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UAE Construction Sector: Know The Legal Do’s And Don’ts

UAE Construction Sector: Know The Legal Do’s And Don’ts

Undertake commercial and technical due diligence before signing any contract, says Celine Kanakri, senior associate at Baker & McKenzie Habib Al Mulla.

The UAE’s booming construction industry has always been a key driver of the nation’s economy, and the legal and commercial practices underlying the sector have also been developing rapidly. International best practices have been adopted locally, with many construction contracts in the UAE modeled on contracts drafted by the International Federation of Consulting Engineers (commonly known as FIDIC).

Contractors and employers, unfamiliar with UAE law, mistakenly assume that having based their contracts on FIDIC will make these contractual provisions prevail by default.

Whether a contractor or an employer, one should be aware that there are a number of UAE law principles that impact, and in some instances even prevail over the parties’ contractual terms. In order to avoid disputes and to achieve commercial objectives, it is key to understand your rights and obligations in terms of contract price, damages and termination.

Contract price – cast in stone?

Under a lump-sum contract, a request for additional costs or remuneration for execution of the originally agreed design is in principle not allowed. However, one should bear in mind that if a variation or an addition to the design is made with the employer’s consent, the contractor will be entitled to recover costs for the additional works.

Interestingly, under UAE law, such a variation and the employer’s consent can be evidenced by all types of proof – a variation to a contract may be oral, by conduct and/or in writing.

Hence, the employer’s consent and/or variation may be proven by exchange of correspondence, engineer’s consent to the additional works, minutes of meetings, expert determination case through the court, etc.

In a re-measurement contract, the law imposes an obligation on part of the contractor to immediately notify the employer of any significant increase in price for the implementation of the agreed design, failing which the contractor loses his right to claim extra costs for the implementation of the agreed design.

In any event, there are a number of exceptions to this “no extra costs” principle, such as instances of unforeseen circumstances or events of force majeure, and circumstances arising out of acts of third party or acts of the contracting party.

Liquidated damages – can they be re-assessed?

Liquidated damages clauses that are very common in construction contracts are in principle valid and enforceable under UAE law, with certain exceptions. However, one should bear in mind that the court has the power to re-assess the damages at the request of a party, irrespective of any agreement otherwise, with the burden of proof lying with the party requesting re-assessment. Compensation for actual damages, loss of profits, loss of opportunity and moral damages can be claimed under UAE law, irrespective of contractual provisions.

Termination – a special and unique regime?

Automatic termination, termination by agreement of both parties and unilateral termination/termination for convenience are possible under UAE law, provided that the contractual provisions in that respect are clear.

However, for the termination to be valid, either party must serve a notice accordingly, unless expressly agreed otherwise.

You should note that the effects of termination are unique under UAE Law: the entire contract is deemed as non-existent, meaning that UAE law shall govern all aspects of the dispute irrespective of any agreement of the parties otherwise, and restitution will be awarded. In the event restitution is impossible, compensation will be awarded, assessment of which will be on the basis of unjust enrichment.

Final tips

Given the importance of UAE law in the interpretation of construction contracts, seek legal advice prior to entering into a contract. Undertake commercial and technical due diligence before pricing and committing to a delivery date. Keep a complete record of the facts that might impact on your legal and contractual rights.

Remember that you may be able to secure a number of interim measures through the UAE courts in support of your case (such as expert appointments, witness hearings, and/or a stopping performance bond), even if no proceedings are initiated yet or proceedings are conducted abroad.

With Expo 2020 fast approaching, the construction industry is set to benefit greatly – understand the challenges and leverage the opportunities.

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