CONSTRUCTION LAW

COMPANY PROFILE

Al Tamimi & Company, originally established in 1989, is today one of the leading law firms in the
Arabian Gulf region. It is the largest local, non-affiliated law firm in the United Arab Emirates with
offices in Dubai, Abu Dhabi, Sharjah and Baghdad, and an associate office in Doha.

Al Tamimi & Company specialises in Banking & Finance, Corporate / Commercial and
Communications, Information Technology & Media, Intellectual Property, Litigation, Arbitration &
Alternative Dispute Resolution, Maritime, Trade & Insurance, Construction and Property Law.

An international team of high calibre lawyers ably serves clients from the United Kingdom, North
America, Europe, the United Arab Emirates and several other Arab countries. Each member of our
team of professionals and qualified administrative staff is fully committed to providing our clients
with accurate, thorough and cost effective advice.

Within the U.A.E. we regularly confer with government ministries during the introduction of new
legislation and the ongoing amendment of internal regulations, relying on long established
contacts in all government departments.

The firm can assist multinational companies to establish operations in the U.A.E. independently,
or in association with local partners. Both our local clients, many of whom have business interests
outside the United Arab Emirates, and our international companies, rely on our global
perspective.
CONSTRUCTION LAW
PUBLICATIONS PRODUCED BY AL TAMIMI & COMPANY
The informative brochures listed below are available free of charge from the lobby of any of our
offices in the UAE. We would also be happy to send them to you by post if you contact our
Dubai office reception. Alternatively, the text of the brochures may be accessed on our website at
www.tamimi.com

Arbitration: Theory and Practice in the United Arab Emirates

Laws Regulating Insurance in the United Arab Emirates
International Agreements, Conventions & Protocols, signed by the Goverment of UAE 1971-2004
UAE Immigration Laws and proceedures in Dubai
E-Commerce and the UAE Law
Companies under the UAE Commercial Companies Law
Registration of Trademarks
Registration of Industrial Patents, Drawings and Designs in the United Arab Emirates
Copyright Law in the United Arab Emirates
UAE Construction Law and Dispute Resolution
Media Query- Setting up in Dubai Media City
IT Query - E-Commerce and the UAE Law
IT Query- Setting up in Dubai Internet City
Framework for Litigation in the United Arab Emirates
Islamic Finance- A UAE Legal Perspective
Banking and Security law in the UAE
Establishing Offshore Companies in the Jebel Ali Free Zone
IT Query- Setting Up in Dubai Internet City
Taxation Law in the UAE
The GCC Enocomic Agreement and Customs Law
Standardisation and Classification in the UAE
Law of Tort
Commercial Companies Law in the UAE
Joint Ventures in the UAE
Inheritence Law in the UAE
Property Law in the UAE
Patents, Designs & Models

Al Tamimi & Company also has a free monthly newsletter called Law Update which provides
readers with the latest news on legal and commercial developments in the region.
To subscribe please send an email to: marketing@tamimi.com or call +971 4 3317090 or
Fax: +971 4 3313177.

visit us at
www.tamimi.com
 CONSTRUCTION LAW
INTRODUCTION

Construction Practice

AL Tamimi & Company’s construction practice is at the heart of one of the most dynamic
and burgeoning industries. Dubai is currently the largest construction site in the world and
our firm’s legal services, provided by experienced high-pedigree lawyers and advocates,
continuously address the needs of contractors and architects. From setting up, to
contract review and dispute resolution, our legal input has helped numerous members of
the construction industry to succeed in what is an increasingly demanding and
competitive market.

The number of construction projects and related contracts has increased substantially in
the UAE over the last decade. This has inevitably given rise to significant numbers of
claims either between contractors and owners / employers or between contractors and
sub-contractors. These disputes are resolved either by way of conciliation or arbitration
and are predominantly held in the English language, with specialist arbitrators appointed
due to the technical nature of the aspects involved. Litigation is a less preferred mode of
dispute resolution in the construction industry, although there are a number of Court
rulings on important aspects of construction law. As a consequence of this, focus on
construction law is increasing. The articles set out herein seek to address some of the
most often encountered issues in construction law related disputes.

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INDEX

Consultants and contractors

Consult before contracting!.......................................................................................................04

Architect’s liability under UAE Law............................................................................................09

But I thought we agreed…!

Can a contractor’s limit of liability be broken?..........................................................................13

Benefits and drawbacks for contractors in commencing

arbitration / litigation prior to completion of works..................................................................17

Advantages and disadvantages of various methods of construction dispute resolution............20

Arbitration practice in the UAE.................................................................................................23

Know now your basics: Critical UAE arbitration stages............................................................30

Conditional payment clauses under construction contracts.......................................................35

All work and no pay?

Can a contractor suspend works following delay in payment?.................................................38

Insuring a design and designing an insurance..........................................................................43

So what have you lost?............................................................................................................47

Construction time bars under UAE Law.....................................................................................51

To suspend works or not to suspend works?

The contractor’s perenial dilemma ..........................................................................................55

Preparing early for works that may be late

Effective documentary management for UAE delay and disruption claims...............................59

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CONSULTANTS AND
CONTRACTORS: CONSULT
BEFORE CONTRACTING!

Contractual transactions in the world of construction that are devoid of legal

input are fraught with pitfalls.

arties to construction or consulting contracts invariably refer to lawyers’ aspects

P that need legal input only after major disputes have arisen or are about to arise.
Other times, the lawyers are only wheeled in when both parties are contemplating
the prospect of commencing arbitration or litigation and worse still, when this has already
started with many – potentially critical - errors.

Most construction related contracts involve very substantial amounts of money and
obligations that can linger for periods of time much longer than the actual duration of the
works. Obtaining legal input prior to the signing of a contract in the construction field is
far from throwing good money after bad: it is an essential and wise precaution that can
not only cater for a dispute that may arise but can also limit the prospects of that dispute
arising in the first place.

The main purpose of legal consultation is to balance the interests of the parties and to
ensure that their intentions are clearly set out in a legally binding document and in a form
that is understandable both to the contracting parties and to a future judge or panel of
arbitrators.

Very often contract managers

working for either party may
overlook important legal fine
tuning despite their admittedly
substantial experience in
negotiating the commercial
substance of contracts. But
commercial substance without
strong legal footing may lead to
the creation of obstacles that
can prove virtually impossible to
overcome.

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Just a small sample of these as they belatedly arrive at a construction lawyer’s office are
the following:

1. Unsigned and unstamped contracts : possibly not worthy of the paper they are
written on

Very often construction works proceed before the contract has been signed and it is
not unusual for the entire document (which very often is a voluminous document
containing amendments and amplifications of various FIDIC based or other standard
forms of construction contracts) to remain unsigned throughout the duration of the
works. This can have substantial legal implications if a dispute arises thereafter and
is brought before a panel of arbitrators or before the UAE Courts. Whilst the very
presence of the works and services provided will probably not be put to question,
local law and legislation does pay great attention to form and procedure: absence of
signatures and stamps in the main contract (including initialing and stamping each
page of the contract) may present evidential difficulties to either or both parties when
they seek to rely on any specific clause.

2. Arbitration clauses : be careful what you wish for

These are often either incomplete or are incorporated by reference only to a main
contract or, more often, to a sub-contract. Arbitration clauses included by reference
only may not be enforceable or recognised by the UAE Courts. This may lead to an
entire nullification of the award by the UAE Courts and loss of precious time and costs
by both parties. Ensuring that a dispute resolution clause, whether arbitration,
mediation or litigation, is drafted clearly becomes essential in any construction
contract so that there can be no question as to how disputes are to be resolved. Aside
from this, very often arbitration clauses are drafted in such a way that the
appointment of the arbitrator is left – unbeknownst to the parties – to the UAE Courts,
who may not have an extensive list of specialists in the area of law or practice that the
parties require. This may result in arbitration proceedings quite different to what the
parties contemplated at the time of contracting.

3. Overriding mandatory law provisions – it’s not just what’s in the contract

Clauses relating to limitation of liability (particularly defects liability) may not be

enforceable under UAE Law as they may be overridden by mandatory law provisions.

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For example, including a defects liability clause for two years only for all defects may
not be upheld under UAE Law because Article 880 of the UAE Civil Law stipulates that
the decennial defects liability period will apply to major defects affecting the stability
or safety of any structure and such decennial liability cannot be decreased even by
the consent of the parties. Contactors’ and architects’ liabilities are quite rigidly set
out in local law, setting impenetrable boundaries for a contracting party that is not
aware of them and who may be lulled into a sense of false security in the thought that
any limitation of liability clause will be legally enforceable.

4. What did you mean by that?

The importance of parties’
intentions

On various issues the intentions

of the parties may be unclear to a
third party, bystander or an
independent arbitrator/judge who
will try to deduce these after the
event and on the basis of
possibly non contemporaneous
evidence. This can lead both to a
misinterpretation and to an unfair
award/judgment. Obtaining
legal input on contractual
documentation prior to its signing
can ensure that the intentions of
both parties are reflected clearly
on clauses that may have
been inserted with a certain
understanding in mind from both
parties but not drafted clearly
enough to be identified by a third
party.

5. Local Government Legislation – each emirate may be different

Construction contracts drafted without legal consultation often ignore local

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government laws applicable in a specific emirate. This will be particularly relevant to
circumstances where one party to the contract is a government entity.

6. UAE case law – the way the Courts think

It may be useful to be aware of the general attitude Courts take when various
construction related disputes are put before them for their resolution. By the use of
recent case law, legal consultation may assist in fine tuning various clauses to reflect
the way with which they may be treated by UAE Courts.

7. Delay – whose fault?

More often than not, construction disputes arise due to a delaying event, the
responsibility for which has not been dealt with in the contract. Legal consultation
may help in identifying such potential delaying events, placing the responsibility for
each one of them on either party to the contract and generally setting out in a legally
binding form the apportionment of liability for all predictable delaying factors.

8. “Back to back” contracts – it’s not that simple

Very often subcontracts are drafted on a “back to back” basis and this phrase is

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abundant in various parts of a subcontract.

“Back to back” is not a legal term and may not
mean much to a dispute resolution authority
(particularly to the UAE Courts) if its substance
is not reflected in the subcontract with an
express explanation of what clauses of the
main contract are to apply by analogy or
verbatim to the subcontract. Furthermore,
certain clauses, such as an arbitration clause,
cannot be included in a subcontract by
reference to a “back to back” arrangement and
neither can an entire main contract necessarily
be deemed to have been viewed by the
subcontractor purely by virtue of such
reference.

One of the reasons why disputes, arising out of

construction contracts, are eventually referred
to arbitration or litigation is because their
wording has been unclear, inadequately drafted
and has not clearly reflected the true intentions
of the parties. As such, perceived intentions
become the object of interpretation and
disagreement leading up to legal battles. This
could be limited (and occasionally altogether avoided) if, following legal advice, intentions
are identified clearly and with heed to UAE Law – the ultimately determining factor of
rights, obligations and amounts awarded locally.

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Architect’s liability under UAE Law
A look at how UAE Law treats architectural liability for both design and
supervision, as well as how the two are differentiated.

D
oes an architect
have as much
exposure as a
contractor when it
comes to issues
of liability? More
worryingly, could it be
even wider? Relevant
liability provisions under
UAE Law stretch
out their ambit to
encompass the errors
and omissions of most
parties actively involved
in a project and the
architects are of course no exception.

Defects liability period

The defects liability period under UAE Law is crucial to any party to a designing contract
primarily because of its decennial (10 year-long) duration and its mandatory nature. The
UAE Law defects liability period relevant provisions states that if the subject matter of the
contract is the construction of buildings or other fixed installations, the plans for which
are made by an architect, to be carried out by the contractor under his supervision, they
shall both be jointly liable for a period of ten years to make compensation to the employer
for any total or partial collapse of the building they have constructed or installation they
have erected, and for any defect which threatens the stability or safety of the building,
unless the contract specifies a longer period.

The only exception to the above is if the contracting parties intend that the structure to
be constructed will remain in place for a period of less than ten years.

A further leap over circumstances that most architects may not consider relevant to them
is set out in UAE Law wherein it is stated that the architect’s obligation to compensate
for the damage caused shall remain, notwithstanding that the defect or collapse of the
structure was related to the land itself or that the employer consented to the construction
of the defective buildings or installations.

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There a number of issues arising as a result of these provisions, the most important of
which for architects are the following:

1. The decennial defects liability period will only apply to major defects affecting the
stability or safety of a structure. Independent or Court appointed experts could
determine the nature of a defect and establish its importance.

2. Decennial liability is joint both for the architect (designer) and the contractor. In
practice, this means that the employer can commence a legal action or arbitration
proceedings for any major defect affecting stability or safety of a structure, both
against the architect/designer and the contractor without being obliged to decide
whether the defect is of a designing or structural nature. The outcome of a Court
action or arbitration proceedings could be either that liability is apportioned between
designer and contractor, or that only one of the two parties is liable, or that both are
liable for the whole amount (in which case the employer is entitled to look for
compensation from either one or both parties).

3. The decennial liability period will not affect minor defects, the liability period for which
can be contractually agreed between the parties. It is important to note that in many
construction contracts the parties agree a defects liability period without specifying
whether that period relates to minor defects or major defects. In practice and under
UAE Law, this defects liability provision will be construed as applying only to minor
defects as the limitation period for major defects is the subject of mandatory UAE Law
which the parties cannot contract out of. In this respect, Article 880 of the UAE Civil
Law does provide that the parties may agree to extend the liability period for major
defects beyond the 10 years provided in that Article.

An exception to the architect’s/designer’s joint liability is set out in Article 881 which
states that:

“If the work of the architect is restricted to making the plans to the exclusion of supervising
the execution, he shall be liable for defects in the plans.”

In circumstances where it is clear that the architect’s/designer’s scope of work was

limited to designing the drawings/plans for the structure in question and that no
supervision of the execution and construction was included in its obligation, the
architect’s/designer’s liability will be limited to purely architectural/designing errors in the
plans and any structural error would be the responsibility of the contractor.

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Limitation of Liability

The position with regard to limitation of liability reflects the provisions of the defects
liability period of the UAE Civil Law. Article 878 of the UAE Civil Law states that:

“ The contractor shall be liable for any loss or damage resulting from his act or work
whether arising through his wrongful act or default or not, but he shall not be liable if it
arises out of an event which could not have been prevented.”

The three major elements arising out of this provision are as follows:

The contractor’s liability for defects affecting the stability or safety (major defects) of
a structure is unlimited.

With regard to the cause of such

defect the only exemption is events
which could not have been
prevented. These can be acts of
war, unpredictable weather related
events, riots or events that were
carried out by third parties over
which the contractor had no power
or control.

The burden of proof of an

extraordinary event which could not
have been prevented, causing a
major defect lies with the contractor.

With regard to minor defects, the UAE

legal position on limitation of
contractor’s liability is more flexible and
allows all parties to engage in an
enforceable contractual agreement
reflecting their wishes. Article 882 of the
UAE Civil Law states that:

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“ Any agreement the purport of which is to exempt the contractor or the architect from
liability, or to limit such liability shall be void.”

Although the above provision does not specify for which type of defects the contractor’s
liability is unlimited, in practice the parties cannot limit or contract out of defects liability
provisions relating to major defects only. It is, however, possible to limit liability for
defects that are minor and do not affect stability or safety of the structure.

Being aware of which UAE statutory provisions are mandatory is important for the parties
to a construction contract so that their respective intentions are not only reflected in the
contract but also enforceable in law.

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BUT I THOUGHT WE AGREED…!
Can a contractor’s limit of liability
be broken?

cornerstone to any construction contract from the contractor’s point of view

A is a clause giving the perceived comfort that regardless of what goes wrong,
the maximum exposure with which the contractor would be faced is a fixed
percentage (typically 10%) of the contract price. This clause is usually headed
“Liquidated damages” or “Limitation of Liability”. However, in circumstances where
the employer feels that the contractor has caused him to suffer losses far exceeding
the agreed limit of liability, he may be tempted to find ways of breaking that limit. Is
this possible and does UAE Law allow it?

Before dealing with this question, it

is best to have a brief look at how
a contractor’s liability is dealt with
under UAE Law.

Is limitation of liability possible in

the first place?

Contractor's liability is governed by

UAE Civil Law provisions stating
that the contractor shall be liable
for any loss or damage resulting
from his work whether arising
through his wrongful act or default
or not. There is also a provision
stating 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. However, this last
provision, when read within the
context of the surrounding
provisions, only prohibits limitation
of liability for major defects
affecting stability or safety of a
structure. It follows on from other

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articles of the law that expressly refer to issues of defect liability, setting out the joint (for
architect and contractor) decennial (ten-year-long) liability for major defects affecting
stability and safety and limiting this liability to designing errors only in the case of an
architect who only designed and did not supervise implementation of his designs.

Whilst it is not expressly stated in these provisions, by the process of elimination it is

generally accepted that a contractor’s liability can be limited by agreement with regard to
minor defects not affecting stability or safety of a structure. This is usually reflected in the
“Maintenance period” or “Defects liability period” section of a standard construction
contract.

What about liability for delay?

The good news is that parties to any type of contract would be free to limit their liability
to the extent allowed by UAE Law. A specific provision states that parties can fix in
advance a specified level of compensation to be paid in lieu of losses incurred.

In a construction contract this is referred to as “limitation of liability”. The preferred term

used for the specified compensation is “liquidated damages” as opposed to “penalty”
because the former presupposes that losses have to be incurred and proven first whereas
the latter may be imposed regardless. The liquidated damages are normally agreed as a
percentage of the contract value and the general intention of the parties is that for any
delay caused by the contractor his maximum exposure would be that percentage
(payment of which is usually secured by the employer through his obtaining an irrevocable
bank guarantee from the contractor for the corresponding amount).

Is there any bad news?

There could be. A further UAE Law provision gives discretion to the judge for him to
effectively break the limit of liability that was agreed between the parties and adjust it to
the loss incurred.

In many instances judges will recognise that freedom of contract should govern the
intentions of the parties and will not interfere with freely negotiated contractual limits of
liability. The power given to the judge is discretionary and this of course means that it may
or may not be applied in a particular case.

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Is this discretion entirely
arbitrary?

There is no formal list of

criteria on how this discretion
is to be exercised. However,
the position could depend on
two issues: firstly how far the
loss claimed is from the
contractual limit of liability (the
greater the difference, the
more likely it could be that the
judge may exercise his
discretion). Secondly whether
the difference, if substantial,
could have been reduced in
any way by the employer.

So in a construction contract where the employer has already proven that the contractor
is to blame for the delay incurred, there would be a number of further hurdles for the
employer to overcome before he can rely on the discretion a UAE judge would have to
break the contractor’s limit of liability. The employer should have to at least:

Provide details of his loss (e.g. evidence of cancellations of confirmed bookings in a

hotel that was supposed to have been completed by a certain date or evidence of a
penalty paid as result of cancellation of an associated contract dependant upon the
project being completed by a specific time).

Link the contractor’s liability for delay directly to the loss he incurred (for example
technical expert evidence that, were it not for the contractor’s delay, the loss claimed
would not have been incurred).

Point out a substantial difference between the loss incurred and the contractually
agreed limit of liability.

Prove that he has limited his loss (e.g. by replacing the delaying contractor with
another, omitting to sign contracts bearing penalty provisions once it became obvious
that the project would be delayed, etc.).

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So is there any point in agreeing a limit at all?

Absolutely. Judges will often be reluctant to vary an agreed limit of compensation and
instances where this has been carried out are comparatively rare. Therefore, it will always
make sense for the limit of compensation to be included. However, it is advisable that the
wording of the clause that stipulates what that limit will be, is such that it gives as clear
an indication as possible on what the intentions of the parties were and what instances
of potential liability they had in mind at the time of signing the contract.

Simple clauses like “Overall limit of liability: 10% of contract price” or similar laconic
references may increase the chances of a judge exercising his discretion to break the limit
agreed. Extreme reliance by the contractor on such clauses could prove hazardous in
certain cases.

In order to break the limit, it is an extraordinary disparity between the instances initially
envisaged and the ones that actually occurred that the employer would seek to allege. It
would, therefore, serve contractors well to ensure that such an allegation appears one
sided when compared with the mutually agreed and detailed wording of the contract.

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Benefits and drawbacks for
contractors in commencing
arbitration / litigation prior to
completion of works

ore often than not the

M dispute resolution process

related to construction
contracts commences after the
works are completed. Lawyers are
instructed, voluminous correspon-
dence is produced and extended
statements of claim are drafted, all in
preparation for a grand trial or
arbitration, the cost and duration of
which can be substantial. As in most
aspects of a dispute resolution
process, deciding when to
commence arbitration/ litigation
proceedings involves consideration
of various benefits and drawbacks,
the most prevailing ones of which
are set out below:

BENEFITS

Increased Pressure on Employer

The threat of a dispute resolution

process would start with the referral of
a dispute to the engineer and end up
with the appointment of an arbitration
panel or the filing of a Court action
before local courts. This procedure can apply substantial pressure on the employer,
who would be, above all, interested in finalising the works as quickly as possible to
avoid penalties arising from relevant project finance.

Contractors stand many chances of resolving disputes in their favour if they

commence arbitration proceedings as quickly as possible after a dispute (that merits
its resolution by way of arbitration/litigation) arises.

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Early Commencement of Dispute Resolution

The second major benefit of commencing arbitration / litigation prior to work

completion is that the chances of successfully resolving the dispute in question are
increased if it is dealt with shortly after it is formed and not left to augment through
the passage of time, increase of costs etc.

In all probability the dispute resolution process if commenced swiftly, will not run its full
course as the attention of both parties will be focused on the dispute at an early stage
and, in view of the overriding purpose of finalising the works, it is almost certain that the
parties will seek to eliminate the prospects of progressing with an arbitration or litigation
to the best of their ability.

In any event, it is advisable that legal assistance is sought as soon as a dispute arises
whether arbitration / litigation proceedings will be commenced or not. This is because,
at an early stage, legal assistance may provide the parties seeking to resolve the dispute
with a clear understanding of the legal position and the issues at stake as well as the
strengths and weaknesses of any potential claim including the ultimate likely outcome of
an arbitration award or final Court judgement.

DRAWBACKS

Dispute Resolution Process may effect progress of works

One important element within the duration of the works is the relationship between
the parties. Very often the offended party may legitimately become reluctant to
commence full arbitration/ litigation proceedings for fear of damaging the all important
relationship with the employer.

In addition, commencing the dispute resolution early will not necessarily guarantee
that such dispute will be successfully resolved to a satisfactory degree for both
parties. If such satisfactory resolution does not take place, the parties’ relationship
may be damaged to such a degree that termination of a contract may also be
envisaged.

This will ultimately have delay repercussions, which will affect both the employer, in
terms of finalising the works in the envisaged time frame and the contractor, in terms
of obtaining swift certification of applications for payment, ultimately leading to
issuance of final certificate of payment.

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If the relationship with the employer is damaged substantially, from the
commencement of arbitration or litigation proceedings prior to the completion of
works and without principled negotiation having taken place, it is possible that also
the cash flow of the contractor may be substantially affected, ultimately resulting in
more money being spent in the pursuit of its claim than is being recovered through
the progress of the works.

Quantification of claims may be difficult to finalise prior to works completion

A practical difficulty in successfully commencing arbitration/litigation prior to work

completion is simply the fact that the quantum of the various heads of claims involved
would not be finalised until works are completed, costs are assessed, man hours and
materials/bills of quantities measured and adjusted.

In addition, the possibility of further heads of claim arising that may be disconnected
with each other at a later stage of the works is always a real one. Therefore, it may
prove to be substantially costly if arbitration has commenced on a number of claims
and before the arbitration proceedings are concluded – and also prior to the works
being completed - further disputes occur.

These would give rise to the need to commence additional arbitration proceedings
especially if the defending party does not agree to the inclusion of such further heads
of claim to the current arbitration proceedings. This can be obstructive both to the
resolution of disputes and to the financial exposure involved with such resolution.

In short, deciding when to commence arbitration/litigation is a fine balancing act between:

The need to ensure that disputes are identified and resolved swiftly and

The common aim to complete the works with little or no interruption and as
efficaciously as possible.

This fine balance is best achieved when a decision to commence any dispute resolution
process is made not as an act of aggression or threat but as a prudent and reasoned
conclusion reached through a thorough and principled negotiation process that has
identified the issues that can be resolved amicably and those that require the intervention
of a mediator/arbitrator or the Court.

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Advantages and disadvantages of
various methods of construction
dispute resolution.

arties to a construction contract may wish to resolve their dispute through a

P number of methods all of which have their advantages and disadvantages.

The principle methods widely used locally and internationally are:

 Alternative Dispute Resolution (to include negotiation, mediation, conciliation

and adjudication)
 Arbitration
 Litigation

We examine below the benefits and drawbacks of resorting to any of the above
dispute resolution methods.

Alternative Dispute Resolution (ADR)

An ADR option should ideally be incorporated in the contract for it to be binding on both
parties. If it is not, the consent of both sides will be required for ADR to take place.

The first stage of resolving a dispute would be for the parties to negotiate. The benefits
of negotiations are of course related to low or no costs involved, combined with speed

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and an amicable desire for the parties to continue their commercial relationship.
The disadvantages are that very often negotiations fail when there is lack of trust and
confidence between the parties.

The next step for resolving a dispute by way of alternative dispute resolution is to proceed
to mediation/conciliation. Again, this method should ideally be incorporated in the
dispute resolution clauses of the contracts. Whereas in a negotiation, resolution of a
dispute takes place purely between the parties, in a mediation/conciliation the
mediators/conciliator is a neutral party appointed by both sides to facilitate the
negotiations and reach a resolution. The mediator’s/conciliator’s role is also to point out
the strengths and weaknesses of each party’s case and guide the parties to a negotiation
process.

The benefits of mediation and conciliation are almost the same as those of negotiation
but also include the benefit of resolution of disputes involving complicated issues by a
party possessing advanced technical or legal knowledge. In addition, mediaton /
conciliation is more appropriate in multi-party disputes (for example, contractor, sub-
contractor, engineer or employer).

As far as drawbacks are concerned, mediation / conciliation may not be appropriate if

there is a need for interpretation of a controversial issue by a legal authority such as a
Court or an Arbitral Tribunal or if any circumstances exist where one of the parties wishes
to strongly discourage similar disputes from occurring in the future.

Arbitration

Arbitration is gradually becoming a popular dispute resolution mode in the UAE as

specialised experts from various fields (particularly construction) are appointed as
arbitrators in view of the better appreciation of the technical aspects of a dispute and their
wealth of technical and legal experience. The advantages of arbitration as a dispute
resolution method include the freedom of choice with respect to the arbitrator, the
flexibility on procedure as rules can be agreed between the parties and the relative speed
of issuance of an arbitration award compared to the time required for a final Court
judgment to be delivered. In addition, arbitration awards are generally private and also
final and binding to the parties with no further rights of appeal.

On the disadvantages front, in the UAE an arbitral award needs to be

authenticated/certified before the UAE Courts. This forces the winning party (in the event

21
CONSTRUCTION LAW

the losing party does not automatically honour the arbitration award) to resort to the
Courts for such authentication and proceed through the Court of First Instance, Court of
Appeal and Court of Cassation before the award is officially final and enforceable.

Further difficulties with regard to enforceability relate to the fact that the UAE is not party
to the New York Convention for mutual enforcement of a foreign arbitration award.
Therefore, with the exception of bilateral treaties (with France, for example) the
enforcement of a foreign arbitration award is very difficult in the UAE.

Litigation

Finally, with regard to a litigation, the advantages relate to the fact that resorting to the
Courts is a dispute resolution method that is available to any party unless they have
specifically contracted out of this by submitting to any other dispute resolution method
evidenced by a duly signed clause / agreement to this effect.

Also, a Court judgment is immediately enforceable once it becomes final thus providing
the parties with a “one stop shop” option for the resolution of their disputes.

The disadvantages of litigation relate mainly to the time consuming process of issuing a
final and binding judgment and the reliance on local courts, which are not always familiar
with complex and technical issues that may arise in a construction contract. As a result
of this, the Courts very often appoint a single expert, who decides upon the disputes and
whose report is adopted, in most cases verbatim, by the Courts.. Very rarely do the
parties to a litigation agree on the identity of the expert and even if such identity is agreed
upon the ultimate decision maker on the dispute in question is one individual as opposed
to a panel of three as is more common in an arbitration.

Finally, Court judgments are available on public record and there is no privacy with regard
to the contents of the dispute.

In conclusion, although there is no single dispute resolution method that is free of any
disadvantages, it is nevertheless important for the parties to a construction contract to be
aware of all the benefits and drawbacks of each such method so as to make a conscious
choice bearing in mind the nature of the dispute that could arise, the availability of
competent experts and the cost related to them, the identity of the parties and the local
legal system.

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 CONSTRUCTION LAW
Arbitration practice in the UAE

rbitration is gradually

A
mode
becoming a popular
dispute
in the
resolution
UAE.
Specialised experts from
various fields (particularly
construction) are appointed
as arbitrators in view of their
better appreciation of the
technical aspects of a
dispute and their wealth of
experience on the basic
principles of dispute
resolution. This, together
with the time limit of six
months (subject to extension by mutual agreement) for issuing an award provided for
in Article 210 of the UAE Civil Procedure Code should, in theory, tackle the prevailing
drawbacks of litigation before the UAE Courts, namely lack of specialised expertise
and length of proceedings.

However, in practice, both parties and arbitrators should be alert to a number of pitfalls
and critical points that, if overlooked, can defeat the purpose of arbitration as a swift and
fair dispute resolution mode. The most important of these are as follows.

(1) Choice of Arbitrators

An arbitration proceeding is essentially a trial that is taking place privately rather than
publicly in courts. Ultimately the parties would have agreed to be bound by the award
issued by the arbitrators, which will subsequently be converted into a judgement (through
the relevant authentication by the UAE Courts). Since the judges in Court litigation are of
legal background, the same should apply to the appointed arbitrators, at least one of
whom, should be either a qualified lawyer, legal consultant or, possessing a mixture of
technical and legal background. This is important for two reasons:

Firstly, so that the legal arguments raised by the parties’ representatives (who are
invariably lawyers or legal consultants) are understood and evaluated: arbitrators with
a purely technical background and experience would have difficulties in deciding
whether to uphold or reject legal arguments raised by either party. Often these

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CONSTRUCTION LAW

arguments may have very little to do with the technical merits of the dispute but they
can, nevertheless, have a critical impact on the overall fair assessment of the case.

The second reason relates to the fact that an arbitrator with a strong legal background
would be more cautious in ensuring that the award becomes enforceable and that it
has not only efficiently dealt with the substantive aspects of the dispute but also with
the legal aspects of the award’s enforceability, as these are set out in Article 216 of
the UAE Civil Procedure Code, which states as follows:-

“ARTICLE – 216

1. In the following instances, the opposing parties may apply for the annulment of an
arbitrator’s ruling when the Court is examining whether to validate it:

(a) If given without a deed of arbitration or if based on an invalid deed, or if lapsed

through prescription, or if the arbitrators have exceeded the limits of the deed.

(b) If the ruling has been given by arbitrators not appointed according to the law, or if
given by some of them without being so empowered in the absence of the others, or
if given under deed of arbitration in which the subject of the dispute is not stated, or
if given by someone not competent to agree to arbitration or by an arbitrator who
does not fulfil the legal
requirements.

(c) If there is something

invalid in the ruling or
in the procedures
affecting the ruling.

2. Acceptance of
invalidity shall not be
inhibited by the
opposing party
abandoning his right
thereto before the
arbitrator’s ruling is
issued.”

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 CONSTRUCTION LAW
It is of course essential that arbitrators do possess a substantial degree of competence
and expertise on the technical aspects of the dispute they have been requested to
resolve. Ultimately, however, their award will take the form of a judgement and as such it
is the arbitrators’ implied obligation to ensure that it is as legally sound as possible so that
its nullification by the UAE Courts is avoided.

(2) Validity of award – Claimant’s perspective

From the point of view of the claimant who instigates the arbitration procedure and
demands resolution of its dispute, it is imperative that throughout the arbitration
procedure (indeed from the stage of drafting the arbitration clause or arbitration
agreement) attention is focused on the ultimate validity of the arbitration award. The
claimant needs to ensure that the arbitration award, when issued, will “survive” any
attempt made by the defendant through the three tiers of the UAE judicial system (Court
of First Instance, Court of Appeal, Court of Cassation) to nullify it on the basis of lapse of
procedure or breach of a mandatory provision of UAE Law.

Some of the basic points that the claimant should bear in mind in this respect, include the
following:

Clear Arbitration Clause – Arbitration Agreement

The arbitration clause or agreement should specify the rules under which any dispute
resolution by way of arbitration should be conducted. These may be the Rules of the
Dubai Chamber of Commerce & Industry, Dubai Municipality Rules, UNICITRAL, ICC etc.
For a more effective supervision and conduct of arbitration proceedings held in the UAE
it is advisable to agree local (as opposed to international) rules. This will facilitate the
certification of the award by the supervising body and subsequently its authentication
through the UAE Courts. In addition, it is preferable that the parties to the dispute, rather
than their lawyers, sign any arbitration agreement. This is because in most cases,
although a Power of Attorney (see below) gives a lawyer rights to conduct an arbitration
on behalf of his client, vary rarely will such Power of Attorney include an express right for
the lawyer to sign binding arbitration agreements.

Determination of whether the dispute will be resolved by one or three Arbitrators.

Very often this issue is left unclear in arbitration clauses or agreements and becomes the
object of a separate dispute. The options available are essentially three:

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CONSTRUCTION LAW

either one arbitrator appointed by mutual agreement of the parties or by a neutral

entity (such as a Chamber of Commerce & Industry) or

three arbitrators, one appointed by each party and the third appointed by the two
arbitrators or a neutral entity, the majority of whom will determine the dispute, or
finally,

two arbitrators, one appointed from each party, and an umpire who will only
determine the dispute if the two arbitrators disagree on their findings.

Powers of Attorney

It is essential that under UAE Law parties are represented by authorised attorneys who
should carry with them, during all arbitration hearings, a letter of authorisation or ideally,
a Power of Attorney appointing them as legal representatives of the parties with powers
to draft pleadings (written submissions) and attend hearings.

Arbitrators should not take actions that exceed the limits of their powers under the
arbitration clause / agreement.

If this aspect is overlooked paragraph 1(a) of Article 216 of the UAE Civil Procedure Code
(set out above) clearly states that the award will be invalid – at least to the extent that it
includes decisions that have been made beyond the powers of the arbitrators as these
are set out in the arbitration clause / agreement.

Arbitrators should not violate or overlook any of the Rules of Arbitration agreed to
by the parties.

Paragraph 1(c) of Article 216 of the UAE Civil Procedure Code sets out the rather general
provision that “if there is something invalid in the ruling or in the procedures affecting the
ruling” the arbitrator’s award may be nullified. In practice, this provision has allowed the
defendant to submit various arguments before the UAE Courts with regard to procedural
and sometimes bureaucratic aspects of the arbitration in an attempt to nullify the award.

The Award is issued within the time limit prescribed by Law

Any time extensions need to be agreed upon at an early stage with the defendant. Time
extensions need to be in compliance with the agreed rules of arbitration and, if the dispute
is subject to UAE Civil Procedural Law, with Article 210 of the UAE Civil Procedure Code,
which states:

26
 CONSTRUCTION LAW
“ARTICLE – 210

(1) If the opposing parties do not specify a time for a ruling to be given in the arbitration
agreement, the arbitrator is to give his ruling within six months from the date of the
initial arbitration hearing, otherwise any of the opposing parties may raise the dispute
to the Court or may pursue it before the Court if already raised.

(2) The opposing parties may explicitly or implicitly agree to extend the date prescribed
by agreement or by law, and they may empower the arbitrator to extend it to a
particular date. At the request of the arbitrator or one of the opposing parties, the
Court may extend the date specified in the foregoing paragraph for such period as it
deems appropriate of a settlement of the dispute.

(3) The period shall be interrupted whenever the proceedings are interrupted or
suspended, and shall be resumed from the date on which the arbitrator becomes
aware that the cause of the interruption or suspension has been eliminated. If the
remaining period is less than a month, it shall be extended to a month.”

It is quite possible for the defendant to apply for nullification of the award on the basis
that it has been issued out of time. It is therefore imperative that the claimant always
oversees this issue and ensures that if it becomes obvious that the arbitration award will
not be issued within the prescribed time limit, an agreement for extension is obtained as
soon as possible.

(3) Validity of award – Defendant’s perspective

Defendants very rarely submit a defence statement that deals purely with the merits of the
dispute. More often than not, the bulk of the defence submissions relates to procedural
aspects, time bars, validity of Powers of Attorney, validity of arbitration agreements,
jurisdiction, etc. This type of preliminary defence is normally accompanied by a request
for one or more interim awards. This has the inevitable effect of prolongation of the
arbitration proceedings, the ultimate goal being either:

To approach the time limit during which the arbitration award should be issued and

before a time extension has been agreed upon, or

to prolong proceedings and force the claimant into an amicable settlement for an
amount substantially lower than that demanded.

27
CONSTRUCTION LAW

In addition to the prolongation, the defendant’s objective is to identify any procedural

errors committed by the arbitrators, which will subsequently give it sufficient ground to
request nullification of the award before the UAE Courts.

(4) Authentication through UAE Courts

As in most jurisdictions, an award needs the authentication of the local courts for it to be
equivalent to a Court judgement and to be enforceable against the losing party’s assets.
The UAE courts cannot consider the merits of the arbitrators’ findings. This is clearly
stated in paragraph 1 of Article 217 of the UAE Civil Procedure Code which states:

“ARTICLE - 217

(1) Arbitrator’s rulings may not be contested in any way.”

In contrast to other jurisdictions, it has been noted that, in the UAE, the nullification /
ratification of the award becomes, effectively, the subject of a separate legal action that
progresses through the process of the three tier local Court system. This is primarily
fuelled by defendants that wish to nullify the award on the basis of procedural errors.
Ultimately the claimant/plaintiff will not be able to enforce the arbitration award until this
is converted into a final judgement confirming validity of the original award. The result of
this process, which can sometimes be lengthy, is that certainly one of the primary
purposes of arbitration – a swift dispute resolution process – is defeated by what is time
wise, yet another trial between the same parties. Very rarely are arbitration awards issued
within the six months time limit. Invariably there will be extensions granted/agreed and it
may be more than a year before an arbitration award is issued. Thereafter, the litigation
process of authentication of the award could result in an additional year’s delay before a
final judgement is issued. The overall time consumed is arguably equal to and sometimes
greater than the time spent before the Courts through a straightforward litigation process.
However, very often the defendant’s request for scrutiny of the award and nullification by
the UAE Courts is quite legitimate because arbitrators that were more focused on the
technical merits of the dispute rather than the form and due process of the arbitration
have overlooked important aspects of mandatory UAE Law.

(5) Legal costs

One major advantage of the arbitration proceedings is that in most cases the successful
party will be awarded a greater portion of its actual expenses and legal costs than it would

28
 CONSTRUCTION LAW
if it had resolved its dispute through litigation.
However, the fact that higher costs are involved
in arbitration coupled by the inevitable legal and
Court fees of the subsequent litigation (for
authentication of the arbitration award) can
mean that the ultimate cost exposure to the
successful party in an arbitration is substantially
greater than in litigation.

(6) Conclusion

Whether arbitration can be a successful mode of dispute resolution is dependant upon a

series of factors that are inextricably linked to each other, the main ones being:

clarity of the arbitration agreement / clause,

quality and legal competence of the arbitrators appointed,

observance of all relevant procedural and mandatory laws as well as issues of public
policy. This should lead to a

swift consideration by the UAE Courts of the validity of an arbitration award

If these areas are addressed, arbitration in the UAE will become an increasingly preferred
option for dispute resolution. This would be a welcome development both from the UAE
Courts’ perspective, who would be alleviated from the increasing volume of commercial
disputes, the merits of which they would otherwise have to consider, and from the
perspective of the UAE’s image as an important commercial and business centre in the
Gulf.

29
CONSTRUCTION LAW
Know now your basics:
Critical UAE arbitration stages.

esolution of

R disputes
way
arbitration
by
of
requires
familiarisation, of all
parties concerned,
with often complex
procedural law, rules
and regulations of
arbitrating bodies,
local as well as federal
provisions and issues
of public policy all of
which can differ
substantially in
various jurisdictions.
We address below
some of the most
crucial junctures in
construction disputes
resolved by way of
arbitration in the UAE:

Nullification of an arbitral award resolving a construction dispute before the UAE

Courts at the request of the losing party.

It is possible to challenge and even nullify an arbitral award but only on specific
procedural grounds. These are set out in Article 216 of the CPC, which states that:

“ARTICLE – 216

1. In the following instances, the opposing parties may apply for the annulment of an
arbitrator’s ruling when the Court is examining whether to validate it:

(a) If given without a deed of arbitration or if based on an invalid deed, or if lapsed

through prescription, or if the arbitrators have exceeded the limits of the deed.

(b) If the ruling has been given by arbitrators not appointed according to the law, or

30
 CONSTRUCTION LAW
if given by some of them without being so empowered in the absence of the
others, or if given under deed of arbitration in which the subject of the dispute is
not stated, or if given by someone not competent to agree to arbitration or by an
arbitrator who does not fulfil the legal requirements.

(c) If there is something invalid in the ruling or in the procedures affecting the ruling.

2. Acceptance of invalidity shall not be inhibited by the opposing party abandoning his
right thereto before the arbitrator’s ruling is issued.”

Ultimately, the award will take the form of a judgment and as such it is imperative to
ensure that it is as legally sound as possible so that its nullification by the UAE Courts is
avoided and that throughout the arbitration procedure (in fact from the stage of drafting
the arbitration clause or arbitration agreement) attention is focused on the ultimate validity
of the arbitration award.

Foreign Arbitration Clauses with Dubai Government Departments.

The position with regard to foreign arbitration clauses with Dubai Government bodies is
set out in Law No.6 of 1997 (“ In respect of Contracts of Government Departments in the
Emirate of Dubai”), Articles 36 and 37 of which state as follows:

“ARTICLE (36)

No stipulation shall be made in any contract in which the Government of Dubai or any of
its departments is a party to conduct the arbitration outside Dubai or to subjugate any
dispute regarding arbitration or the procedures thereof to any laws or principles rather
than those applicable in the Emirate of Dubai. Any stipulation in violation thereof shall be
deemed null and void.

Save as the foregoing and wherever the public interest may require, the Government or
any of its departments, institutions, bodies or authorities may – under a written consent
from the Ruler – be exempted from abiding by this provision.

This law is mandatory and will override any conditions in a contract with a Dubai
Government Department that directly contravene its provisions. The mandatory nature of
the Law is set out in Article 84 of Part 4 of Law No: 6 of 1997, which reads:

31
CONSTRUCTION LAW

“The Head of the Financial Department shall draft the written form of all the contracts
stated herein together with the general conditions thereof in accordance with the
provisions hereof. All the departments shall abide by such form and conditions”.

In circumstances where various provisions of this law are not compulsory/mandatory and
the parties can contract out of them this is clearly stated. For example, Article 36 relating
to arbitration states that:

“Save as the foregoing and wherever the public interest may require, the Government or
any of its departments, institutions, bodies or authorities may – under written consent from
the Ruler – be excepted from abiding by this provision”.

The nature of this law is that it is applied universally by all Dubai departments and that
such departments do not have the option (save for specific provisions referred to in the
law such as Article 36 referred to above) to waive any of the rights or liabilities that this
law creates for the contracting parties.

It could be argued that the above provisions apply also to companies that are wholly UAE
Government owned, though not government departments as such. In any event, a foreign
arbitration clause, even if accepted and ratified by the Ruler’s Court, could present the
winning party with substantial enforcement problems. This is because the UAE has not
yet acceded to the 1958 New York Convention for the reciprocal Enforcement of Arbitral
Awards and with the exception of a few bilateral treaties (for example with France),
enforcement of a foreign arbitration award is extremely difficult in the UAE.

Time frame for issuing an arbitration award under UAE Law in construction disputes
resolved through arbitration

The time limit for issuing an arbitral award is usually six months, but can often be
extended up to another six months or more by mutual agreement. Any time extensions
need to be agreed upon at an early stage. Time extensions need to be in compliance with
the agreed rules of Arbitration and Article 210 of the UAE CPL, which states:

“ARTICLE – 210

(1) If the opposing parties do not specify a time for a ruling to be given in the arbitration
agreement, the arbitrator is to give his ruling within six months from the date of the
initial arbitration hearing, otherwise any of the opposing parties may raise the dispute
to the Court or may pursue it before the Court if already raised.

32
 CONSTRUCTION LAW
(2) The opposing parties may explicitly or implicitly agree to extend the date prescribed
by agreement or by law, and they may empower the arbitrator to extend it to a
particular date. At the request of the arbitrator or one of the opposing parties, the
Court may extend the date specified in the foregoing paragraph for such period as it
deems appropriate of a settlement of the dispute.

(3) The period shall be interrupted whenever the proceedings are interrupted or
suspended, and shall be resumed from the date on which the arbitrator becomes
aware that the cause of the interruption or suspension has been eliminated. If the
remaining period is less than a month, it shall be extended to a month.”

It is important that the claimant always focuses on this issue and ensures that if it
becomes obvious that the arbitration award will not be issued within the prescribed time
limit, an agreement for extension is obtained as soon as possible.

Enforcement on losing party’s assets of an arbitral award resolving a construction

dispute

As in most jurisdictions, an award needs the authentication of the local courts for it to be
equivalent to a Court judgement and to be enforceable against the defendant’s assets.
This involves an application to the Court of First Instance, the judgement of which is then
appealable within 30 days before the Court of Appeal. Thereafter, the Court of Appeal
judgment can be appealed within 30 days before the Court of Cassation, the judgement
of which is final. During the process of this authentication, the UAE Courts cannot
consider the merits of the arbitrator’s findings. This is clearly stated in paragraph 1 of
Article 217 of the UAE Civil Procedure Code, which states that arbitrator’s rulings may not
be contested in any way. There have also been a number of Dubai and Abu Dhabi Court
of Cassation rulings confirming that appeals against the merits of arbitrator’s awards are
not permissible.

Legal costs and relevant expenses incurred in arbitration proceedings

Although legal costs are not generally recoverable by the successful party under UAE
Law, in some cases, the successful party will be awarded a greater portion of its actual
expenses and legal costs than it would have done had it resolved its dispute through
litigation. For example, Article 48 of the Dubai Chamber of Commerce & Industry Rules
for Arbitration and Conciliation states that:

33
CONSTRUCTION LAW

“The costs of conciliation or arbitration shall include charges of the Chamber,

remuneration and actual expenses of the conciliators or arbitrators, fees and expenses of
the experts and the translators if any, normal expenses incurred by the parties in
preparation of their pleadings any administrative expenses relating to meeting-rooms
rentals, typing, recording, photocopying and others incurred in the course of the
conciliation or arbitration proceedings.”

In addition, it is possible for both parties, at the beginning of the arbitration, to agree on
bearing their own legal costs or that these will be borne by the losing party. The higher
costs that are generally involved in arbitration coupled by the inevitable legal and Court
fees of the subsequent litigation (for authentication of the arbitration award) can mean that
the ultimate cost exposure to the successful party in arbitration may be substantially
greater than in litigation.

Litigation of a dispute arising out of a construction contract containing an

arbitration clause.

The claiming party may resort to litigation (i.e. file a case with the Court) even where the
contract contains an arbitration clause. However, the defendant may expressly refer to
the arbitration clause at the first Court hearing in accordance with Article (203/5) of the
CPL. Upon the defendant so doing, the Court will refer the matter to arbitration.
Conversely, if the defendant fails to object and refer to the arbitration clause at the first
Court hearing, the Court will assume that the arbitration clause has been waived by both
parties and will continue with the resolution of the dispute through litigation. The plaintiff
in such approach should bear in mind that it may lose the Court fees and advocacy
charges if the defendant successfully raises the arbitration clause defence at the first
hearing.

34
 CONSTRUCTION LAW
Conditional payment clauses under
construction contracts

n important consideration

A for subcontractors
involved in a construction
project is the fulfilment of
payment of the subcontract
value by the main contractor and
in many cases, ultimately, by the
employer/ owner. Ideally, when
the works are completed both
the main contractor and any
subcontractors should be fully
remunerated for work duly
carried out and completed. In
addition to the employer’s
reluctance to pay for parts of
work carried out there is also the
risk of non-payment as a result
of the employer’s inability to pay.
It is, therefore, important for the
main contractor and the
subcontractor to agree the basis
on which the risk of the
employer’s inability or
reluctance to pay is borne.

Very often the main contractor will prefer to let the subcontractor bear the burden of the
employer’s inability or reluctance to pay amounts ultimately due to the subcontractor. The
main contractor will often use “pay when paid” or “pay if paid” clauses in the
subcontracts (for example, “…the total subcontract price paid to the subcontractor shall
be …, no part of which will be paid until and unless such part has been received by the
employer…”).

In addition, Article 891 of the UAE Civil Law expressly precludes the subcontractor from
claiming directly from the employer for any amounts that are properly claimed against the
main contractor unless the main contractor has given to the subcontractor an assignment
of its rights against the employer.

35
CONSTRUCTION LAW

Furthermore, standard clauses are often included to reflect this. For example, Clause 4.3
of the FIDIC Conditions of Subcontract for Works of Civil Engineering Construction,
states:

“Nothing herein shall be construed as creating any privity of contract between

subcontractor and the employer”

The above legal and contractual framework can place the subcontractor in substantial
difficulties if he has effectively waived his rights against the main contractor and also is
barred by UAE Law to claim directly against the employer.

Although UAE Courts have so far been sympathetic to subcontractors deprived of their
payment by the main contractor, this to date has been in circumstances where there was
no “pay if paid” clause in the subcontract. It remains to be seen whether the position will
change when a dispute between the subcontractor and the main contractor arises and is
brought either to arbitration or litigation before the UAE Courts in a situation where a “pay
if paid” clause forms part of the subcontract. However, a “pay if paid” clause may be
considered as contrary to public policy and to Article 891 of the UAE Civil Law and could
therefore be rejected by the UAE Courts. If it is rejected, this would place an obligation
upon the main contractor to effect all due payments to the subcontractor regardless of
whether the main contractor has been paid by the employer or not.

Under UAE Law, risking the effect of a “pay if paid” clause may not be advisable for a
main contractor. However, the risk of not receiving any payment to pass to the
subcontractor under the subcontract (either due to reluctance or due to inability of the
employer to effect such payment) may be very real. It may, therefore, be preferable for the
main contractor to simply follow the wording of Article 891 of the UAE Civil Code and
include a clause in the subcontract giving the subcontractor an assignment of his rights
against the employer. In addition, any clauses that exclude any privity of contract
between subcontractor and the employer should be deleted from the subcontract. Finally
for maximum clarity of the true intentions of the parties a “pay if paid” clause should also
be added in any event, the content of which should in general be as follows:

“The subcontractor will not be paid unless the main contractor receives payment from the
employer and the subcontractor assumes the risk of non-payment by the employer due to
any reason whatsoever.”

In practice, an assignment clause in the subcontract will very often be subject to the
employer’s approval, which could in many circumstances, understandably, not be given.

36
 CONSTRUCTION LAW
If the main contractor gives such assignment only after the event, i.e., after the
subcontract has been signed and at a stage when the works have been completed and
payment is outstanding, it is likely that the subcontractor may not actually wish to direct
his claim against the employer. This can be particularly so if the employer is bankrupt or
faces financial difficulties or simply does not have any assets which would provide
sufficient security for the subcontractor’s claim. This, combined with the possibility of the
main contractor providing the subcontractor with a more tangible and attractive target to
launch his claim against, can mean that an assignment after the event will not assist the
main contractor in discharging the burden of paying the subcontractor.

Provided the assignment clause is acceptable to the employer, such clause would be in
compliance with UAE Law and would in all probability be upheld by arbitrators and UAE
Courts. This clause may serve the interests of the main contractor (who will be able to
avoid liability for payment towards the subcontractor if the employer does not pay). It
could also assist the subcontractor in circumstances where lodging a claim against the
employer may be a more attractive option than doing so against the main contractor (who
may have less assets or be unable to pay if payment has not been received by the
employer).

In conclusion, it is important for both the main contractor and the subcontractor to have
a clear agreement well in advance of signing the subcontract on any issues that relate to
liability for payment and risk for non-payment and to ensure that any such agreement is
enforceable and recognisable under UAE Law.

37
CONSTRUCTION LAW
All work and no pay?
Can a contractor suspend works following
delay in payment?

ontractors often fail to agree with the employer/engineer the pricing for

C additional works or variations that they feel they are perfectly entitled to.
Furthermore, certificates of payment are often not issued on time or at all.
What’s worse, payment certificates are issued but not honoured at a time when:

Works are not completed,

The engineer has issued positive decisions on various extensions of time and
additional payment requests, as a result of which payment certificates are
issued.

However, in a scenario where the employer does not honour these payment certificates,
the contractor is simply left with a piece of paper evidencing an entitlement to be paid and
an ever hanging question mark on whether he should carry on the works and hope for the
best or rest his tools and go on a quasi strike until his demands are met.

Similar instances are often part and parcel of construction practice internationally for a
variety of reasons. But what are the rights and obligations of a contractor under UAE Law
when faced with delay in payment? Well, a lot will depend on what we mean by delay in
payment in the first place. This is how UAE Law deals with this issue:

38
 CONSTRUCTION LAW
So is payment actually late?

Very often contractors believe that their additional payments are late in what they
perceive (often quite rightly) to be a straightforward case of “you want more you pay for
more”. The contractor has followed the agreed procedures, made his applications for
variation orders, which were either rejected or not dealt with, and his requests for
engineer’s decisions, which were also ignored. To the contractor’s mind there is a delay
in payment and consequently a feeling of being justified to succumb to the temptation of
simply stopping work.

As frustrating as this may be, for as long as no payment certificate has been issued,
strictly speaking, the law does not see any delay in payment. At best there could be a
delay in issuing a decision on whether payment is due, or a delay in approving payment,
but no delay in payment as such can properly be argued. Hence, no right to suspend
works can be founded.

Delay in payment is only recognised as such by UAE Law if it is alleged following the
issuance of a payment certificate. Anything prior to a payment certificate being issued
does not qualify as a delay in payment.

Payment certificate issued and still no money - what now?

In this instance both UAE Law and various standard contractual clauses are more
sympathetic to the contractor. UAE Case Law has upheld the contractor’s right to
suspend work if payment is delayed following issuance of a payment certificate. In
addition, clause 69.4 of the FIDIC General Conditions to Civil Engineering Construction,
states that:

“Contractor’s Entitlement to Suspend Work – Clause 69.4

Without prejudice to the contractor’s entitlement to interest under Sub-Clause 60.10 and
to terminate under Sub-Clause 69.1, the contractor may, if the employer fails to pay the
contractor the amount due under any certificate of the engineer [emphasis added] within
28 days after the expiry of the time stated in Sub-Clause 60.10 within which payment is
to be made, subject to any deduction that the employer is entitled to make under the
contract, after giving 28 days’ prior notice to the employer, with a copy to the engineer,
suspend work or reduce the rate of work.

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CONSTRUCTION LAW

If the contractor suspends work or reduces

the rate of work in accordance with the
provisions of this sub-Clause and thereby
suffers delay or incurs costs the engineer
shall, after due consultation with the
employer and the contractor, determine:

(a) any extension of time to which the

contractor is entitled under Clause 44, and

(b) the amount of such costs, which shall be

added to the contract price, and shall notify
the contractor accordingly, with a copy to
the employer.”

The general position on the impact of

commencing arbitration proceedings is
reflected in Clause 67.3 of the FIDIC General
Conditions to Civil Engineering Construction,
which states, amongst other issues, that:

“…Arbitration may be commenced prior to or after completion of the works, provided that
the obligations of the employer, the engineer and the contractor shall not be altered by
reason of the arbitration being conducted during the progress of the works.”

However, a default in payment following issuance of a payment certificate, goes so much

into the heart and the purpose of a construction agreement that the above Clause 69.4 is
a contractual exception - upheld by UAE Courts - to the general standpoint that neither
party can default on its obligations pending resolution of any dispute arising in the
meantime.

Works legitimately suspended and still no payment – can we go to Court now?

Whether litigation (i.e. dispute resolution before the Courts) is an available option will very
much depend on the contractual terms agreed. The default position is that litigation is
always available unless the right to it has been expressly and unequivocally waived in the
contract by both parties with the inclusion of an arbitration clause duly stamped and
signed by the parties’ authorised signatories.

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 CONSTRUCTION LAW
It must be noted that other dispute resolution methods such as conciliation or mediation
are not expressly recognised in the UAE Civil Procedure Law. As such, any awards or
opinions issued pursuant to these methods are not enforceable against the losing party.
In essence, UAE Civil Procedure Law recognises two basic dispute resolution methods:
arbitration and litigation.

This being the legal background, going to Court may not be an option, if an arbitration
clause is in place, even for something that appears as straightforward as a debt collection
from the defaulting employer. In that scenario, the only stage that can be skipped is that
of a request for an engineer’s decision and of settlement negotiations and this is
confirmed in standard contractual clauses. Clause 67.4 of the FIDIC General Conditions
to Civil Engineering Construction states:

“Failure to Comply with Engineer’s Decision – Clause 67.4

Where neither the employer nor the contractor has given notice of intention to
commence arbitration of a dispute within the period stated in Sub-Clause 67.1 and the
related decision has become final and binding, either party may, if the other party fails
to comply with such decision, and without prejudice to any other rights it may have,
refer the failure to arbitration in accordance with Sub-Clause 67.3. The provisions of
Sub-Clauses 67.1 [i.e. engineer’s decision] and 67.2 [i.e. amicable settlement] shall not
apply to any such reference.”

So does one only have to look at the

contractual clauses to see what rights each
party has? Doesn’t the law play any role?
The rule of thumb to bear in mind is that
contractual clauses that refer to a procedure
mutually agreed between the parties with
regard to dispute resolution are generally
upheld by UAE Courts. It is in relation to
clauses that go into the merits of liabilities
(and especially exclusion or limitation
thereof), and the rights or obligations of the
parties with regard to defects, delays etc that
one needs to be aware of mandatory UAE
Law provisions overriding any conflicting
contractual clause.

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CONSTRUCTION LAW

What else can the contractor do to force the employer’s hand for swift payment?

Article 879 of the UAE Civil Law provides another remedy for the contractor who has been
deprived of his dues:

“Article 879

(1) If the work of the contractor produces (a beneficial) effect on the property in
question, he may retain it until the consideration due is paid, and if it is lost in his hands
prior to payment of the consideration, he shall not be liable to the loss, nor shall he be
entitled to the consideration.”

This is a form of a lien that the contractor may exercise on the property, although
physically doing so may involve additional labour costs and defeat the purpose it is
meant to serve. Furthermore, the drastic measures that an employer may take to
remove a contractor from the site (ex parte Court orders for example) may far exceed
in their effectiveness any lien that the contractor may apply pursuant to Article 879. It
is also difficult to determine exactly what is meant by “beneficial effect” especially in
light of the less encouraging second paragraph of the same article, which states that:

“(2) If his work produces no (beneficial) effect on the property, he shall not have the
right to retain it pending payment of the consideration, and if he does so and the
property is lost, he shall be liable in the same manner as if he had misappropriated it.”

In circumstances, where the employer’s financial status may not be in question,

exercising the right set our in Article 879 of the UAE Civil Law may prove to be
superfluous. The provision appears to be more tailored for circumstances where,
rather than a possible dispute in payment, there is a real inability on the part of the
employer to pay the contractor. In this case, the contractor would seek to attach any
asset belonging to the employer and it is this right that the above provision would
seek to secure.

In short, it is important to differentiate between an employer’s delay in agreeing that

payment is due and a delay in honouring a payment certificate. In either of the two
scenarios it is also crucial to respect the dispute resolution methods agreed and be
aware of which means of securing a contractor’s claim are advisable to exercise and
under which conditions.

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 CONSTRUCTION LAW
INSURING A DESIGN AND
DESIGNING AN INSURANCE
The pros and cons of providing adequate cover for an
architect’s contractual liabilities

n architect’s

A obligation to insure
for designing errors,
and provide satisfactory
evidence of having done so,
is invariably imposed by
employers in UAE contracts
for architectural or
consultancy services.
As a result, compulsory
insurance provisions have
become an inseparable part
of UAE contracts within the
designing industry, as the
quantum of losses, claims
and arbitration awards
increases.

Under UAE Law, there are no

specific legal requirements for an architect to insure for all of its liabilities that may flow
from designing and consultancy related errors or omissions. Neither the general
provisions of the UAE Civil Law nor the more specific and stringent provisions of Law
No.6/97 in relation to Contracts with Government Departments in the Emirate of Dubai,
set out any obligation for either the architect or the employer to obtain insurance cover.

Insuring for an architect’s potential losses and liabilities may be a wise option that will
provide “peace of mind” but taking out insurance is an additional cost exposure for the
architect. Knowing what type of optional insurance to take presupposes knowledge of the
exposure to local legal liability and of the potential quantum involved. Some of the more
common types of optional insurance available worlwide are the following:

1. Professional indemnity insurance

UAE Construction Law liability provisions can be quite onerous for the architect. Some of

43
CONSTRUCTION LAW

the most important ones to bear in mind when determining the level of professional
insurance to be taken out are the following:

Liability for defects affecting the safety or stability of a building is joint for the
designer/architect and the contractor.

If the designer’s/architect’s work does not include supervision of execution of the

works, its liability will be contained only to any purely designing errors (always
affecting stability or safety).

Limitation of liability for major designing defects would be held as invalid.

For any design responsibility, it is essential to take out professional indemnity insurance
covering legal liability for negligence in design. However, the precise level of an
architect’s designing liability is not always obvious. If “fit for purpose” designing liability
is involved, insuring for it can be very expensive. Input from insurance brokers is highly
advisable before a legally binding contract is signed.

2. Insurance for legal costs

In view of the fact that the UAE legal system does not allow recovery of legal expenses
by the successful party (i.e., loser does not pay winner’s cost), it is essential to consider
taking out legal expenses insurance. Architects should consider taking out insurance to
cover legal expenses incurred in defending a designing errors liability action. Having said
this, insurers that issue policies for legal expenses may decline cover for defending or
pursuing an action that does not have reasonable prospects of success and they may
seek to determine this first before cover is provided. If legal expenses insurance has not
been placed, it may be possible (and in some jurisdiction compulsory for lawyers to
advise their client) to obtain “after the event” insurance. This type of insurance is available
to protect an insured from the downside of specific known litigation by covering their legal
costs (and certain disbursements) in the event that the action is lost. In certain cases, the
potential liability can also be insured. If the insured wins the case, or a settlement is
reached which is in favour of the insured, the insurer has no liability to pay out. Otherwise,
the insurer will pay both sides’ legal costs. The assessment of the risk insured would be
made by the insurer who will obtain independent or in house legal advice and then
determine the insurance premium payable. However, under UAE Law recovery of such
premium by the successful litigant is unlikely.

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 CONSTRUCTION LAW
3. Environmental liability insurance

UAE Federal law No.24/99 for the Protection and Development of the environment, poses
substantial penalties for “the natural or non natural contamination of the environment
resulting from introduction of pollutants directly or indirectly, deliberately or non
deliberately by man to the natural elements of the environment which may jeopardise the
health of humans, plants or animals, or harm the resources and ecological systems.”

Environmental insurance can pose a substantial cost exposure to the architect because
various assessments are usually carried out at the architect’s expense, to determine the
level of the risk and the type of likely pollution, throughout the course of the works. Even
so, in view of the strict liability provisions set out in UAE Law, it is important to at least
assess whether an environmental risk is likely and to what extent. A third party liability
policy may provide cover for one incident of pollution but an additional policy may be
required if gradual pollution liability, inclusive of clean up costs, needs to be insured for.

4. Insurance for health

and safety liability

As indicated, liability for

designing defects affecting the
safety of a structure is set out
in UAE Civil Law. It is
important to be aware of the
current health and safety
regulations and relevant
legislation to determine any
insurance cover. For example,
the Dubai Municipality has
recently issued strict rules with
which construction companies
need to comply relating to
safety and applicable to all
private, local and federal
establishments as well as free
zones. To this extent the
designing architect also acts

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CONSTRUCTION LAW

as supervising engineer ensuring that safety measures are correctly implemented. Taking
out health and safety liability insurance should also be considered by architects.

5. UAE Insurance Law principles

UAE Civil Law sets out the general principles of insurance. Of these the most fundamental
are the following:

The obligation of the insured to declare at the time the insurance policy is drawn, all
information, knowledge of which is of concern to the insurer for estimation of the risk
assumed. This is in line with the internationally adopted principle of an insurance
contract being one of utmost good faith.

The three-year time bar for claims arising out of an insurance policy from the
occurrence of the incident out of which the claim arose.

An arbitration clause built into an insurance policy will be invalid. For an arbitration
clause to be valid, it would need to be part of a separate (arbitration) agreement.

If many different types of insurance policies are taken out, there is a risk for overlap of
insurance. Although not specifically set out in the general provisions of the insurance
section of the UAE Civil Law, policies invariably do not allow recovery of the same insured
loss more than once. The insurers will seek to only contribute their proportion of the
insured loss. This can lead to disputes and loss of time. It is therefore essential for
architects wishing to insure their potential liabilities that no duplication exists in policies
taken out. This will also ensure that the cost exposure to insurance premium is kept to a
minimum.

Although taking out the right type of insurance is an additional administrative burden for
architects, it can at the same time prove to be a valuable risk management tool for
potential losses.

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 CONSTRUCTION LAW
So what have you lost?
Can an employer deduct and keep liquidated damages if a
contractor is in delay?

I
nvariably a construction contract will include a clause entitled “liquidated
damages”, wherein the employer reserves the right to deduct a specified amount
for each day or part of a day that the contractor is late in meeting a specific
milestone or in completing the works. Very often, in the minds of both parties, lies
a preconception that once a delay entirely attributable to the contractor has taken
place, this amount can be automatically deducted by the employer – no questions
asked. We examine below whether this is indeed the case under UAE Law.

Liquidated damages and penalties

In legal practice there is a distinction between liquidated damages and penalties:

Liquidated damages do presuppose that some initial agreement by both contractor and
employer exists that a determinable but not accurately quantifiable loss will be incurred
by the employer in the event the contractor is in delay.

A penalty is a more strict imposition of an amount regardless of whether a loss has been
incurred or not.

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CONSTRUCTION LAW

UAE jurisprudence has taken a stricter stance on whether and how liquidated damages
can be imposed by an employer, by adopting the view that the loss incurred by the
employer cannot be less than the amount deducted by way of liquidated damages.

Consequently whether worded as a penalty or a liquidated damages clause, any provision

setting out an employer’s right to deduct amounts that would otherwise be due to the
contractor, would be subject to substantiation of any corresponding losses incurred.

Burden of proof

In most cases the employer has the advantage of simply triggering the liquidated
damages clause and deducting the amount stipulated in the contract for every day the
contractor is in delay. Following this, the contractor will try to claim back his money by
following a contractually agreed procedure, usually through applications to the consulting
engineer, culminating in a notice to refer matters in dispute to arbitration.

In doing so, the contractor will allege that the employer should not have deducted the
amounts stipulated in the liquidated damages clause because no proportionate loss was
incurred.

It is normal practice for any allegation made by a party to an arbitration or litigation, to

carry with it the burden of substantiating the veracity of such allegation. In essence, the
contractor would have to prove that the employer has either suffered no losses at all or
has suffered losses substantially lower than the amounts deducted under the liquidated
damages clause.

Loss proved

Whether the contactor is the one that has to prove absence of loss or whether it is the
employer who has to substantiate his loss, the fact remains that a liquidated damages
clause does not equate to an automatic right for the employer to deduct and keep any
amounts without proving at some later stage, at least in general terms, that these
amounts did not equate to undue enrichment nor to a penalisation of the contractor in
delay, but to an actual loss incurred by him and which was the sort of loss both parties
envisaged would be incurred by the employer in the event of a delay.

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 CONSTRUCTION LAW
Assuming a loss can be substantiated; is a liquidated damages clause without an
overall limit enforceable?

Usually, no. The common practice in construction is to “cap” the overall limit of liability
for delay and the total amount to be deducted by way of liquidated damages, to 10% of
the contract price.

However, it is possible to depart from that practice if the employer can substantiate
losses that were occasioned in circumstances where the employer feels that the
contractor has caused him to suffer losses far exceeding the usual 10% of the contract
price.

As previously reported, a UAE Law provision gives discretion to the judge for him to
effectively depart from any limit of overall liability that was either agreed between the
parties or applied in practice and adjust it to the loss actually incurred by the employer.

In many instances judges will recognise that freedom of contract should govern the
intentions of the parties and will not interfere with freely negotiated contractual limits of
liability. However, the position may be different if no specific “cap” has been agreed and
the employer capitalises on this to depart from the general practice and submit evidence
showing a greater loss incurred by him.

How easy would it be for an employer to do this?

The greater the difference, between the claimed loss and normal limits of overall liability,
the more likely it could be that the judge may award losses actually incurred. However,
the employer would have to show that he did not simply let this loss accrue indefinitely
but took active steps to minimise its quantum.

So can the contractor always hope that liquidated damages imposed upon him would
eventually be recovered?

Not necessarily. Whilst the employer would have to substantiate his losses, if loss of profit
or consequential losses have not been expressly ruled out in the contract, the door is
open for the employer to build a case by submitting evidence that points to actual,
consequential or economic loss. This may be enough in some instances for the judge or
arbitrator to conclude that at least a part of this loss has been actually incurred and
therefore uphold the validity of deducting liquidated damages.

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CONSTRUCTION LAW

In conclusion

Proving that the contractor was in delay through reasons entirely attributable to him is
only half the battle for the employer to successfully invoke a liquidated damages clause
and keep the amounts deducted. In addition the employer should at least:

Provide details of his loss

Point out a substantial difference between the loss incurred and the contractually
agreed limit of liability or the normal construction practice.

Prove that he has taken active steps to minimise his loss.

In any event, it would be helpful for both parties as well as for the dispute resolution
authority that decides on the merits of a claim, to include in the liquidated damages
clause, as clear an indication as possible as to what the intentions of the parties were and
what instances of potential liability they had in mind at the time of signing the contract
and agreeing the liquidated damages quantum.

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 CONSTRUCTION LAW
Construction Time Bars Under
UAE Law

he purpose of this article is to examine the way with which various statutory

T and contractual time bars interact at different stages of a construction

contract and affect the process of dispute resolution.

1. Statutory Time Bars for Commencing Litigation / Arbitration Proceedings

Relating to Construction Disputes

(a) Article 95 of the Commercial Transaction Law

In the absence of a specific construction law, the applicable provision relating to a general
time bar for disputes arising out of construction contracts is found in Article 95 of the UAE
Commercial Transactions Law, which states that:

“When denied, and

without lawful excuse,
actions relating to the
obligations of traders to
each other and in
connection with their
commercial business
shall not be heard upon
the expiration of ten
years from the due date
for fulfilment of the
obligation, unless the law
provides for a lesser
period.”

This provision is applicable to construction contracts by virtue of the fact that both parties
to a construction contract (employer and contractor or main contractor and
subcontractor) are viewed by UAE Law as “traders” engaging in commercial transactions.

The 10 year time bar set out in Article 95 of the Commercial Transaction Law should not
be confused with the decennial liability set out in Article 880 of the UAE Civil Law (referred
to below).

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CONSTRUCTION LAW

(b) Article 880 of the UAE Civil Law states that:

This article sets out the contractor’s decennial liability and states that:

“ (1) If the subject matter of the contract is the construction of buildings or other fixed
installations, the plans for which are made by an architect, to be carried out by the
contractor under his supervision, they shall both be jointly liable for a period of ten years
to make compensation to the employer for any total or partial collapse of the building they
have constructed or installation they have erected, and for any defect which threatens the
stability or safety of the building, unless the contract specifies a longer period. The above
shall apply unless the contracting parties intend that such installations should remain in
place for a period of less than ten years.

(2) The said obligation to make compensation shall remain notwithstanding that the
defect or collapse arises out of a defect in the land itself or that the employer consented
to the construction of the defective buildings or installations.

(3) The period of ten years shall commence as from the time of delivery of the work.”

This article sets out the decennial liability applicable only for major defects affecting
stability or safety. The decennial liability period will not effect minor defects the liability
period for which can be contractually agreed between the parties.

(c) Article 886 (1) of the UAE Civil Law

In addition to the statutory time bars mentioned above, the following specific
statutory time bars should also be observed in the context of a construction contract:

Article 886 (1) of the UAE Civil Law states that -

“ If a contract is made under an itemised list on the basis of unit prices and it
appears during the course of the work that it is necessary for the execution of the plan
agreed substantially to exceed the quantities on the itemised list, the contractor must
immediately notify the employer thereof, setting out the increased price expected, and if
he does not do so he shall lose his right to recover the excess cost over and above the
value of the itemised list.”

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 CONSTRUCTION LAW
This article is relevant to increases in Bills of Quantities which must be notified by the
contractor to the employer immediately or as soon as practically possible after their
quantification.

(d) Article 883 of the Civil Law states that –

“ No claim for compensation shall be heard after the expiration of three years from
the collapse or the discovery of the defect.”

This article sets out a three year time limit for the employer to start the contractually
agreed mode of dispute resolution (i.e. commence arbitration proceedings or file an
action before the UAE Courts) from the date a defect was discovered or should have been
discovered) on a building / structure etc. This three-year time limit may, in practice, result
in the decennial period mentioned in Article 880 of the Civil Law to be overrun if the
employer discovers the defect less than three years before the expiry of the decennial
liability period.

2. Contractual Time Bars for commencing Arbitration Proceedings

In many construction contracts and all FIDIC contracts there are various contractual time
provisions for notifying disputes arising between the parties to the engineer leading up to
Notice to Refer Matters in dispute to arbitration. The enforceability and relevance of those
time bars set out in various contractual clauses will depend upon the intention of the
parties:

Intention is to time bar

If the intention is to time bar the right to arbitrate then the effect of a breach of that time
bar would be that the parties will effectively lose the right to refer the matter to arbitration.
However, the right to refer the matter to litigation can not be lost and will always be
subject to the 10 year time bar set out in Article 95 of the Commercial Transactions Law.

Intention of the parties is only to provide a timeline

If the intention of the parties is only to provide a timeline of the right to arbitrate and if
complying with such time line is not a precondition to the right to arbitrate then such right
may still not be lost for the parties. In such circumstances, the matter may still be resolved

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CONSTRUCTION LAW

by way of arbitration. The burden proof on whether the intention of the parties is to time
bar the right to arbitrate or simply to provide a timeline of the right to arbitrate is a matter
that lies with the party seeking to resort to arbitration. In this respect, a recent Dubai Court
judgment highlighted three important issues.

All the contractually agreed time bars and procedures in a construction contract, that
activate the right to commence arbitration, are generally upheld by UAE Courts in
circumstances where the parties intended to time bar the right to arbitrate. The
parties should therefore ensure that such time bars and procedures are very closely
monitored and observed.

If a dispute arises, the party wishing to rely on arbitration clause needs to follow the
contractually agreed procedure even if that party is a defendant. Failing this, that
party would not be entitled to either rely on the arbitration clause or avoid litigation
before the Courts.

If the right to resort to arbitration has been lost due to failure by either of both parties
to abide by the contractually agreed procedure, the right to resolve the dispute
through litigation is not lost or time barred (subject always to the statutory time bar)
set out in Article 95 of the UAE Commercial Transactions Law.

3. Court procedure time bars

After the issuance of an arbitration award, authentication of it will be required by the UAE
Courts although there is no specific time bar for that purpose. There are further time bars
relating to the appeals that either party may file before the UAE Courts between the Court
of First Instance and Court of Appeal level (30 days from the date of service of the Court
of First Instance judgment) and the Court of Appeal to Court Cassation level (30 days from
the date of service of the Court of Appeal judgment).

Being aware of the UAE statutory and contractual time bar provisions will affect the
parties’ ability to pursue their claims through the dispute resolution mode chosen and
compliance with them is critical from the early stages of referral of a dispute to the
engineer until the final stages of commencing arbitration/litigation or enforcing an
arbitration award.

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 CONSTRUCTION LAW
TO SUSPEND WORKS OR NOT
TO SUSPEND WORKS?
The contractor’s perenial dilemma

T
wo scenarios are amongst
the most frustrating ones
in construction practice for
contractors:

The failure to agree with the

employer/engineer the pricing
for additional works or
variations.

The failure to obtain

certificates of payment either
on time or at all.

In the first scenario, does the

contractor have the right to
refuse doing the additional work
or should he proceed with the
work and claim later?

In the second, can the contractor

terminate the contract and leave
the site or does he have to
continue with the work
regardless of non payment and
in any event?

Termination under the Law

Article 892 of the UAE Civil Law sets out three possible termination options for the parties
to a construction contract:

“A contract of muqawala shall terminate upon the completion of the work agreed
or upon the cancellation of the contract by consent, or by order of the Court.”

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CONSTRUCTION LAW

Completion of the works may at first glance seem a comfortable option. However, in
practice, completion is evidenced by a taking over certificate, which the engineer will
simply not issue if the employer is not satisfied with the works or requires additional
variations over and above the work contracted for.

Consent of both parties is a seemingly less problematic option. Obviously if both the
employer and the contractor are in agreement on termination of the works, the position
does not become litigious or acrimonious. However, this option is in practice no different
from the first one, in that the contractor is again dependant upon the employer agreeing
on the issuance of a taking over certificate and thus formalising the end of the works
carried out by the contractor thus far.

Obtaining a Court order is the third option available to the contractor. The objective of this
option would be for the contractor to be legally allowed to cease the works. The reasons
that would be raised by the contractor before the Court could vary from lack of payment,
inability to agree on additional works pricing or to any other major breach of the
construction contract by the employer. This option is rarely used in practice. This is
primarily because of the following reasons:

There is substantial onus on the contractor to prove that the employer is in breach of
the construction contract.

The Court will have to consider the documentation submitted as well as any
arguments raised by the employer and develop the whole matter into a full trial before
any order is issued.

In the meantime, the contractor would have to continue with the works and only rely
on the final Court order which, if it allowed for the termination of the contract, should
also include any compensation he is entitled to for continuing the works.

In certain circumstances the law provides for no additional compensation if the

variations are within 30% over and above the contractually agreed price for the works.
This is expressly provided for in Article 48 of Law No: 6 of 1997 in respect of contracts
with the Government Departments in the Emirate of Dubai.

Obtaining a Court order is a relatively easier process for the employer (although still very
time consuming and potentially costly), should it require the contractor to be removed

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 CONSTRUCTION LAW
from the site: an application to the Court through an authorised local advocate together
with a bank guarantee for the value of the works should normally ensure the issuance of
the order, although matters may be further perplexed if the contract provides for an
arbitration clause as this may lead the UAE Courts to decide that a decision on whether
the contract can be terminated only falls within the ambit of the arbitrator’s powers.

In an application for termination filed by the contractor, it is usually difficult for the Court
to determine the amount that would be required by way of bank guarantee to cover the
potential loss of the opposing employer. The Court is therefore more likely to look into the
merits of the contractor’s reasons for termination before it issues an order. This in
practice means that a full trial will take place during which the contractor will have to
continue with the works.

The right to terminate through a Court order seems, therefore, to be a real option for the
employer but an academic one for the contractor.

Contractual provisions

In practice, most construction contracts include a provision for the contractor to carry out
any additional works in the form of variations as these may be decided by the
employer/engineer. As such, in addition to the legal obligations set out by mandatory
provisions of the UAE Civil Code, the contractor is also obliged contractually to carry out
additional work, comply with a very strict procedure for claims for additional time or
additional payment and then, either hope that its claims will be approved by the
supervising engineer, or rely on a formal dispute resolution process (usually arbitration or
litigation and sometimes conciliation) to recover its dues.

In the meantime, the contractor will have no practical option but to finance any operations
required for the additional work and variations of the employer/engineer.

International position

The position is cumbersome for the contractor in other jurisdictions as well: under English
Law the most recent Construction Act sets out that the contractor’s right to suspend
depends on:

a sum of money falling due under the contract

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CONSTRUCTION LAW

it not being paid in full by the payment date and

there not being effective notice of withholding payment in addition to

a seven day notice for an intention to suspend.

There are also mandatory law requirements for a contractor to provide a payment notice
to be given no later than five days after payment falls due or should have fallen due.

However, there are also other mandatory provisions in English Law that prohibit
withholding of payment unless the paying party gives notice of the amounts to be
withheld and the grounds for doing so.

In short, the position internationally and in the UAE seems to be that if there is any burden
on the employer, it is one that is relatively easy to discharge: it will always be feasible for
the employer to state the reasons (whether they are justified or not) for withholding
payment and, by doing so, it would have complied with mandatory law and possibly
contractual provisions.

Conversely, the onus on the contractor is substantial, and the requirements with which it
needs to comply are numerous and complex. In the UAE, the right to suspend works is
not recognised and the right to terminate is conditional upon a Court order being issued
the difficulties of which are set out above.

Appreciating and limiting the pitfalls relating to variations and additional works in a
construction contract is crucial for the contractor. Accepting highly onerous terms or
overlooking provisions that seek to compel completion of extra works in any event, can
have serious financial implications for the contractor that could eliminate its profit margin
and expose it to additional costs at the employer’s benefit.

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 CONSTRUCTION LAW
PREPARING EARLY FOR WORKS
THAT MAY BE LATE:
Effective documentary
management for UAE delay and
disruption claims

ow can a

H contractor
maximise its
chances of success in a
delay and disruption
claim? How can it ensure
that by commencing the
enormous task of
preparing and submitting
a complex claim in a UAE
Court litigation or
arbitration, it is not
actually throwing good
money after bad?

Below we examine the

factors that need to be
addressed before a
disruption claim is filed,
and how these are dealt
with under UAE Law.

A. CONTRACT MANAGEMENT

1. Applying effective contractual procedures

The effectiveness of contract administration systems is crucial for both the employer and
the contractor. The first step is to engage into a contract with clear and comprehensive
terms but thereafter, it is compliance with the contractual provisions and regular
management of documentation that will secure a watertight claim submission. Efficient

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contract management should ideally ensure that:

1. The intention of the parties on contractual time limits is clearly defined.

2. Where the parties’ intention is to time bar and extinguish a claim failing
implementation of specific actions after the passage of a certain time limit, those time
limits are strictly complied with;

3. The delaying effect, if any, of every variation order is assessed and communicated
promptly through contractually agreed mechanisms; and that

4. The parties seek as soon as possible to agree on such assessment, failing which, the
agreed mode of dispute resolution is commenced while the evidence is still fresh
and the employer still has an interest in completing the works within a prescribed
time frame.

This being the theoretical and ideal position, the fact remains that complex and major
variations demand a dedicated claims processing team working contemporaneously with
other departments of the contracting company. In practice, not many contractors can
allocate the necessary resources to achieve this in parallel with normal work progress.

UAE Law stipulates that variations should generally be proportionate to the initial
specifications of the contract. Article 887 (2) of the UAE Civil Law states:

“If any variation or addition is made to the plan with the consent of the employer, the
existing agreement with the contractor must be observed in connection with such
variation or addition”.

In circumstances where variations depart considerably from the initial specifications the
delaying impact on the completion date will be substantial. UAE Law recognises the need
to remunerate the contractor for additional work carried out but the relevant provision in
support of this is vague and does not stipulate a precise measure for determining the
value of such additional works. Article 888 of the UAE Civil Law states:

“If the consideration for the work is not specified in a contract, the contractor shall be
entitled to fair remuneration, together with the value of the materials he has provided as
required by the work”.

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The burden of proving what is “fair remuneration” is squarely placed on the contractor
who would need to substantiate any alleged delaying impact of a variation order on the
contract price. Contractors are expected to produce and continuously update a critical
path analysis. The more complete the technical support available and the more
specialised the contractor’s personnel is, the more accurate the information supporting a
claim will be.

Having said this, it may still not be possible for the contractor at any given point in time
to always be able to calculate with precision the disruption or delay aspect of a variation
order. In that case, the contractor may defer the calculation until such point in time as the
position becomes clearer and more easily quantifiable. In doing so, the contractor must
ensure that it reserves its position in a legally effective way so that it is not barred from
subsequently producing evidence that was not readily quantifiable at an earlier point in
time.

Although at an initial stage the employer is usually not required to justify any rejection,
once the dispute resolution process has commenced, it will inevitably have to produce
substantiating evidence in support of its decision to do so. To achieve this, the employer
would also need to have implemented equally effective claims handling resources so that
it can properly reject or accept the contractor’s claims.

B. DOCUMENTS MANAGEMENT

The bedrock of any delay and disruption claim is the documentation available to support
it. A non-exhaustive list of such documentation will include:

Daily communications by fax or e-mail,

Notices given in accordance with the contractual method agreed,

Signed minutes of meetings by all parties attending,

Progress reports,

Countersigned timesheets or other man-hour measuring document relevant to the

dispute,

Cost analysis for hiring equipment, plant etc.

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Monitoring from an early stage, the contemporaneous documentary back-up of a claim is

just as crucial to its success under UAE Law as in any other jurisdiction and may
ultimately determine whether such claim can be resolved before or after work completion.
Communications to the employer notifying expected delays and attaching a detailed
breakdown of anticipated costs will be far more convincing evidence than
communications made in defence only after the contractor has incurred damages or is
confronted with a claim for liquidated damages for delay in completion. On some
occasions, such as notifications for an anticipated increase in bills of quantities, UAE Law
demands swift action on the part of the contractor. Article 886(1) of the UAE Civil Law
states:

“If a contract is made under an itemised list on the basis of unit prices and it appears
during the course of the work that it is necessary for the execution of the plan agreed
substantially to exceed the quantities on the itemised list, the contractor must
immediately notify the employer thereof, setting out the increased price expected, and if
he does not do so he shall lose his right to recover the excess cost over and above the
value of the itemised list”.

The accuracy and completeness of any data in support of a delay and disruption claim is
also dependent upon the contractor’s quality control system. The higher the level of
quality control the more objective and reliable the data submitted will be thus increasing
the chances of compliance with UAE Law provisions and of the dispute being efficiently
resolved before works are completed.

Very often, instructions on site on aspects that could affect a critical path are given
verbally. Even if such instructions are given in writing, they are invariably generated by an
unauthorised party. A panel of arbitrators or a UAE Court appointed expert may reject
such communications filed as evidence in support of submitting or contesting a claim.

Conversely, correspondence generated by representatives of the employer, the engineer

or the contractor, may have major legal or contractual implications at a later stage. It is
therefore important to review from a legal and contractual perspective, potentially
controversial correspondence (alleging delays, attributing fault to factors that have not yet
been assessed or inadvertently admitting liability where the position should be reserved)
before it is generated.

Preparing early for late completion requires substantial investment in human and
technical resources but is an investment worth considering in view of the fact that it can
result in an educated evaluation of the claims submitted and, potentially, in their earlier
settlement.

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