiscover that theseforms wereheavilybased onFIDIC
forms. However, familiarity withone contract formcanleadtoa false sense of securityand
unexpectedsurprises whenapplied inanother jurisdiction. Whether FIDIC, anyother
standardformor bespoke, thecontract itself is onlyhalf thestory. Constructioncontracts
governedbyUAE lawwill always be subject totheUAE Civil Code, and (not unlike many
other Civil Codes) therecanbe unwelcome surprises for theunwary.
For example, Article390of theUAE Civil Codepermits contractingparties toagree in
advance whatcompensation will be payable intheevent of a breach, inmuchthesameway
that English lawhas developedto
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The real sting in this is that it can apply even if the contract is governed by a law other
than UAE law. If the property in question is situated in the UAE, a UAE employer
seeking the enforceability of decennial liability could expect reasonable prospects of
success in the local courts.
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permittheconcept of liquidated or agreeddamages clauses. However, Article390grants
judges thediscretiontovarytheagreementdownwards so that thelevels of damages equal
theactual loss suffered. There aresimilar provisions givingjudges suchdiscretioninmany
other MiddleEasternCivil Codes includinginsome(theJ ordanianfor example) arguablythe
discretiontovarythedamages upwards as well as downwards toreflectthetrueloss. While
commonlawjudges usuallyrefrainfrominterferingwiththeparties' freedomtoagree on
commercial terms (whether imprudent or otherwise) under theCivil Codes of manyMiddle
Easterncountries, a judgehas thediscretiontoreduce theamounttobe paidtozero or to
someother sumwhichit considers tobe appropriate. How, inpractice, suchdiscretionis
exercisedinlocal courts is not always clear and suchprecedents as therearefromlocal
courts canbe veryhardtofollowor
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The general position under Article 267 is that a contract may be terminated in three
ways: mutual consent; court order; or by force of law (even though this Article appears
to be directed at cases where the contract is silent on the matter).
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drawanyreliable conclusions from. Discerning thetrueeffect of suchprovisions canbe far
fromeasyand consequentlyit is perhaps no surprise that, notwithstandingthat theyhave the
power todo so byapplying thegoverninglaw, Arbitral Tribunals areoftenmorereluctantto
interfere withthebargainand exercisesuchdiscretionthanjudges inthelocal courts.
Perhaps one of themajor differences betweenthecommonlawand civil jurisdictions ina
constructioncontextis thenotion of decennial liabilitywhichcanstill comeas anunwelcome
surprise tomanyinternational contractors. For example, Article880of theUAE Civil Code
imposes a jointliabilityonthecontractor and thedesigner for a periodof 10years for thetotal
or partial collapse of a buildingor for a defectwhichthreatens thestabilityof thebuilding. This
liabilityis strict; even if thecontractor canbe showntohave used reasonableskill and care
and compliedwithrecognizedstandards, or if thedefectwas unforeseen, decennial liability
still applies, irrespective of anyshorter defects liabilityperiodor other suchcontractual
limitation. The real stinginthis is that it canapplyeven if thecontract is governedbya law
other thanUAE law. If theproperty inquestionis situatedintheUAE, a UAE employer
seekingtheenforceabilityof decennial liabilitycouldexpect reasonableprospects of success
inthelocal courts. Again, it might be consideredthat sucharguments wouldhave less
prospects of success beforeanArbitral Tribunal composedof commonlawarbitrators who
might be expectedtogiveeffect totheexpress bargainagreedincludinglimitations onliability
inpreferencetoapplying thelocal, but non governinglawof thecontract.
While onthesubject of limitation, parties shouldbe awarethat under Article473of theUAE
Civil Code, thelimitationperiodfor contractual claims incivil matters intheUAE is 15years
fromthedatethecause of action arises (and generally10years incommercial matters under
Article95).
The issueof unilateral terminationof a contract still provokes debate intheUAE. Termination
is addressedinseveral articles of theUAE Civil Code. However, dependingoninterpretation
(and withtheabsenceof clarityprovidedbybinding precedent) a courtorder maybe required
for a unilateral terminationtobe enforceable. The general positionunder Article267is that a
contract
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Time and again Arbitral Tribunals show themselves to be reticent to apply what might
be considered to be alien concepts quite as freely as applied by local courts.
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maybe terminatedinthreeways: mutual consent; courtorder; or byforceof law(althoughthis
Articleappears tobe directedatcases wherethecontract is silentonthematter). While
strongarguments canbe made (for example, under Articles 246and 258) for thelegalityof
unilateral terminationwherethecontract provides for such, if a challenge is made it will often
be submittedtothecourts.
The positioncanalsobe complicatedif disputes (includingas totermination) have been
agreedtobe submittedtoInternational Arbitrationrather thanthelocal courts. UAE lawhas
similar principles toEnglish lawonmitigation. However, intheUAE context, mitigationcould
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be even morecrucial. A positivedutyis placedontheinnocentpartytomitigate losses tothe
extentthat recoverable losses arethosewhichcannot be avoidedbyexertingreasonable
effort. Furthermore a judgecanreduce thelevel of compensation (even tozero) wherethe
innocentpartyparticipatedinor aggravatedits ownloss. Whenthings go well, a construction
contract itself seems tobe relegatedtosimplya procedure manual for managingthe
associatedproject, and it's onlywhenthings go wrong, that it comes tothefore. Whenfamiliar
precepts areplacedindifferent jurisdictions, theimpact of thelocal lawcanfundamentally
alter their treatment. Contractors and employers alike shouldalways consider theimpact of
local lawand takeappropriate measures tomitigate suchrisks. Onesuchmeasurecanbe to
consider International Arbitrationfor theresolutionof disputes. Time and againArbitral
Tribunals showthemselves tobe reticenttoapplywhatmight be consideredtobe alien
concepts quite as freelyas applied bylocal courts. This is particularlyso wherethe
application of suchconcepts drives theproverbial coach and horses throughtheexpress
terms of thebargain.
The content of this article is intended to provide a general guide to the subject matter.
Specialist advice should be sought about your specific circumstances.
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