The Construction Disputes Law Review: United Arab Emirates

Introduction

Construction disputes in the United Arab Emirates (UAE) are primarily resolved through arbitration, litigation or negotiations. Occasionally, other forms of dispute resolution are used, such as mediation, dispute boards or expert determination. There is no statutory mechanism in place, such as adjudication, and party autonomy is widely respected. Tiered dispute resolution clauses, such as those found in the International Federation of Consulting Engineers (FIDIC) suite of contracts, are quite common.

In respect of litigation, the geographic location of a construction project will in most cases determine the appropriate court. This can be either one of the onshore jurisdictions or one of the free zones, which have their own courts, such as the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM).

As for arbitration, the legal framework in place will depend on the seat of arbitration chosen by the parties. Parties again have the choice of an onshore seat (e.g., Dubai) or a free zone seat, such as the DIFC or the ADGM. Parties also have a choice of arbitration institutions, although this has been streamlined to some degree by virtue of a recent government decree (discussed further below).

Regarding current trends, the construction industry in the UAE has been suffering recently through widespread cash flow issues that have affected the industry across all levels. This has been exacerbated by the covid-19 pandemic and associated shutdowns, including a three-month pause on all works in mid-2020. This has resulted in at least one major casualty, with major construction company Arabtec Holdings going into liquidation this year. This has had huge follow-on effects on developers and other contractors. This has also affected the dispute resolution landscape, with parties forced to consider and engage with local court administration proceedings. This climate has also brought performance bond and other guarantee issues to the forefront.

Year in review

Firstly, it should be noted that the UAE is a civil law jurisdiction and, accordingly, the decisions of its courts (not including the DIFC or ADGM courts) do not form precedents to be followed in other cases. Having said that, decisions can still be influential in the way future courts will interpret the law.

This does not apply to the courts of the DIFC and ADGM, which operate as common law jurisdictions. Decisions made by those courts do form precedents, although these are fewer than decisions of the onshore courts.

The key decision in the past year was the decision of the Dubai Court of First Instance on 16 June 2021 to accept the bankruptcy petition submitted by Arabtec Holding. In doing so the Court commenced bankruptcy proceedings against Arabtec Holdings, as well as six of its subsidiaries – Arabtec Construction LLC, Austrian Arabian Readymix Concrete Co LLC, Arabtec Precast LLC, Arabtec Constructions LLC, Emirates Falcon Electromechanical Co EFECO LLC and Emirates Falcon Electromechanical Co EFECO LLC.

The bankruptcy proceedings were commenced under new amendments to the UAE Bankruptcy Law, which came into force on 22 October 2020, and constitute a test case for the implementation of the new provisions. In commencing bankruptcy proceedings the Court further decided to freeze all judicial and execution proceedings against Arabtec Holdings and its subsidiaries.

The opening of bankruptcy proceedings was of great significance given the size of Arabtec Holdings and its stature within the UAE construction industry and, most importantly, the sheer number of parties involved in contracts with the Arabtec group. Counterparties include contractors of all shapes and sizes, as well as developers, suppliers, consultants and other service providers.

There have been expected consequences for counterparties, such as an inability to enforce judgments or awards, and a need to engage with the liquidators appointed by the Court, but there have also been unintended consequences unique to the construction industry; for example, an inability to get sign-off on the release of performance bonds. Parties are left to try to negotiate with the liquidator or, if possible, to apply for a court order for the release of the bond.

Aside from the Arabtec bankruptcy decision, there have been a number of interesting court decisions this year. The Dubai Court of Cassation (Commercial Division) delivered its judgment in Case No. 922/2020, making several important findings. Firstly, in relation to delay penalties, the grounds for obliging a contractor to pay a contractually agreed delay penalty are that the contractor performed all the assigned work but delayed in delivering the work to the employer within the stipulated period. Accordingly, it is not permissible to oblige the contractor to pay a delay penalty where the contractor did not perform any of the assigned work or only performed part of the assigned work, and therefore if the employer seeks compensation from the contractor in this regard, the employer must present evidence that it suffered damage as a result of non-performance or partial performance.

Secondly, a construction contract is a 'continuing' contract, whose rescission shall have no effect on the works already performed, and the contractor's claim for due entitlements for works already performed is an enforcement of the terms of the construction contract and not an effect of the rescission.

Finally, the Court considered pricing in construction contracts and found that in the event that a construction contract was entered into on the basis of an agreed design in consideration for a total contracting fee, the contractor cannot request an increase in the fee. If there was a variation or addition to the design with the consent of the employer, a provision must be included for an increase in fee in the event of a variation or addition. If the contractor does not stipulate an increased fee, the contractor shall be entitled to the value of the equipment or materials supplied by the contractor for the additional work. In the event that the contract is entered into on the basis of man-hours (i.e., time-spent rate), the contractor may request fees for additional work performed on the basis of the agreed man-hour rate. The distinction between a lump-sum construction contract and a construction contract based on a man-hour rate is that in the former, the contractor's fees are determined by a total sum specified in advance (which does not increase or decrease), while the latter is based on a man-hour rate calculation for work performed.

The Dubai Court of Cassation also handed down its judgment in Cases Nos. 1053/2019 and 1064/2019, in which it considered an employer's attempt to dispute a final certificate issued by the engineering consultant appointed by the employer. The Court found that a certificate issued by an engineering consultant appointed by the employer in relation to construction contracts, which sets out that the contractor completed the assigned works and accordingly is entitled to a certain monetary sum, is the sole responsibility of the engineering consultant and the employer cannot dispute or repudiate the certificate unless able to prove that the engineering consultant committed fraud or collusion with another party.

Courts and procedure

i Fora

Construction disputes may be brought either in the onshore courts or in the courts of the DIFC or ADGM free zones. In the onshore court system, the emirates of Abu Dhabi, Dubai and Ras Al Khaimah maintain their own independent judicial departments with their own courts. The emirates of Sharjah, Ajman, Fujairah and Umm Al Quwain are part of the federal judiciary, with courts falling under the federal judicial structure.

There is no specialist construction division in the onshore courts; construction disputes are generally referred to the commercial division. However, it is usual for the courts to appoint experts to assist in the consideration of evidence in and determination of construction disputes, especially in complicated matters.

The DIFC in 2017 set up the specialist Technology and Construction Division, which draws on specialist judges and industry-specific rules to facilitate fast-track resolution of cases.

Article 32 of Federal Law No.11 of 1992 Concerning Civil Procedures provides that actions in rem in respect of real property must be brought in the jurisdiction where the real property is located, and actions in personam in the jurisdiction where either the real property is located or the defendant is domiciled.

This has the effect of restricting to some degree the choice of jurisdiction in which a party can bring a construction dispute. The most common restriction is on parties selecting the DIFC or ADGM free zones. Given the above legal provision, parties are forced to bring their dispute in the onshore courts instead, since that is usually where the real property or defendant is located.

In respect of supervising arbitration, any of the onshore courts or the DIFC or ADGM courts are empowered to supervise arbitration proceedings seated within their jurisdiction. Where the parties have elected to refer disputes to arbitration seated in Dubai, for example, the Dubai courts will supervise that arbitration. Where they have elected to refer disputes to arbitration seated in the DIFC, the DIFC courts will have jurisdiction to supervise the arbitration.

ii Jurisdiction

Where proceedings are commenced in the onshore courts in violation of an existing arbitration agreement, parties must typically raise a jurisdictional objection at the first hearing or risk waiving their right to arbitration.

In the event that such proceedings are commenced in the DIFC courts, Article 13 of the DIFC Arbitration Law2 permits an objection to be raised 'if a party so requests not later than when submitting his first statement on the substance of the dispute'. Article 16 of the ADGM Arbitration Regulations similarly allows such an objection to be made, but not after taking 'any step in those proceedings to answer the substantive claim'.

As regards multi-tiered dispute resolution clauses, any question whether the steps have been followed properly is typically left to the tribunal to decide and is likely to be construed as either an issue of jurisdiction or a defence to the claim. As all the applicable arbitration statutes in the UAE give an arbitral tribunal the power to determine its own jurisdiction, this question will therefore ultimately rest with the tribunal.

There is one particular issue with respect to jurisdiction that is largely unique to the UAE. Given that the UAE has effectively three separate arbitration regimes – onshore under the UAE Arbitration Law, the DIFC under the DIFC Arbitration Act and the ADGM under the ADGM Arbitration Regulations – there have at times been overlap and confusion as to the appropriate supervisory court concerning arbitration proceedings. The most common example of this has been in the case of arbitration proceedings under the rules of the Dubai International Arbitration Centre (DIAC) but seated in the DIFC or, conversely, arbitration proceedings under the rules of the DIFC-LCIA Arbitration Centre but seated in Dubai. This has resulted in inconsistent rulings; for example, the Dubai courts refusing jurisdiction over an arbitration seated in Dubai but conducted under the rules of the DIFC-LCIA Arbitration Centre, on the basis that DIFC-LCIA arbitration proceedings should theoretically be under the supervision of the DIFC courts.

In the past several years, this situation has been alleviated somewhat by the establishment of the Joint Judicial Committee, designed to resolve judicial conflicts between the Dubai and DIFC courts, and further with the enactment of Decree No. 34 of 2021 on the DIAC (Decree No. 34), which came into force on 22 September 2021. The overriding purpose of Decree No. 34 is to streamline arbitration in Dubai, with the DIFC-LCIA Arbitration Centre and the Emirates Maritime Arbitration Centre (also located in the DIFC) both absorbed into the DIAC, and the structure and operation of the DIAC changed to make the default seat of arbitration the DIFC (previously this was Dubai) and to introduce other elements of best practice (for example introducing an arbitration court similar to that of the International Chamber of Commerce). This should reduce questions of jurisdiction by making the DIFC the main seat of arbitration for arbitration proceedings in Dubai.

iii Procedure rules

In the case of onshore court proceedings, procedure follows the civil law tradition. Parties set out their position in written memoranda and there is no oral hearing nor disclosure process. Parties can either ask for an expert to be appointed or present their own expert evidence, or the court can appoint an expert on its own motion. It is quite common in the case of construction disputes for an expert to be appointed, and the expert will take submissions from and meet with the parties. The court will invariably follow the expert's recommendations.

Court proceedings before the courts of the DIFC or ADGM largely mirror the procedures of the English courts. The DIFC Court Rules and the ADGM Court Procedure Rules both contain provisions for disclosure, witness statements, expert evidence and oral hearings.

As for procedure in arbitration proceedings, this is usually up to the parties' agreement but will often depend on the procedural rules chosen and the nationality and background of the parties and the tribunal. For example, in arbitrations under the DIAC arbitration rules where the parties and the tribunal come from civil law jurisdictions, the procedure is likely to be based on memoranda instead of pleadings, with little or no disclosure. Conversely, proceedings under the rules of the DIFC-LCIA Arbitration Centre where the parties and tribunal hail from common law jurisdictions will most likely include full disclosure (often utilising a Redfern schedule), pleadings and full oral hearings with cross-examination.

There are a number of hurdles that may be encountered in construction disputes in the UAE. In proceedings before the onshore courts, it can be difficult to ensure that the proper expert is appointed by the court as often the parties will have no say in the matter. In arbitration proceedings, it can be difficult to reconcile differences where parties or tribunal members come from different legal backgrounds and traditions. In these cases it becomes important to find the right balance so that both parties' wishes are respected.

iv Evidence

As discussed above, the applicable rules and procedures in respect of evidence will depend on the forum. In the onshore courts, for example, proceedings operate according to the civil law tradition, whereby the parties submit memoranda setting out their position and attach the documents on which they rely. There is typically no disclosure. Parties may also appoint an expert, but ordinarily an expert will be appointed by the court who will also take submissions from the parties and prepare a report for the court. The court will usually follow the recommendations of the expert.

In the DIFC and ADGM courts, a common law approach is followed with pleadings and witness statements. The parties are able to rely on expert evidence if they wish and there is provision for disclosure similar to that found in the English courts.

As for arbitration, the procedure is largely left to the parties' agreement. Typically in cases where the parties are from civil law jurisdictions, the procedure will mirror civil law processes (i.e., limited disclosure and memoranda instead of pleadings). Where the parties are from common law jurisdictions, one can expect fuller disclosure, witness statements and pleadings instead of memoranda. There are other factors that may come into play; for example, the background of the parties' legal representatives or the tribunal members.

The parties are generally free to adduce expert evidence regardless of whether civil or common law procedures are chosen, especially in more complicated matters.

Alternative dispute resolution

i Statutory adjudication

The UAE does not have a statutory adjudication regime in place.

ii Arbitration

The UAE is a signatory to both the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States and the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Five investment disputes have been brought against the UAE, two of which – the 2001 case of Impregilo v. United Arab Emirates and the 2017 case of BM Mühendislik v. United Arab Emirates – are listed as construction disputes.

Arbitration in Dubai is generally referred under the rules of either the DIAC or the DIFC-LCIA Arbitration Centre. However, in light of the entry into force of Decree No. 34, this is likely to be reduced to the DIAC alone in future. Also as a result of Decree No. 34, the default seat for arbitration proceedings in Dubai is now the DIFC, although parties can still choose Dubai as the seat of the arbitration if they wish. There is also the option of the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) or the ADGM Arbitration Centre, both located in Abu Dhabi, and the ADGM as a seat of arbitration.

Each of the arbitration statutes in force in the UAE is modern and based on current best practice. These include the UAE Arbitration Law (applicable in onshore UAE), the DIFC Arbitration Law (applicable in the DIFC) and the ADGM Arbitration Regulations (applicable in the ADGM). All are considered arbitration-friendly and supportive in terms of recognition and enforcement of awards. In addition, all courts in the UAE must observe the provisions of the New York Convention as a minimum.

Other than in contracts with government entities, there is no restriction on the right of parties to refer construction disputes to arbitration, nor any requirement to refer such disputes to domestic tribunals. Arbitration agreements are generally interpreted favourably, with arbitral tribunals given the power to determine their own jurisdiction in the first instance. Overall, the UAE is considered an arbitration-friendly jurisdiction with a wealth of arbitration experience and a rich history of arbitration of construction disputes.

iii Mediation

Mediation has gained traction as an option for the resolution of disputes in recent years. However, it has not traditionally been popular among local or regional parties. Having said that, shariah principles do support a tradition of mediation and conciliation and, accordingly, mediation is growing in importance as an alternative dispute resolution (ADR) option in the UAE. The Dubai government created the Centre for Amicable Settlement of Disputes, which is attached to the Dubai courts. The DIFC and ADGM courts both also provide for court-referred mediation and the DIFC-LCIA maintains mediation rules separate from and in addition to its arbitration rules.

iv Other ADR methods

Hybrid methods of ADR, such as 'med-arb', are not generally used in the UAE. However, other mechanisms are used, often before arbitration or litigation. These include options such as dispute boards or expert determination. These are usually agreed by parties in their contracts rather than being a formal process.

Construction contracts

i Public procurement

Federal Regulation of Conditions of Purchases, Tenders and Contracts, Financial Order No. 16 of 1975 (the Public Tenders Law) governs public federal procurement in the UAE. Open public tenders are required for most tenders with a contract value over 700,000 UAE dirhams. The Public Tenders Law applies to federal but not state government projects, and each individual emirate will have its own process for public procurement. Typically, this will follow the federal model. Ordinarily, a party wishing to tender a bid must register with the appropriate authority, depending on the jurisdiction in which the project is being undertaken.

The Public Tenders Law further requires all foreign entities either (1) to operate through a joint venture with a local entity; (2) to set up an entity that is majority owned by UAE nationals; or (3) to have a UAE national representative (which could be a registered commercial agent or a national agent for a branch or representative office).

In addition to the Public Tenders Law, in 2015, the government of Dubai enacted Dubai Law No. 22 of 2015 (the Dubai PPP Law) and in 2017 the UAE government issued UAE Cabinet Resolution No. 1/1 on the procedures manual for partnerships between federal entities and the private sector. Under these laws, as well as other sector-specific statutes already in place, government entities must select the local law as the governing law of contracts to which they are party, and such contracts may not provide for arbitration outside the UAE. As a result, government entities in Dubai have traditionally used a DIAC arbitration clause in their contracts, and government entities in Abu Dhabi have traditionally used clauses referring to ADCCAC. Furthermore, pursuant to Council of Ministers Decision No. 406/2 of 2003, governments in the UAE are required to obtain approval from the Ministry of Justice before agreeing to an arbitration clause.

ii Contract interpretation

In the UAE, there is no separate piece of legislation governing construction contracts. Instead, all contractual rules for governance are codified in the Civil Transaction Law No. 5 of 1985 (the UAE Civil Code). More specifically, construction contracts (also known as 'muqawala contracts' or contracts to build) are regulated under Articles 872 to 896 of the UAE Civil Code. This includes mandatory provisions, such as Article 882, which holds that any clause exonerating or limiting the warranty of an architect or contractor is void.

Otherwise, contract interpretation is subject to the overarching provisions on contracts set out in Articles 125 to 175 of the Civil Code and, in particular, Articles 257 to 266, dealing with interpretation of contracts. Express terms are given primacy, but implied terms may also be used. For example, Article 258(1) provides that 'purposes and meanings are decisive, not the wording or construction forms'. Article 265(1) provides that 'If the wording of a contract is clear, it may not be departed from by way of interpretation to ascertain the intention of the parties'; however, Article 265(2) goes on to say that: 'If there is scope for an interpretative construction of the contract, an enquiry shall be made into the mutual intentions of the parties beyond the literal meaning of the words, and guidance may be sought in so doing from the nature of the transaction, and the trust and confidence that should exist between the parties in accordance with current commercial usage.'

Oral agreement to or variation of terms is theoretically permitted under Article 132. However, this is commonly qualified by an agreement between the parties that any variation should be made in writing and signed off by the parties.

The DIFC has its own laws governing contractual interpretation, namely DIFC Law No. 6 of 2004. Both the DIFC and the ADGM generally follow the laws of England and Wales in respect of interpretation of contracts.

Common substantive issues and remedies

i Time bars as condition precedent to entitlement

On its face, the UAE Civil Code supports a strict application of time bars included as a condition precedent to claims, such as in FIDIC 20.1 or New Engineering Contract Clause 61.3. This can be seen through Articles 243(2) or 265(1) with respect to strict interpretation of contracts. However, the UAE Civil Code also provides for an equitable and fair approach to balancing parties' rights and obligations. Article 246(1) requires parties to perform contracts in good faith. In addition, Article 106(2)(c) defines as an unlawful exercise of rights the exercise of a right 'if the interests desired are disproportionate to the harm that will be suffered by others'. It is often argued, and open to a court or tribunal to find, that a strict application of a time bar is not in good faith or is an unlawful exercise of the employer's rights, especially where the employer was otherwise aware of the substance of the claim.

ii Right to payment for variations and varied scope of work

As set out above, the UAE Civil Code supports both a strict interpretation of contractual provisions and at the same time an equitable balancing of parties' rights, keeping the principles of good faith in mind. In respect of variations, the UAE Civil Code permits oral agreement but also allows parties to require variations to be in writing if that is agreed between them. Having said that, Articles 318 and 319 deal with unjust enrichment and provide a potential avenue to claim damages where the agreed procedure for variations has not been followed. Note, however, that, in the case of a lump-sum contract price, a contractor's recovery through an unjust enrichment claim may be limited to the equipment and materials used as a result of the variation. Again, an important factor will be whether the employer was aware of the additional works or variation.

iii Concurrent delay

UAE law does not deal directly with concurrent delay. However, there are a number of provisions that will be relevant. Good faith and unlawful exercise of rights, explored above, may both be relevant in cases of concurrent delay. In addition, Article 878 is useful. Pursuant to this Article, a contractor will only be liable for any loss or damage that results from an act or work of the contractor, whether through wrongful act or default. The contractor will not be liable if the loss or damage arises out of an event that the contractor could not have prevented (for example, an event caused by the employer). Article 290 allows a judge to reduce damages where the injured party has contributed to the damage. Article 291 allows a judge to allot liability between multiple parties where multiple parties are responsible for a prejudicial act. Although the UAE Civil Code does not contemplate concurrent delay explicitly, the above provisions all provide ways in which concurrent delay can be taken into consideration.

iv Suspension and termination

Article 247 of the UAE Civil Code allows a party to refuse to perform obligations where the other party does not honour its own obligations. This allows a party to suspend performance in the case of, for example, non-payment. Otherwise the parties are obliged to follow the terms of their agreement.

As to termination, Article 892 sets out the requirements for termination in construction contracts. Construction contracts can be terminated by (1) completion of all agreed works or services; (2) mutual consent; or (3) court order. It is broadly accepted that agreed contractual provisions amount to mutual consent for the purposes of Article 892.

v Penalties and liquidated damages

Article 390(1) of the UAE Civil Code permits the parties to fix in advance the amount of damages that will be payable as compensation. Article 390(2), however, allows a court or tribunal to adjust these contractually agreed penalties or liquidated damages to a figure that matches the damage suffered, either upwards or downwards. This is a mandatory provision that cannot be excluded by the parties.

vi Defects correction and liabilities

UAE law recognises any agreement between the parties in respect of defect liability post-completion. In addition, Article 880 provides for 'decennial liability' pursuant to which contractors and supervising engineers or architects can be held liable in the case of total or partial collapse of a building, or where a defect threatens the stability of a building, for a period of 10 years. Parties may not exclude decennial liability in their contract.

vii Bonds and guarantees

Letters of guarantee, and by extension performance bonds, are regulated by UAE Federal Commercial Law No. 18 of 1993 (the Commercial Code). Guarantees are defined at Article 414, and Article 417(1) recognises a bank's obligation to make payment when called on to do so. However, Article 417(2) allows a court to attach the amount of the guarantee with the bank, provided there are 'serious and certain reasons' for the request to do so. The courts are willing to invoke their power under Article 417(2), but the reasons for doing so must be clear on the documents and exceptional in nature.

viii Overall caps on liability

UAE law generally permits exclusion and caps on liability where agreed by the parties. However, this is not without exception. Article 296 of the UAE Civil Code deals with tortious liability and provides that any exemption on tortious liability will be considered void. Similarly, Article 882 states that any clause excluding or capping decennial liability will also be considered void. Finally, notwithstanding any cap on liability, Article 390 will still permit a court or tribunal to adjust damages in accordance with actual loss suffered.

Outlook

There are two notable developments that have captured the attention of the construction industry in recent months and will continue to do so going forward.

Firstly, the ongoing liquidation of Arabtec Holdings and its subsidiaries is a prime encapsulation of many of the issues found in the construction industry at present and will play a massive role in the construction industry moving forward. The sheer size of Arabtec Holdings and its importance in the region mean that countless companies within the industry will be affected.

Secondly, the ongoing modification of the DIAC will be keenly watched, as will the arbitration landscape in Dubai generally. Parties and their legal representatives will be interested to note the make-up of the DIAC's board of directors and court of arbitration, as well as the new DIAC arbitration rules once they are released.

Footnotes

1 Rabih Tabbara is a partner at Ince.

2 DIFC Law No. 1 of 2008.

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