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COMPANY PROFILE
Al Tamimi & Company, originally established in 1989, is today one of the leading law firms in theArabian Gulf region. It is the largest local, non-affiliated law firm in the United Arab Emirates withoffices in Dubai, Abu Dhabi, Sharjah and Baghdad, and an associate office in Doha.
Al Tamimi & Company specialises in Banking & Finance, Corporate / Commercial andCommunications, 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, NorthAmerica, Europe, the United Arab Emirates and several other Arab countries. Each member of ourteam of professionals and qualified administrative staff is fully committed to providing our clientswith accurate, thorough and cost effective advice.
Within the U.A.E. we regularly confer with government ministries during the introduction of newlegislation and the ongoing amendment of internal regulations, relying on long establishedcontacts 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 interestsoutside the United Arab Emirates, and our international companies, rely on our globalperspective.
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The informative brochures listed below are available free of charge from the lobby of any of ouroffices in the UAE. We would also be happy to send them to you by post if you contact ourDubai office reception. Alternatively, the text of the brochures may be accessed on our website atwww.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 providesreaders with the latest news on legal and commercial developments in the region. To subscribe please send an email to: [email protected] or call +971 4 3317090 or Fax: +971 4 3313177.
visit us at www.tamimi.com
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Construction Practice
AL Tamimi & Company’s construction practice is at the heart of one of the most dynamicand burgeoning industries. Dubai is currently the largest construction site in the world andour firm’s legal services, provided by experienced high-pedigree lawyers and advocates,continuously address the needs of contractors and architects. From setting up, tocontract review and dispute resolution, our legal input has helped numerous members ofthe construction industry to succeed in what is an increasingly demanding andcompetitive market.
The number of construction projects and related contracts has increased substantially inthe UAE over the last decade. This has inevitably given rise to significant numbers ofclaims either between contractors and owners / employers or between contractors andsub-contractors. These disputes are resolved either by way of conciliation or arbitrationand are predominantly held in the English language, with specialist arbitrators appointeddue to the technical nature of the aspects involved. Litigation is a less preferred mode ofdispute resolution in the construction industry, although there are a number of Courtrulings on important aspects of construction law. As a consequence of this, focus onconstruction law is increasing. The articles set out herein seek to address some of themost often encountered issues in construction law related disputes.
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INTRODUCTION
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Consultants and contractorsConsult 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 lateEffective documentary management for UAE delay and disruption claims...............................59
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Parties to construction or consulting contracts invariably refer to lawyers’ aspectsthat 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 alreadystarted with many – potentially critical - errors.
Most construction related contracts involve very substantial amounts of money andobligations that can linger for periods of time much longer than the actual duration of theworks. Obtaining legal input prior to the signing of a contract in the construction field isfar from throwing good money after bad: it is an essential and wise precaution that cannot only cater for a dispute that may arise but can also limit the prospects of that disputearising in the first place.
The main purpose of legal consultation is to balance the interests of the parties and toensure that their intentions are clearly set out in a legally binding document and in a formthat is understandable both to the contracting parties and to a future judge or panel ofarbitrators.
Very often contract managersworking for either party mayoverlook important legal finetuning despite their admittedlysubstantial experience innegotiating the commercialsubstance of contracts. Butcommercial substance withoutstrong legal footing may lead tothe creation of obstacles thatcan prove virtually impossible toovercome.
CONSULTANTS AND CONTRACTORS: CONSULTBEFORE CONTRACTING!
Contractual transactions in the world of construction that are devoid of legalinput are fraught with pitfalls.
Just a small sample of these as they belatedly arrive at a construction lawyer’s office arethe following:
1. Unsigned and unstamped contracts : possibly not worthy of the paper they arewritten on
Very often construction works proceed before the contract has been signed and it isnot unusual for the entire document (which very often is a voluminous documentcontaining amendments and amplifications of various FIDIC based or other standardforms of construction contracts) to remain unsigned throughout the duration of theworks. This can have substantial legal implications if a dispute arises thereafter andis brought before a panel of arbitrators or before the UAE Courts. Whilst the verypresence 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 ofsignatures and stamps in the main contract (including initialing and stamping eachpage of the contract) may present evidential difficulties to either or both parties whenthey 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 maincontract or, more often, to a sub-contract. Arbitration clauses included by referenceonly may not be enforceable or recognised by the UAE Courts. This may lead to anentire nullification of the award by the UAE Courts and loss of precious time and costsby both parties. Ensuring that a dispute resolution clause, whether arbitration,mediation or litigation, is drafted clearly becomes essential in any constructioncontract so that there can be no question as to how disputes are to be resolved. Asidefrom this, very often arbitration clauses are drafted in such a way that theappointment 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 theparties require. This may result in arbitration proceedings quite different to what theparties 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 beenforceable 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 maynot be upheld under UAE Law because Article 880 of the UAE Civil Law stipulates thatthe decennial defects liability period will apply to major defects affecting the stabilityor safety of any structure and such decennial liability cannot be decreased even bythe consent of the parties. Contactors’ and architects’ liabilities are quite rigidly setout in local law, setting impenetrable boundaries for a contracting party that is notaware of them and who may be lulled into a sense of false security in the thought thatany limitation of liability clause will be legally enforceable.
4. What did you mean by that?The importance of parties’intentions
On various issues the intentionsof the parties may be unclear to athird party, bystander or anindependent arbitrator/judge whowill try to deduce these after theevent and on the basis ofpossibly non contemporaneousevidence. This can lead both to amisinterpretation and to an unfairaward/judgment. Obtaining legal input on contractualdocumentation prior to its signingcan ensure that the intentions ofboth parties are reflected clearlyon clauses that may have been inserted with a certainunderstanding in mind from bothparties but not drafted clearlyenough to be identified by a thirdparty.
5. Local Government Legislation – each emirate may be different
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government laws applicable in a specific emirate. This will be particularly relevant tocircumstances 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 variousconstruction related disputes are put before them for their resolution. By the use ofrecent case law, legal consultation may assist in fine tuning various clauses to reflectthe 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, theresponsibility for which has not been dealt with in the contract. Legal consultationmay help in identifying such potential delaying events, placing the responsibility foreach one of them on either party to the contract and generally setting out in a legallybinding 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 notmean much to a dispute resolution authority(particularly to the UAE Courts) if its substanceis not reflected in the subcontract with anexpress explanation of what clauses of themain contract are to apply by analogy orverbatim to the subcontract. Furthermore,certain clauses, such as an arbitration clause,cannot be included in a subcontract byreference to a “back to back” arrangement andneither can an entire main contract necessarilybe deemed to have been viewed by thesubcontractor purely by virtue of suchreference.
One of the reasons why disputes, arising out ofconstruction contracts, are eventually referredto arbitration or litigation is because theirwording has been unclear, inadequately draftedand has not clearly reflected the true intentionsof the parties. As such, perceived intentionsbecome the object of interpretation anddisagreement leading up to legal battles. This
could be limited (and occasionally altogether avoided) if, following legal advice, intentionsare identified clearly and with heed to UAE Law – the ultimately determining factor ofrights, obligations and amounts awarded locally.
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Does an architecthave as muchexposure as a
contractor when itcomes to issues of liability? Moreworryingly, could it beeven wider? Relevantliability provisions underUAE Law stretch out their ambit toencompass the errorsand omissions of mostparties actively involvedin a project and thearchitects are of course no exception.
Defects liability period
The defects liability period under UAE Law is crucial to any party to a designing contractprimarily because of its decennial (10 year-long) duration and its mandatory nature. TheUAE Law defects liability period relevant provisions states that if the subject matter of thecontract is the construction of buildings or other fixed installations, the plans for whichare made by an architect, to be carried out by the contractor under his supervision, theyshall both be jointly liable for a period of ten years to make compensation to the employerfor any total or partial collapse of the building they have constructed or installation theyhave 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 tobe 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 themis set out in UAE Law wherein it is stated that the architect’s obligation to compensatefor the damage caused shall remain, notwithstanding that the defect or collapse of thestructure was related to the land itself or that the employer consented to the constructionof the defective buildings or installations.
Architect’s liability under UAE Law
A look at how UAE Law treats architectural liability for both design andsupervision, as well as how the two are differentiated.
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There a number of issues arising as a result of these provisions, the most important ofwhich for architects are the following:
1. The decennial defects liability period will only apply to major defects affecting thestability or safety of a structure. Independent or Court appointed experts coulddetermine the nature of a defect and establish its importance.
2. Decennial liability is joint both for the architect (designer) and the contractor. Inpractice, this means that the employer can commence a legal action or arbitrationproceedings for any major defect affecting stability or safety of a structure, bothagainst the architect/designer and the contractor without being obliged to decidewhether the defect is of a designing or structural nature. The outcome of a Courtaction or arbitration proceedings could be either that liability is apportioned betweendesigner and contractor, or that only one of the two parties is liable, or that both areliable for the whole amount (in which case the employer is entitled to look forcompensation from either one or both parties).
3. The decennial liability period will not affect minor defects, the liability period for whichcan be contractually agreed between the parties. It is important to note that in manyconstruction contracts the parties agree a defects liability period without specifyingwhether that period relates to minor defects or major defects. In practice and underUAE Law, this defects liability provision will be construed as applying only to minordefects as the limitation period for major defects is the subject of mandatory UAE Lawwhich the parties cannot contract out of. In this respect, Article 880 of the UAE CivilLaw does provide that the parties may agree to extend the liability period for majordefects beyond the 10 years provided in that Article.
An exception to the architect’s/designer’s joint liability is set out in Article 881 whichstates that:
“If the work of the architect is restricted to making the plans to the exclusion of supervisingthe 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 waslimited to designing the drawings/plans for the structure in question and that nosupervision of the execution and construction was included in its obligation, thearchitect’s/designer’s liability will be limited to purely architectural/designing errors in theplans and any structural error would be the responsibility of the contractor. C
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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 suchdefect the only exemption is eventswhich could not have beenprevented. These can be acts ofwar, unpredictable weather relatedevents, riots or events that werecarried out by third parties overwhich the contractor had no poweror control.
� The burden of proof of anextraordinary event which could nothave been prevented, causing amajor defect lies with the contractor.
With regard to minor defects, the UAElegal position on limitation ofcontractor’s liability is more flexible andallows all parties to engage in anenforceable contractual agreementreflecting their wishes. Article 882 of theUAE Civil Law states that:
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“ Any agreement the purport of which is to exempt the contractor or the architect fromliability, or to limit such liability shall be void.”
Although the above provision does not specify for which type of defects the contractor’sliability is unlimited, in practice the parties cannot limit or contract out of defects liabilityprovisions relating to major defects only. It is, however, possible to limit liability fordefects 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 partiesto a construction contract so that their respective intentions are not only reflected in thecontract but also enforceable in law.
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Acornerstone to any construction contract from the contractor’s point of viewis 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 wherethe employer feels that the contractor has caused him to suffer losses far exceedingthe agreed limit of liability, he may be tempted to find ways of breaking that limit. Isthis possible and does UAE Law allow it?
Before dealing with this question, itis best to have a brief look at howa contractor’s liability is dealt withunder UAE Law.
Is limitation of liability possible inthe first place?
Contractor's liability is governed byUAE Civil Law provisions statingthat the contractor shall be liablefor any loss or damage resultingfrom his work whether arisingthrough his wrongful act or defaultor not. There is also a provisionstating that any agreement thepurport of which is to exempt thecontractor or the architect fromliability, or to limit such liability,shall be void. However, this lastprovision, when read within thecontext of the surroundingprovisions, only prohibits limitationof liability for major defectsaffecting stability or safety of astructure. It follows on from other
BUT I THOUGHT WE AGREED…!Can a contractor’s limit of liabilitybe broken?
articles of the law that expressly refer to issues of defect liability, setting out the joint (forarchitect and contractor) decennial (ten-year-long) liability for major defects affectingstability and safety and limiting this liability to designing errors only in the case of anarchitect 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 isgenerally accepted that a contractor’s liability can be limited by agreement with regard tominor 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 constructioncontract.
What about liability for delay?
The good news is that parties to any type of contract would be free to limit their liabilityto the extent allowed by UAE Law. A specific provision states that parties can fix inadvance 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 termused for the specified compensation is “liquidated damages” as opposed to “penalty”because the former presupposes that losses have to be incurred and proven first whereasthe latter may be imposed regardless. The liquidated damages are normally agreed as apercentage of the contract value and the general intention of the parties is that for anydelay caused by the contractor his maximum exposure would be that percentage(payment of which is usually secured by the employer through his obtaining an irrevocablebank 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 toeffectively break the limit of liability that was agreed between the parties and adjust it tothe loss incurred.
In many instances judges will recognise that freedom of contract should govern theintentions of the parties and will not interfere with freely negotiated contractual limits ofliability. The power given to the judge is discretionary and this of course means that it mayor may not be applied in a particular case.C
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Is this discretion entirelyarbitrary?
There is no formal list ofcriteria on how this discretionis to be exercised. However,the position could depend ontwo issues: firstly how far theloss claimed is from thecontractual limit of liability (thegreater the difference, themore likely it could be that thejudge may exercise hisdiscretion). Secondly whetherthe difference, if substantial,could have been reduced inany way by the employer.
So in a construction contract where the employer has already proven that the contractoris to blame for the delay incurred, there would be a number of further hurdles for theemployer to overcome before he can rely on the discretion a UAE judge would have tobreak 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 ahotel that was supposed to have been completed by a certain date or evidence of apenalty paid as result of cancellation of an associated contract dependant upon theproject being completed by a specific time).
� Link the contractor’s liability for delay directly to the loss he incurred (for exampletechnical expert evidence that, were it not for the contractor’s delay, the loss claimedwould not have been incurred).
� Point out a substantial difference between the loss incurred and the contractuallyagreed limit of liability.
� Prove that he has limited his loss (e.g. by replacing the delaying contractor withanother, omitting to sign contracts bearing penalty provisions once it became obviousthat 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 andinstances where this has been carried out are comparatively rare. Therefore, it will alwaysmake sense for the limit of compensation to be included. However, it is advisable that thewording of the clause that stipulates what that limit will be, is such that it gives as clearan indication as possible on what the intentions of the parties were and what instancesof 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 laconicreferences may increase the chances of a judge exercising his discretion to break the limitagreed. Extreme reliance by the contractor on such clauses could prove hazardous incertain cases.
In order to break the limit, it is an extraordinary disparity between the instances initiallyenvisaged and the ones that actually occurred that the employer would seek to allege. Itwould, therefore, serve contractors well to ensure that such an allegation appears onesided when compared with the mutually agreed and detailed wording of the contract.
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More often than not thedispute resolution processrelated to construction
contracts commences after theworks are completed. Lawyers areinstructed, voluminous correspon-dence is produced and extendedstatements of claim are drafted, all inpreparation for a grand trial orarbitration, the cost and duration ofwhich can be substantial. As in mostaspects of a dispute resolutionprocess, deciding when tocommence arbitration/ litigationproceedings involves considerationof various benefits and drawbacks,the most prevailing ones of whichare set out below:
BENEFITS
�� Increased Pressure on Employer
The threat of a dispute resolutionprocess would start with the referral ofa dispute to the engineer and end upwith the appointment of an arbitrationpanel 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 toavoid penalties arising from relevant project finance.
Contractors stand many chances of resolving disputes in their favour if theycommence arbitration proceedings as quickly as possible after a dispute (that meritsits resolution by way of arbitration/litigation) arises.
Benefits and drawbacks forcontractors in commencing arbitration / litigation prior tocompletion of works
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�� Early Commencement of Dispute Resolution
The second major benefit of commencing arbitration / litigation prior to workcompletion is that the chances of successfully resolving the dispute in question areincreased if it is dealt with shortly after it is formed and not left to augment throughthe passage of time, increase of costs etc.
In all probability the dispute resolution process if commenced swiftly, will not run its fullcourse as the attention of both parties will be focused on the dispute at an early stageand, in view of the overriding purpose of finalising the works, it is almost certain that theparties will seek to eliminate the prospects of progressing with an arbitration or litigationto the best of their ability.
In any event, it is advisable that legal assistance is sought as soon as a dispute ariseswhether 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 disputewith a clear understanding of the legal position and the issues at stake as well as thestrengths and weaknesses of any potential claim including the ultimate likely outcome ofan 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 betweenthe parties. Very often the offended party may legitimately become reluctant tocommence full arbitration/ litigation proceedings for fear of damaging the all importantrelationship with the employer.
In addition, commencing the dispute resolution early will not necessarily guaranteethat such dispute will be successfully resolved to a satisfactory degree for bothparties. If such satisfactory resolution does not take place, the parties’ relationshipmay be damaged to such a degree that termination of a contract may also beenvisaged.
This will ultimately have delay repercussions, which will affect both the employer, interms of finalising the works in the envisaged time frame and the contractor, in termsof obtaining swift certification of applications for payment, ultimately leading toissuance of final certificate of payment.
If the relationship with the employer is damaged substantially, from thecommencement of arbitration or litigation proceedings prior to the completion ofworks and without principled negotiation having taken place, it is possible that alsothe cash flow of the contractor may be substantially affected, ultimately resulting inmore money being spent in the pursuit of its claim than is being recovered throughthe 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 workcompletion is simply the fact that the quantum of the various heads of claims involvedwould not be finalised until works are completed, costs are assessed, man hours andmaterials/bills of quantities measured and adjusted.
In addition, the possibility of further heads of claim arising that may be disconnectedwith each other at a later stage of the works is always a real one. Therefore, it mayprove to be substantially costly if arbitration has commenced on a number of claimsand before the arbitration proceedings are concluded – and also prior to the worksbeing completed - further disputes occur.
These would give rise to the need to commence additional arbitration proceedingsespecially if the defending party does not agree to the inclusion of such further headsof claim to the current arbitration proceedings. This can be obstructive both to theresolution 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 asefficaciously as possible.
This fine balance is best achieved when a decision to commence any dispute resolutionprocess is made not as an act of aggression or threat but as a prudent and reasonedconclusion reached through a thorough and principled negotiation process that hasidentified the issues that can be resolved amicably and those that require the interventionof a mediator/arbitrator or the Court.
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Advantages and disadvantages ofvarious methods of constructiondispute resolution.
Parties to a construction contract may wish to resolve their dispute through anumber 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, conciliationand adjudication)
�� Arbitration �� Litigation
We examine below the benefits and drawbacks of resorting to any of the abovedispute resolution methods.
Alternative Dispute Resolution (ADR)
An ADR option should ideally be incorporated in the contract for it to be binding on bothparties. 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 benefitsof 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 andconfidence between the parties.
The next step for resolving a dispute by way of alternative dispute resolution is to proceedto mediation/conciliation. Again, this method should ideally be incorporated in thedispute resolution clauses of the contracts. Whereas in a negotiation, resolution of adispute takes place purely between the parties, in a mediation/conciliation themediators/conciliator is a neutral party appointed by both sides to facilitate thenegotiations and reach a resolution. The mediator’s/conciliator’s role is also to point outthe strengths and weaknesses of each party’s case and guide the parties to a negotiationprocess.
The benefits of mediation and conciliation are almost the same as those of negotiationbut also include the benefit of resolution of disputes involving complicated issues by aparty 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 ifthere is a need for interpretation of a controversial issue by a legal authority such as aCourt or an Arbitral Tribunal or if any circumstances exist where one of the parties wishesto strongly discourage similar disputes from occurring in the future.
Arbitration
Arbitration is gradually becoming a popular dispute resolution mode in the UAE asspecialised experts from various fields (particularly construction) are appointed asarbitrators in view of the better appreciation of the technical aspects of a dispute and theirwealth of technical and legal experience. The advantages of arbitration as a disputeresolution method include the freedom of choice with respect to the arbitrator, theflexibility on procedure as rules can be agreed between the parties and the relative speedof issuance of an arbitration award compared to the time required for a final Courtjudgment to be delivered. In addition, arbitration awards are generally private and alsofinal and binding to the parties with no further rights of appeal.
On the disadvantages front, in the UAE an arbitral award needs to beauthenticated/certified before the UAE Courts. This forces the winning party (in the event
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the losing party does not automatically honour the arbitration award) to resort to theCourts for such authentication and proceed through the Court of First Instance, Court ofAppeal 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 partyto the New York Convention for mutual enforcement of a foreign arbitration award.Therefore, with the exception of bilateral treaties (with France, for example) theenforcement 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 theCourts is a dispute resolution method that is available to any party unless they havespecifically contracted out of this by submitting to any other dispute resolution methodevidenced by a duly signed clause / agreement to this effect.
Also, a Court judgment is immediately enforceable once it becomes final thus providingthe 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 afinal and binding judgment and the reliance on local courts, which are not always familiarwith complex and technical issues that may arise in a construction contract. As a resultof this, the Courts very often appoint a single expert, who decides upon the disputes andwhose report is adopted, in most cases verbatim, by the Courts.. Very rarely do theparties to a litigation agree on the identity of the expert and even if such identity is agreedupon the ultimate decision maker on the dispute in question is one individual as opposedto 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 regardto the contents of the dispute.
In conclusion, although there is no single dispute resolution method that is free of anydisadvantages, it is nevertheless important for the parties to a construction contract to beaware of all the benefits and drawbacks of each such method so as to make a consciouschoice bearing in mind the nature of the dispute that could arise, the availability ofcompetent experts and the cost related to them, the identity of the parties and the locallegal system.
Arbitration is graduallybecoming a populardispute resolution
mode in the UAE.Specialised experts fromvarious fields (particularlyconstruction) are appointedas arbitrators in view of theirbetter appreciation of thetechnical aspects of adispute and their wealth ofexperience on the basicprinciples of disputeresolution. This, togetherwith the time limit of sixmonths (subject to extension by mutual agreement) for issuing an award provided forin Article 210 of the UAE Civil Procedure Code should, in theory, tackle the prevailingdrawbacks of litigation before the UAE Courts, namely lack of specialised expertiseand length of proceedings.
However, in practice, both parties and arbitrators should be alert to a number of pitfallsand critical points that, if overlooked, can defeat the purpose of arbitration as a swift andfair 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 thanpublicly in courts. Ultimately the parties would have agreed to be bound by the awardissued by the arbitrators, which will subsequently be converted into a judgement (throughthe relevant authentication by the UAE Courts). Since the judges in Court litigation are oflegal background, the same should apply to the appointed arbitrators, at least one ofwhom, should be either a qualified lawyer, legal consultant or, possessing a mixture oftechnical and legal background. This is important for two reasons:
�� Firstly, so that the legal arguments raised by the parties’ representatives (who areinvariably lawyers or legal consultants) are understood and evaluated: arbitrators witha purely technical background and experience would have difficulties in decidingwhether to uphold or reject legal arguments raised by either party. Often these
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arguments may have very little to do with the technical merits of the dispute but theycan, 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 backgroundwould be more cautious in ensuring that the award becomes enforceable and that ithas not only efficiently dealt with the substantive aspects of the dispute but also withthe legal aspects of the award’s enforceability, as these are set out in Article 216 ofthe UAE Civil Procedure Code, which states as follows:-
“ARTICLE – 216
1. In the following instances, the opposing parties may apply for the annulment of anarbitrator’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 lapsedthrough 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 ifgiven by some of them without being so empowered in the absence of the others, orif given under deed of arbitration in which the subject of the dispute is not stated, orif given by someone not competent to agree to arbitration or by an arbitrator whodoes not fulfil the legalrequirements.
(c) If there is somethinginvalid in the ruling orin the proceduresaffecting the ruling.
2. Acceptance ofinvalidity shall not beinhibited by theopposing partyabandoning his rightthereto before thearbitrator’s ruling isissued.”C
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It is of course essential that arbitrators do possess a substantial degree of competenceand expertise on the technical aspects of the dispute they have been requested toresolve. Ultimately, however, their award will take the form of a judgement and as such itis the arbitrators’ implied obligation to ensure that it is as legally sound as possible so thatits 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 anddemands resolution of its dispute, it is imperative that throughout the arbitrationprocedure (indeed from the stage of drafting the arbitration clause or arbitrationagreement) attention is focused on the ultimate validity of the arbitration award. Theclaimant needs to ensure that the arbitration award, when issued, will “survive” anyattempt made by the defendant through the three tiers of the UAE judicial system (Courtof First Instance, Court of Appeal, Court of Cassation) to nullify it on the basis of lapse ofprocedure 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 thefollowing:
Clear Arbitration Clause – Arbitration Agreement
The arbitration clause or agreement should specify the rules under which any disputeresolution by way of arbitration should be conducted. These may be the Rules of theDubai Chamber of Commerce & Industry, Dubai Municipality Rules, UNICITRAL, ICC etc.For a more effective supervision and conduct of arbitration proceedings held in the UAEit is advisable to agree local (as opposed to international) rules. This will facilitate thecertification of the award by the supervising body and subsequently its authenticationthrough the UAE Courts. In addition, it is preferable that the parties to the dispute, ratherthan 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 arbitrationon behalf of his client, vary rarely will such Power of Attorney include an express right forthe 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 theobject of a separate dispute. The options available are essentially three:
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�� either one arbitrator appointed by mutual agreement of the parties or by a neutralentity (such as a Chamber of Commerce & Industry) or
�� three arbitrators, one appointed by each party and the third appointed by the twoarbitrators or a neutral entity, the majority of whom will determine the dispute, orfinally,
�� two arbitrators, one appointed from each party, and an umpire who will onlydetermine 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 whoshould 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 powersto draft pleadings (written submissions) and attend hearings.
Arbitrators should not take actions that exceed the limits of their powers under thearbitration 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 itincludes decisions that have been made beyond the powers of the arbitrators as theseare set out in the arbitration clause / agreement.
Arbitrators should not violate or overlook any of the Rules of Arbitration agreed toby the parties.
Paragraph 1(c) of Article 216 of the UAE Civil Procedure Code sets out the rather generalprovision that “if there is something invalid in the ruling or in the procedures affecting theruling” the arbitrator’s award may be nullified. In practice, this provision has allowed thedefendant to submit various arguments before the UAE Courts with regard to proceduraland 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. Timeextensions need to be in compliance with the agreed rules of arbitration and, if the disputeis subject to UAE Civil Procedural Law, with Article 210 of the UAE Civil Procedure Code,which states:C
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“ARTICLE – 210
(1) If the opposing parties do not specify a time for a ruling to be given in the arbitrationagreement, the arbitrator is to give his ruling within six months from the date of theinitial arbitration hearing, otherwise any of the opposing parties may raise the disputeto 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 prescribedby agreement or by law, and they may empower the arbitrator to extend it to aparticular date. At the request of the arbitrator or one of the opposing parties, theCourt may extend the date specified in the foregoing paragraph for such period as itdeems appropriate of a settlement of the dispute.
(3) The period shall be interrupted whenever the proceedings are interrupted orsuspended, and shall be resumed from the date on which the arbitrator becomesaware that the cause of the interruption or suspension has been eliminated. If theremaining 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 basisthat it has been issued out of time. It is therefore imperative that the claimant alwaysoversees this issue and ensures that if it becomes obvious that the arbitration award willnot be issued within the prescribed time limit, an agreement for extension is obtained assoon as possible.
(3) Validity of award – Defendant’s perspective
Defendants very rarely submit a defence statement that deals purely with the merits of thedispute. More often than not, the bulk of the defence submissions relates to proceduralaspects, time bars, validity of Powers of Attorney, validity of arbitration agreements,jurisdiction, etc. This type of preliminary defence is normally accompanied by a requestfor one or more interim awards. This has the inevitable effect of prolongation of thearbitration 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 anamount substantially lower than that demanded.
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In addition to the prolongation, the defendant’s objective is to identify any proceduralerrors committed by the arbitrators, which will subsequently give it sufficient ground torequest 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 beequivalent 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 clearlystated 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 thatprogresses through the process of the three tier local Court system. This is primarilyfuelled 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 thisis converted into a final judgement confirming validity of the original award. The result ofthis process, which can sometimes be lengthy, is that certainly one of the primarypurposes of arbitration – a swift dispute resolution process – is defeated by what is timewise, yet another trial between the same parties. Very rarely are arbitration awards issuedwithin the six months time limit. Invariably there will be extensions granted/agreed and itmay be more than a year before an arbitration award is issued. Thereafter, the litigationprocess of authentication of the award could result in an additional year’s delay before afinal judgement is issued. The overall time consumed is arguably equal to and sometimesgreater 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 bythe UAE Courts is quite legitimate because arbitrators that were more focused on thetechnical merits of the dispute rather than the form and due process of the arbitrationhave overlooked important aspects of mandatory UAE Law.
(5) Legal costs
One major advantage of the arbitration proceedings is that in most cases the successfulparty will be awarded a greater portion of its actual expenses and legal costs than it wouldC
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if it had resolved its dispute through litigation.However, the fact that higher costs are involvedin arbitration coupled by the inevitable legal andCourt fees of the subsequent litigation (forauthentication of the arbitration award) canmean that the ultimate cost exposure to thesuccessful party in an arbitration is substantiallygreater than in litigation.
(6) Conclusion
Whether arbitration can be a successful mode of dispute resolution is dependant upon aseries 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 publicpolicy. 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 preferredoption for dispute resolution. This would be a welcome development both from the UAECourts’ perspective, who would be alleviated from the increasing volume of commercialdisputes, the merits of which they would otherwise have to consider, and from theperspective of the UAE’s image as an important commercial and business centre in theGulf.
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Resolution ofdisputes byway of
arbitration requiresfamiliarisation, of allparties concerned,with often complexprocedural law, rulesand regulations ofarbitrating bodies,local as well as federalprovisions and issuesof public policy all ofwhich can differsubstantially invarious jurisdictions.We address belowsome of the mostcrucial junctures inconstruction disputesresolved by way ofarbitration in the UAE:
Nullification of an arbitral award resolving a construction dispute before the UAECourts at the request of the losing party.
It is possible to challenge and even nullify an arbitral award but only on specificprocedural 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 anarbitrator’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 lapsedthrough 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
Know now your basics:Critical UAE arbitration stages.
if given by some of them without being so empowered in the absence of theothers, or if given under deed of arbitration in which the subject of the dispute isnot stated, or if given by someone not competent to agree to arbitration or by anarbitrator 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 hisright thereto before the arbitrator’s ruling is issued.”
Ultimately, the award will take the form of a judgment and as such it is imperative toensure that it is as legally sound as possible so that its nullification by the UAE Courts isavoided and that throughout the arbitration procedure (in fact from the stage of draftingthe arbitration clause or arbitration agreement) attention is focused on the ultimate validityof the arbitration award.
Foreign Arbitration Clauses with Dubai Government Departments.
The position with regard to foreign arbitration clauses with Dubai Government bodies isset out in Law No.6 of 1997 (“ In respect of Contracts of Government Departments in theEmirate 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 ofits departments is a party to conduct the arbitration outside Dubai or to subjugate anydispute regarding arbitration or the procedures thereof to any laws or principles ratherthan those applicable in the Emirate of Dubai. Any stipulation in violation thereof shall bedeemed null and void.
Save as the foregoing and wherever the public interest may require, the Government orany of its departments, institutions, bodies or authorities may – under a written consentfrom the Ruler – be exempted from abiding by this provision.
This law is mandatory and will override any conditions in a contract with a DubaiGovernment Department that directly contravene its provisions. The mandatory nature ofthe Law is set out in Article 84 of Part 4 of Law No: 6 of 1997, which reads:
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“The Head of the Financial Department shall draft the written form of all the contractsstated herein together with the general conditions thereof in accordance with theprovisions hereof. All the departments shall abide by such form and conditions”.
In circumstances where various provisions of this law are not compulsory/mandatory andthe parties can contract out of them this is clearly stated. For example, Article 36 relatingto arbitration states that:
“Save as the foregoing and wherever the public interest may require, the Government orany of its departments, institutions, bodies or authorities may – under written consent fromthe Ruler – be excepted from abiding by this provision”.
The nature of this law is that it is applied universally by all Dubai departments and thatsuch departments do not have the option (save for specific provisions referred to in thelaw such as Article 36 referred to above) to waive any of the rights or liabilities that thislaw creates for the contracting parties.
It could be argued that the above provisions apply also to companies that are wholly UAEGovernment owned, though not government departments as such. In any event, a foreignarbitration clause, even if accepted and ratified by the Ruler’s Court, could present thewinning party with substantial enforcement problems. This is because the UAE has notyet acceded to the 1958 New York Convention for the reciprocal Enforcement of ArbitralAwards 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 disputesresolved through arbitration
The time limit for issuing an arbitral award is usually six months, but can often beextended up to another six months or more by mutual agreement. Any time extensionsneed to be agreed upon at an early stage. Time extensions need to be in compliance withthe 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 arbitrationagreement, the arbitrator is to give his ruling within six months from the date of theinitial arbitration hearing, otherwise any of the opposing parties may raise the disputeto the Court or may pursue it before the Court if already raised.C
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(2) The opposing parties may explicitly or implicitly agree to extend the date prescribedby agreement or by law, and they may empower the arbitrator to extend it to aparticular date. At the request of the arbitrator or one of the opposing parties, theCourt may extend the date specified in the foregoing paragraph for such period as itdeems appropriate of a settlement of the dispute.
(3) The period shall be interrupted whenever the proceedings are interrupted orsuspended, and shall be resumed from the date on which the arbitrator becomesaware that the cause of the interruption or suspension has been eliminated. If theremaining 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 itbecomes obvious that the arbitration award will not be issued within the prescribed timelimit, an agreement for extension is obtained as soon as possible.
Enforcement on losing party’s assets of an arbitral award resolving a constructiondispute
As in most jurisdictions, an award needs the authentication of the local courts for it to beequivalent 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 thenappealable within 30 days before the Court of Appeal. Thereafter, the Court of Appealjudgment can be appealed within 30 days before the Court of Cassation, the judgementof which is final. During the process of this authentication, the UAE Courts cannotconsider the merits of the arbitrator’s findings. This is clearly stated in paragraph 1 ofArticle 217 of the UAE Civil Procedure Code, which states that arbitrator’s rulings may notbe contested in any way. There have also been a number of Dubai and Abu Dhabi Courtof Cassation rulings confirming that appeals against the merits of arbitrator’s awards arenot permissible.
Legal costs and relevant expenses incurred in arbitration proceedings
Although legal costs are not generally recoverable by the successful party under UAELaw, in some cases, the successful party will be awarded a greater portion of its actualexpenses and legal costs than it would have done had it resolved its dispute throughlitigation. For example, Article 48 of the Dubai Chamber of Commerce & Industry Rulesfor Arbitration and Conciliation states that:
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“The costs of conciliation or arbitration shall include charges of the Chamber,remuneration and actual expenses of the conciliators or arbitrators, fees and expenses ofthe experts and the translators if any, normal expenses incurred by the parties inpreparation of their pleadings any administrative expenses relating to meeting-roomsrentals, typing, recording, photocopying and others incurred in the course of theconciliation or arbitration proceedings.”
In addition, it is possible for both parties, at the beginning of the arbitration, to agree onbearing their own legal costs or that these will be borne by the losing party. The highercosts that are generally involved in arbitration coupled by the inevitable legal and Courtfees of the subsequent litigation (for authentication of the arbitration award) can mean thatthe ultimate cost exposure to the successful party in arbitration may be substantiallygreater than in litigation.
Litigation of a dispute arising out of a construction contract containing anarbitration clause.
The claiming party may resort to litigation (i.e. file a case with the Court) even where thecontract contains an arbitration clause. However, the defendant may expressly refer tothe arbitration clause at the first Court hearing in accordance with Article (203/5) of theCPL. 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 firstCourt hearing, the Court will assume that the arbitration clause has been waived by bothparties and will continue with the resolution of the dispute through litigation. The plaintiffin such approach should bear in mind that it may lose the Court fees and advocacycharges if the defendant successfully raises the arbitration clause defence at the firsthearing.
An important considerationfor subcontractorsinvolved in a construction
project is the fulfilment ofpayment of the subcontractvalue by the main contractor andin many cases, ultimately, by theemployer/ owner. Ideally, whenthe works are completed boththe main contractor and anysubcontractors should be fullyremunerated for work dulycarried out and completed. Inaddition to the employer’sreluctance to pay for parts ofwork carried out there is also therisk of non-payment as a resultof the employer’s inability to pay.It is, therefore, important for themain contractor and thesubcontractor to agree the basison which the risk of theemployer’s inability orreluctance to pay is borne.
Very often the main contractor will prefer to let the subcontractor bear the burden of theemployer’s inability or reluctance to pay amounts ultimately due to the subcontractor. Themain contractor will often use “pay when paid” or “pay if paid” clauses in thesubcontracts (for example, “…the total subcontract price paid to the subcontractor shallbe …, no part of which will be paid until and unless such part has been received by theemployer…”).
In addition, Article 891 of the UAE Civil Law expressly precludes the subcontractor fromclaiming directly from the employer for any amounts that are properly claimed against themain contractor unless the main contractor has given to the subcontractor an assignmentof its rights against the employer.
Conditional payment clauses underconstruction contracts
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Furthermore, standard clauses are often included to reflect this. For example, Clause 4.3of the FIDIC Conditions of Subcontract for Works of Civil Engineering Construction,states:
“Nothing herein shall be construed as creating any privity of contract betweensubcontractor and the employer”
The above legal and contractual framework can place the subcontractor in substantialdifficulties if he has effectively waived his rights against the main contractor and also isbarred by UAE Law to claim directly against the employer.
Although UAE Courts have so far been sympathetic to subcontractors deprived of theirpayment by the main contractor, this to date has been in circumstances where there wasno “pay if paid” clause in the subcontract. It remains to be seen whether the position willchange when a dispute between the subcontractor and the main contractor arises and isbrought either to arbitration or litigation before the UAE Courts in a situation where a “payif paid” clause forms part of the subcontract. However, a “pay if paid” clause may beconsidered as contrary to public policy and to Article 891 of the UAE Civil Law and couldtherefore be rejected by the UAE Courts. If it is rejected, this would place an obligationupon the main contractor to effect all due payments to the subcontractor regardless ofwhether 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 amain contractor. However, the risk of not receiving any payment to pass to thesubcontractor under the subcontract (either due to reluctance or due to inability of theemployer to effect such payment) may be very real. It may, therefore, be preferable for themain contractor to simply follow the wording of Article 891 of the UAE Civil Code andinclude a clause in the subcontract giving the subcontractor an assignment of his rightsagainst the employer. In addition, any clauses that exclude any privity of contractbetween subcontractor and the employer should be deleted from the subcontract. Finallyfor maximum clarity of the true intentions of the parties a “pay if paid” clause should alsobe 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 theemployer and the subcontractor assumes the risk of non-payment by the employer due toany reason whatsoever.”
In practice, an assignment clause in the subcontract will very often be subject to theemployer’s approval, which could in many circumstances, understandably, not be given. C
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If the main contractor gives such assignment only after the event, i.e., after thesubcontract has been signed and at a stage when the works have been completed andpayment is outstanding, it is likely that the subcontractor may not actually wish to directhis claim against the employer. This can be particularly so if the employer is bankrupt orfaces financial difficulties or simply does not have any assets which would providesufficient security for the subcontractor’s claim. This, combined with the possibility of themain contractor providing the subcontractor with a more tangible and attractive target tolaunch his claim against, can mean that an assignment after the event will not assist themain contractor in discharging the burden of paying the subcontractor.
Provided the assignment clause is acceptable to the employer, such clause would be incompliance with UAE Law and would in all probability be upheld by arbitrators and UAECourts. This clause may serve the interests of the main contractor (who will be able toavoid liability for payment towards the subcontractor if the employer does not pay). Itcould also assist the subcontractor in circumstances where lodging a claim against theemployer may be a more attractive option than doing so against the main contractor (whomay have less assets or be unable to pay if payment has not been received by theemployer).
In conclusion, it is important for both the main contractor and the subcontractor to havea clear agreement well in advance of signing the subcontract on any issues that relate toliability for payment and risk for non-payment and to ensure that any such agreement isenforceable and recognisable under UAE Law.
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Contractors often fail to agree with the employer/engineer the pricing for
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:
All work and no pay?Can a contractor suspend works followingdelay in payment?
So is payment actually late?
Very often contractors believe that their additional payments are late in what theyperceive (often quite rightly) to be a straightforward case of “you want more you pay formore”. The contractor has followed the agreed procedures, made his applications forvariation orders, which were either rejected or not dealt with, and his requests forengineer’s decisions, which were also ignored. To the contractor’s mind there is a delayin payment and consequently a feeling of being justified to succumb to the temptation ofsimply 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 adelay 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 suspendworks can be founded.
Delay in payment is only recognised as such by UAE Law if it is alleged following theissuance of a payment certificate. Anything prior to a payment certificate being issueddoes 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 moresympathetic to the contractor. UAE Case Law has upheld the contractor’s right tosuspend work if payment is delayed following issuance of a payment certificate. Inaddition, 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 andto terminate under Sub-Clause 69.1, the contractor may, if the employer fails to pay thecontractor the amount due under any certificate of the engineer [emphasis added] within28 days after the expiry of the time stated in Sub-Clause 60.10 within which payment isto be made, subject to any deduction that the employer is entitled to make under thecontract, 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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If the contractor suspends work or reducesthe rate of work in accordance with theprovisions of this sub-Clause and therebysuffers delay or incurs costs the engineershall, after due consultation with theemployer and the contractor, determine:
(a) any extension of time to which thecontractor is entitled under Clause 44, and
(b) the amount of such costs, which shall beadded to the contract price, and shall notifythe contractor accordingly, with a copy tothe employer.”
The general position on the impact ofcommencing arbitration proceedings isreflected in Clause 67.3 of the FIDIC GeneralConditions to Civil Engineering Construction,
which states, amongst other issues, that:
“…Arbitration may be commenced prior to or after completion of the works, provided thatthe obligations of the employer, the engineer and the contractor shall not be altered byreason of the arbitration being conducted during the progress of the works.”
However, a default in payment following issuance of a payment certificate, goes so muchinto the heart and the purpose of a construction agreement that the above Clause 69.4 isa contractual exception - upheld by UAE Courts - to the general standpoint that neitherparty can default on its obligations pending resolution of any dispute arising in themeantime.
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 verymuch depend on the contractual terms agreed. The default position is that litigation isalways available unless the right to it has been expressly and unequivocally waived in thecontract by both parties with the inclusion of an arbitration clause duly stamped andsigned by the parties’ authorised signatories.C
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It must be noted that other dispute resolution methods such as conciliation or mediationare not expressly recognised in the UAE Civil Procedure Law. As such, any awards oropinions 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 arbitrationclause is in place, even for something that appears as straightforward as a debt collectionfrom the defaulting employer. In that scenario, the only stage that can be skipped is thatof a request for an engineer’s decision and of settlement negotiations and this isconfirmed in standard contractual clauses. Clause 67.4 of the FIDIC General Conditionsto 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 tocommence arbitration of a dispute within the period stated in Sub-Clause 67.1 and therelated decision has become final and binding, either party may, if the other party failsto 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 ofSub-Clauses 67.1 [i.e. engineer’s decision] and 67.2 [i.e. amicable settlement] shall notapply to any such reference.”
So does one only have to look at thecontractual clauses to see what rights eachparty has? Doesn’t the law play any role?The rule of thumb to bear in mind is thatcontractual clauses that refer to a proceduremutually agreed between the parties withregard to dispute resolution are generallyupheld by UAE Courts. It is in relation toclauses that go into the merits of liabilities(and especially exclusion or limitationthereof), and the rights or obligations of theparties with regard to defects, delays etc thatone needs to be aware of mandatory UAELaw provisions overriding any conflictingcontractual clause.
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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 beendeprived of his dues:
“Article 879
(1) If the work of the contractor produces (a beneficial) effect on the property inquestion, he may retain it until the consideration due is paid, and if it is lost in his handsprior to payment of the consideration, he shall not be liable to the loss, nor shall he beentitled to the consideration.”
This is a form of a lien that the contractor may exercise on the property, althoughphysically doing so may involve additional labour costs and defeat the purpose it ismeant to serve. Furthermore, the drastic measures that an employer may take toremove a contractor from the site (ex parte Court orders for example) may far exceedin their effectiveness any lien that the contractor may apply pursuant to Article 879. Itis also difficult to determine exactly what is meant by “beneficial effect” especially inlight 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 theright to retain it pending payment of the consideration, and if he does so and theproperty 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 besuperfluous. 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 theemployer to pay the contractor. In this case, the contractor would seek to attach anyasset belonging to the employer and it is this right that the above provision wouldseek to secure.
In short, it is important to differentiate between an employer’s delay in agreeing thatpayment is due and a delay in honouring a payment certificate. In either of the twoscenarios it is also crucial to respect the dispute resolution methods agreed and beaware of which means of securing a contractor’s claim are advisable to exercise andunder which conditions.C
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An architect’sobligation to insurefor designing errors,
and provide satisfactoryevidence of having done so,is invariably imposed byemployers in UAE contractsfor architectural orconsultancy services. As a result, compulsoryinsurance provisions havebecome an inseparable partof UAE contracts within thedesigning industry, as thequantum of losses, claimsand arbitration awardsincreases.
Under UAE Law, there are nospecific legal requirements for an architect to insure for all of its liabilities that may flowfrom designing and consultancy related errors or omissions. Neither the generalprovisions of the UAE Civil Law nor the more specific and stringent provisions of LawNo.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 willprovide “peace of mind” but taking out insurance is an additional cost exposure for thearchitect. Knowing what type of optional insurance to take presupposes knowledge of theexposure to local legal liability and of the potential quantum involved. Some of the morecommon 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
INSURING A DESIGN ANDDESIGNING AN INSURANCE
The pros and cons of providing adequate cover for anarchitect’s contractual liabilities
the most important ones to bear in mind when determining the level of professionalinsurance to be taken out are the following:
�� Liability for defects affecting the safety or stability of a building is joint for thedesigner/architect and the contractor.
�� If the designer’s/architect’s work does not include supervision of execution of theworks, its liability will be contained only to any purely designing errors (alwaysaffecting 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 insurancecovering legal liability for negligence in design. However, the precise level of anarchitect’s designing liability is not always obvious. If “fit for purpose” designing liabilityis involved, insuring for it can be very expensive. Input from insurance brokers is highlyadvisable 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 expensesby the successful party (i.e., loser does not pay winner’s cost), it is essential to considertaking out legal expenses insurance. Architects should consider taking out insurance tocover legal expenses incurred in defending a designing errors liability action. Having saidthis, insurers that issue policies for legal expenses may decline cover for defending orpursuing an action that does not have reasonable prospects of success and they mayseek to determine this first before cover is provided. If legal expenses insurance has notbeen placed, it may be possible (and in some jurisdiction compulsory for lawyers toadvise their client) to obtain “after the event” insurance. This type of insurance is availableto protect an insured from the downside of specific known litigation by covering their legalcosts (and certain disbursements) in the event that the action is lost. In certain cases, thepotential liability can also be insured. If the insured wins the case, or a settlement isreached 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 bemade by the insurer who will obtain independent or in house legal advice and thendetermine the insurance premium payable. However, under UAE Law recovery of suchpremium by the successful litigant is unlikely. C
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3. Environmental liability insurance
UAE Federal law No.24/99 for the Protection and Development of the environment, posessubstantial penalties for “the natural or non natural contamination of the environmentresulting from introduction of pollutants directly or indirectly, deliberately or nondeliberately by man to the natural elements of the environment which may jeopardise thehealth of humans, plants or animals, or harm the resources and ecological systems.”
Environmental insurance can pose a substantial cost exposure to the architect becausevarious assessments are usually carried out at the architect’s expense, to determine thelevel of the risk and the type of likely pollution, throughout the course of the works. Evenso, in view of the strict liability provisions set out in UAE Law, it is important to at leastassess whether an environmental risk is likely and to what extent. A third party liabilitypolicy may provide cover for one incident of pollution but an additional policy may berequired if gradual pollution liability, inclusive of clean up costs, needs to be insured for.
4. Insurance for healthand safety liability
As indicated, liability fordesigning defects affecting thesafety of a structure is set outin UAE Civil Law. It isimportant to be aware of thecurrent health and safetyregulations and relevantlegislation to determine anyinsurance cover. For example,the Dubai Municipality hasrecently issued strict rules withwhich construction companiesneed to comply relating tosafety and applicable to allprivate, local and federalestablishments as well as freezones. To this extent thedesigning architect also acts
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as supervising engineer ensuring that safety measures are correctly implemented. Takingout 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 fundamentalare the following:
�� The obligation of the insured to declare at the time the insurance policy is drawn, allinformation, knowledge of which is of concern to the insurer for estimation of the riskassumed. This is in line with the internationally adopted principle of an insurancecontract being one of utmost good faith.
�� The three-year time bar for claims arising out of an insurance policy from theoccurrence of the incident out of which the claim arose.
�� An arbitration clause built into an insurance policy will be invalid. For an arbitrationclause 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 ofinsurance. Although not specifically set out in the general provisions of the insurancesection of the UAE Civil Law, policies invariably do not allow recovery of the same insuredloss more than once. The insurers will seek to only contribute their proportion of theinsured loss. This can lead to disputes and loss of time. It is therefore essential forarchitects wishing to insure their potential liabilities that no duplication exists in policiestaken out. This will also ensure that the cost exposure to insurance premium is kept to aminimum.
Although taking out the right type of insurance is an additional administrative burden forarchitects, it can at the same time prove to be a valuable risk management tool forpotential losses.
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Invariably a construction contract will include a clause entitled “liquidateddamages”, wherein the employer reserves the right to deduct a specified amountfor 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, liesa preconception that once a delay entirely attributable to the contractor has takenplace, this amount can be automatically deducted by the employer – no questionsasked. 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 andemployer exists that a determinable but not accurately quantifiable loss will be incurredby 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 beenincurred or not.
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So what have you lost?
Can an employer deduct and keep liquidated damages if acontractor is in delay?
UAE jurisprudence has taken a stricter stance on whether and how liquidated damagescan be imposed by an employer, by adopting the view that the loss incurred by theemployer cannot be less than the amount deducted by way of liquidated damages.
Consequently whether worded as a penalty or a liquidated damages clause, any provisionsetting out an employer’s right to deduct amounts that would otherwise be due to thecontractor, 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 liquidateddamages clause and deducting the amount stipulated in the contract for every day thecontractor is in delay. Following this, the contractor will try to claim back his money byfollowing a contractually agreed procedure, usually through applications to the consultingengineer, 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 theamounts stipulated in the liquidated damages clause because no proportionate loss wasincurred.
It is normal practice for any allegation made by a party to an arbitration or litigation, tocarry with it the burden of substantiating the veracity of such allegation. In essence, thecontractor would have to prove that the employer has either suffered no losses at all orhas suffered losses substantially lower than the amounts deducted under the liquidateddamages clause.
Loss proved
Whether the contactor is the one that has to prove absence of loss or whether it is theemployer who has to substantiate his loss, the fact remains that a liquidated damagesclause does not equate to an automatic right for the employer to deduct and keep anyamounts without proving at some later stage, at least in general terms, that theseamounts did not equate to undue enrichment nor to a penalisation of the contractor indelay, but to an actual loss incurred by him and which was the sort of loss both partiesenvisaged would be incurred by the employer in the event of a delay.
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Assuming a loss can be substantiated; is a liquidated damages clause without anoverall limit enforceable?
Usually, no. The common practice in construction is to “cap” the overall limit of liabilityfor delay and the total amount to be deducted by way of liquidated damages, to 10% ofthe contract price.
However, it is possible to depart from that practice if the employer can substantiatelosses that were occasioned in circumstances where the employer feels that thecontractor has caused him to suffer losses far exceeding the usual 10% of the contractprice.
As previously reported, a UAE Law provision gives discretion to the judge for him toeffectively depart from any limit of overall liability that was either agreed between theparties 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 theintentions of the parties and will not interfere with freely negotiated contractual limits ofliability. However, the position may be different if no specific “cap” has been agreed andthe employer capitalises on this to depart from the general practice and submit evidenceshowing 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 indefinitelybut took active steps to minimise its quantum.
So can the contractor always hope that liquidated damages imposed upon him wouldeventually be recovered?
Not necessarily. Whilst the employer would have to substantiate his losses, if loss of profitor consequential losses have not been expressly ruled out in the contract, the door isopen 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 orarbitrator to conclude that at least a part of this loss has been actually incurred andtherefore uphold the validity of deducting liquidated damages.
In conclusion
Proving that the contractor was in delay through reasons entirely attributable to him isonly half the battle for the employer to successfully invoke a liquidated damages clauseand 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 contractuallyagreed 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 resolutionauthority that decides on the merits of a claim, to include in the liquidated damagesclause, as clear an indication as possible as to what the intentions of the parties were andwhat instances of potential liability they had in mind at the time of signing the contractand agreeing the liquidated damages quantum.
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The purpose of this article is to examine the way with which various statutoryand contractual time bars interact at different stages of a constructioncontract 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 generaltime bar for disputes arising out of construction contracts is found in Article 95 of the UAECommercial Transactions Law, which states that:
“When denied, andwithout lawful excuse,actions relating to theobligations of traders toeach other and inconnection with theircommercial businessshall not be heard uponthe expiration of tenyears from the due datefor fulfilment of theobligation, unless the lawprovides for a lesserperiod.”
This provision is applicable to construction contracts by virtue of the fact that both partiesto a construction contract (employer and contractor or main contractor andsubcontractor) 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 notbe confused with the decennial liability set out in Article 880 of the UAE Civil Law (referredto below).
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Construction Time Bars UnderUAE 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 fixedinstallations, the plans for which are made by an architect, to be carried out by thecontractor under his supervision, they shall both be jointly liable for a period of ten yearsto make compensation to the employer for any total or partial collapse of the building theyhave constructed or installation they have erected, and for any defect which threatens thestability or safety of the building, unless the contract specifies a longer period. The aboveshall apply unless the contracting parties intend that such installations should remain inplace for a period of less than ten years.
(2) The said obligation to make compensation shall remain notwithstanding that thedefect or collapse arises out of a defect in the land itself or that the employer consentedto 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 affectingstability or safety. The decennial liability period will not effect minor defects the liabilityperiod 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 specificstatutory 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 itappears during the course of the work that it is necessary for the execution of the planagreed substantially to exceed the quantities on the itemised list, the contractor mustimmediately notify the employer thereof, setting out the increased price expected, and ifhe does not do so he shall lose his right to recover the excess cost over and above thevalue of the itemised list.”C
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This article is relevant to increases in Bills of Quantities which must be notified by thecontractor to the employer immediately or as soon as practically possible after theirquantification.
(d) Article 883 of the Civil Law states that –
“ No claim for compensation shall be heard after the expiration of three years fromthe collapse or the discovery of the defect.”
This article sets out a three year time limit for the employer to start the contractuallyagreed mode of dispute resolution (i.e. commence arbitration proceedings or file anaction before the UAE Courts) from the date a defect was discovered or should have beendiscovered) on a building / structure etc. This three-year time limit may, in practice, resultin the decennial period mentioned in Article 880 of the Civil Law to be overrun if theemployer discovers the defect less than three years before the expiry of the decennialliability period.
2. Contractual Time Bars for commencing Arbitration Proceedings
In many construction contracts and all FIDIC contracts there are various contractual timeprovisions for notifying disputes arising between the parties to the engineer leading up toNotice to Refer Matters in dispute to arbitration. The enforceability and relevance of thosetime bars set out in various contractual clauses will depend upon the intention of theparties:
Intention is to time bar
If the intention is to time bar the right to arbitrate then the effect of a breach of that timebar 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 besubject 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 ifcomplying with such time line is not a precondition to the right to arbitrate then such rightmay still not be lost for the parties. In such circumstances, the matter may still be resolved
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by way of arbitration. The burden proof on whether the intention of the parties is to timebar the right to arbitrate or simply to provide a timeline of the right to arbitrate is a matterthat lies with the party seeking to resort to arbitration. In this respect, a recent Dubai Courtjudgment highlighted three important issues.
� All the contractually agreed time bars and procedures in a construction contract, thatactivate the right to commence arbitration, are generally upheld by UAE Courts incircumstances where the parties intended to time bar the right to arbitrate. Theparties should therefore ensure that such time bars and procedures are very closelymonitored and observed.
� If a dispute arises, the party wishing to rely on arbitration clause needs to follow thecontractually agreed procedure even if that party is a defendant. Failing this, thatparty would not be entitled to either rely on the arbitration clause or avoid litigationbefore the Courts.
� If the right to resort to arbitration has been lost due to failure by either of both partiesto abide by the contractually agreed procedure, the right to resolve the disputethrough 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 UAECourts although there is no specific time bar for that purpose. There are further time barsrelating to the appeals that either party may file before the UAE Courts between the Courtof First Instance and Court of Appeal level (30 days from the date of service of the Courtof First Instance judgment) and the Court of Appeal to Court Cassation level (30 days fromthe date of service of the Court of Appeal judgment).
Being aware of the UAE statutory and contractual time bar provisions will affect theparties’ ability to pursue their claims through the dispute resolution mode chosen andcompliance with them is critical from the early stages of referral of a dispute to theengineer until the final stages of commencing arbitration/litigation or enforcing anarbitration award.
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Two scenarios are amongstthe most frustrating onesin construction practice for
contractors:
�� The failure to agree with theemployer/engineer the pricingfor additional works orvariations.
�� The failure to obtaincertificates of payment eitheron time or at all.
In the first scenario, does thecontractor have the right torefuse doing the additional workor should he proceed with thework and claim later?
In the second, can the contractorterminate the contract and leavethe site or does he have tocontinue with the workregardless of non payment andin any event?
Termination under the Law
Article 892 of the UAE Civil Law sets out three possible termination options for the partiesto a construction contract:
“A contract of muqawala shall terminate upon the completion of the work agreedor upon the cancellation of the contract by consent, or by order of the Court.”
TO SUSPEND WORKS OR NOTTO SUSPEND WORKS?The contractor’s perenial dilemma
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Completion of the works may at first glance seem a comfortable option. However, inpractice, completion is evidenced by a taking over certificate, which the engineer willsimply not issue if the employer is not satisfied with the works or requires additionalvariations over and above the work contracted for.
Consent of both parties is a seemingly less problematic option. Obviously if both theemployer and the contractor are in agreement on termination of the works, the positiondoes not become litigious or acrimonious. However, this option is in practice no differentfrom the first one, in that the contractor is again dependant upon the employer agreeingon the issuance of a taking over certificate and thus formalising the end of the workscarried out by the contractor thus far.
Obtaining a Court order is the third option available to the contractor. The objective of thisoption would be for the contractor to be legally allowed to cease the works. The reasonsthat 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 theconstruction contract by the employer. This option is rarely used in practice. This isprimarily because of the following reasons:
� There is substantial onus on the contractor to prove that the employer is in breach ofthe construction contract.
� The Court will have to consider the documentation submitted as well as anyarguments raised by the employer and develop the whole matter into a full trial beforeany order is issued.
� In the meantime, the contractor would have to continue with the works and only relyon the final Court order which, if it allowed for the termination of the contract, shouldalso include any compensation he is entitled to for continuing the works.
� In certain circumstances the law provides for no additional compensation if thevariations 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 contractswith the Government Departments in the Emirate of Dubai.
Obtaining a Court order is a relatively easier process for the employer (although still verytime consuming and potentially costly), should it require the contractor to be removed
from the site: an application to the Court through an authorised local advocate togetherwith a bank guarantee for the value of the works should normally ensure the issuance ofthe order, although matters may be further perplexed if the contract provides for anarbitration clause as this may lead the UAE Courts to decide that a decision on whetherthe 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 Courtto determine the amount that would be required by way of bank guarantee to cover thepotential loss of the opposing employer. The Court is therefore more likely to look into themerits of the contractor’s reasons for termination before it issues an order. This inpractice means that a full trial will take place during which the contractor will have tocontinue with the works.
The right to terminate through a Court order seems, therefore, to be a real option for theemployer but an academic one for the contractor.
Contractual provisions
In practice, most construction contracts include a provision for the contractor to carry outany additional works in the form of variations as these may be decided by theemployer/engineer. As such, in addition to the legal obligations set out by mandatoryprovisions of the UAE Civil Code, the contractor is also obliged contractually to carry outadditional work, comply with a very strict procedure for claims for additional time oradditional payment and then, either hope that its claims will be approved by thesupervising engineer, or rely on a formal dispute resolution process (usually arbitration orlitigation and sometimes conciliation) to recover its dues.
In the meantime, the contractor will have no practical option but to finance any operationsrequired 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 EnglishLaw the most recent Construction Act sets out that the contractor’s right to suspenddepends on:
�� a sum of money falling due under the contract
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�� 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 noticeto 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 prohibitwithholding of payment unless the paying party gives notice of the amounts to bewithheld and the grounds for doing so.
In short, the position internationally and in the UAE seems to be that if there is any burdenon the employer, it is one that is relatively easy to discharge: it will always be feasible forthe employer to state the reasons (whether they are justified or not) for withholdingpayment and, by doing so, it would have complied with mandatory law and possiblycontractual provisions.
Conversely, the onus on the contractor is substantial, and the requirements with which itneeds to comply are numerous and complex. In the UAE, the right to suspend works isnot recognised and the right to terminate is conditional upon a Court order being issuedthe difficulties of which are set out above.
Appreciating and limiting the pitfalls relating to variations and additional works in aconstruction contract is crucial for the contractor. Accepting highly onerous terms oroverlooking provisions that seek to compel completion of extra works in any event, canhave serious financial implications for the contractor that could eliminate its profit marginand expose it to additional costs at the employer’s benefit.
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How can acontractormaximise its
chances of success in adelay and disruptionclaim? How can it ensurethat by commencing theenormous task ofpreparing and submittinga complex claim in a UAECourt litigation orarbitration, it is notactually throwing goodmoney after bad?
Below we examine thefactors that need to beaddressed before adisruption claim is filed,and how these are dealtwith under UAE Law.
A. CONTRACT MANAGEMENT
1. Applying effective contractual procedures
The effectiveness of contract administration systems is crucial for both the employer andthe contractor. The first step is to engage into a contract with clear and comprehensiveterms but thereafter, it is compliance with the contractual provisions and regularmanagement of documentation that will secure a watertight claim submission. Efficient
PREPARING EARLY FOR WORKSTHAT MAY BE LATE:Effective documentarymanagement for UAE delay anddisruption claims
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 failingimplementation of specific actions after the passage of a certain time limit, those timelimits are strictly complied with;
3. The delaying effect, if any, of every variation order is assessed and communicatedpromptly through contractually agreed mechanisms; and that
4. The parties seek as soon as possible to agree on such assessment, failing which, theagreed 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 majorvariations demand a dedicated claims processing team working contemporaneously withother departments of the contracting company. In practice, not many contractors canallocate the necessary resources to achieve this in parallel with normal work progress.
UAE Law stipulates that variations should generally be proportionate to the initialspecifications 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, theexisting agreement with the contractor must be observed in connection with suchvariation or addition”.
In circumstances where variations depart considerably from the initial specifications thedelaying impact on the completion date will be substantial. UAE Law recognises the needto remunerate the contractor for additional work carried out but the relevant provision insupport of this is vague and does not stipulate a precise measure for determining thevalue 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 beentitled to fair remuneration, together with the value of the materials he has provided asrequired by the work”.C
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The burden of proving what is “fair remuneration” is squarely placed on the contractorwho would need to substantiate any alleged delaying impact of a variation order on thecontract price. Contractors are expected to produce and continuously update a criticalpath analysis. The more complete the technical support available and the morespecialised the contractor’s personnel is, the more accurate the information supporting aclaim will be.
Having said this, it may still not be possible for the contractor at any given point in timeto always be able to calculate with precision the disruption or delay aspect of a variationorder. In that case, the contractor may defer the calculation until such point in time as theposition becomes clearer and more easily quantifiable. In doing so, the contractor mustensure that it reserves its position in a legally effective way so that it is not barred fromsubsequently producing evidence that was not readily quantifiable at an earlier point intime.
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 producesubstantiating evidence in support of its decision to do so. To achieve this, the employerwould also need to have implemented equally effective claims handling resources so thatit 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 supportit. 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 thedispute,
� Cost analysis for hiring equipment, plant etc.
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Monitoring from an early stage, the contemporaneous documentary back-up of a claim isjust as crucial to its success under UAE Law as in any other jurisdiction and mayultimately determine whether such claim can be resolved before or after work completion.Communications to the employer notifying expected delays and attaching a detailedbreakdown of anticipated costs will be far more convincing evidence thancommunications made in defence only after the contractor has incurred damages or isconfronted with a claim for liquidated damages for delay in completion. On someoccasions, such as notifications for an anticipated increase in bills of quantities, UAE Lawdemands swift action on the part of the contractor. Article 886(1) of the UAE Civil Lawstates:
“If a contract is made under an itemised list on the basis of unit prices and it appearsduring the course of the work that it is necessary for the execution of the plan agreedsubstantially to exceed the quantities on the itemised list, the contractor mustimmediately notify the employer thereof, setting out the increased price expected, and ifhe does not do so he shall lose his right to recover the excess cost over and above thevalue of the itemised list”.
The accuracy and completeness of any data in support of a delay and disruption claim isalso dependent upon the contractor’s quality control system. The higher the level ofquality control the more objective and reliable the data submitted will be thus increasingthe chances of compliance with UAE Law provisions and of the dispute being efficientlyresolved before works are completed.
Very often, instructions on site on aspects that could affect a critical path are givenverbally. Even if such instructions are given in writing, they are invariably generated by anunauthorised party. A panel of arbitrators or a UAE Court appointed expert may rejectsuch communications filed as evidence in support of submitting or contesting a claim.
Conversely, correspondence generated by representatives of the employer, the engineeror the contractor, may have major legal or contractual implications at a later stage. It istherefore important to review from a legal and contractual perspective, potentiallycontroversial correspondence (alleging delays, attributing fault to factors that have not yetbeen 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 andtechnical resources but is an investment worth considering in view of the fact that it canresult in an educated evaluation of the claims submitted and, potentially, in their earliersettlement.C
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