‘Construction Law & Practice

6/2/2014

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UAE Galadari Advocates & Legal Consultants Charles Ingmire 1. Construction industry overview for the jurisdiction 1 .1 Comment on the size and importance of the construction industry (eg what is its size in relation to the GDP of the jurisdiction? How many people does the industry employ? Is the industry profitable?). The United Arab Emirates (UAE), formed in 1971, consists of seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain. The best known and the most developed are Abu Dhabi (the capital) and Dubai, and those two Emirates will be the primary focus of this chapter. To market itself the UAE has created, with great flair, some of the most iconic real estate projects and Dubai is home to five of the six tallest hotels in the world including the Burj Al Arab, in the shape of a boat sail; the man-made peninsular The Palm Jumeirah; and the recently completed Burj Khalifa, the tallest building in the world at 829 metres. It was said that in 2008, almost a quarter of the world’s cranes were to be found in Dubai alone. True or not, this anecdotal claim was illustrative of the lightning metamorphosis of Dubai. The capital, Abu Dhabi, and Sharjah have also developed but to a lesser degree in the last decade. At its height, Dubai attracted an estimated 35 per cent of the projects, 14 per cent of capital investment and 25 per cent of the jobs created in the Middle East North Africa (MENA) region, and contributed to an estimated 20 per cent of a growth in GDP of nearly 8 per cent in 2008 [Dubai Department of Economic Development figures]. This growth therefore represented a local ‘spike’, which is hard to contextualise against a background of global boom and recession. The UAE government reported that GDP shrank by around 2.1 per cent (the IMF put this figure at 3.2 per cent) to 914.3 billion dirhams in 2009, with construction accounting for 10.7 per cent of this figure. Construction reportedly contributed 8 per cent to the country’s GDP even in 2009, possibly through infrastructure investment such as the Dubai Metro, the Burj Khalifa, the Al Maktoum International Airport, and new road and bridge projects as contributors to economic growth. [UAE Economic Report 2009]. In terms of UAE employment, the construction industry accounted for an estimated 48 per cent of all workers in 2008, nearly two million workers, which was approximately double the figure for 2006. [UAE Yearbook 2010]. In terms of its ‘importance’, the vast majority of these workers were expatriates, so the suspension of many of the construction projects did not have an impact on unemployment figures in the same way that it would with a domestic workforce: the

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) unemployed had to quickly acquire alternative sponsored employment or leave the UAE. For the corporate survivors of the recession, the industry appears to remain profitable, albeit at a reduced level. One of the largest listed construction companies in the UAE [Arabtec] recorded a profit of 958 million dirhams in 2008 and 307 million dirhams in 2010. Smaller companies with a lesser international reach are likely to have been more adversely affected.

1.2 Is it a local domestic industry? Does it have international reach? Do overseas contractors and professional consultants operate in the jurisdiction? The majority of construction companies operating in the UAE are domestic. Tenders are predominantly won by local contractors, and the international element is typically made up by foreign sub-contractors and consultants, usually operating from branch offices and with a local sponsor. The Burj Khalifa is perhaps the best-known example of international collaboration in the UAE between developer EMAAR (UAE), and a main-contractor joint venture between companies from the UAE, South Korea and a Belgium-UAE company. The international reach of the UAE's construction industry is largely within other GCC countries. 1.3 What are the challenges to/difficulties experienced by construction clients seeking to undertake works in the jurisdiction? The first challenge for a foreign construction company or consultant is to find a suitable local partner (sponsor). Federal Law No. 8 of 1984 Concerning Commercial Companies states that every company incorporated in the UAE must have one or more national partners whose share must not be less than 51 per cent of the company capital (Article 22). The financial effect of this is modified by Article 19, which states that ’If the Memorandum of Association does not specify a certain percentage of profit or loss for a partner, his share thereof will be proportional to his share of capital’ and Article 227 which provides for profit and loss to be equally divided ‘amongst the shares, unless it is otherwise stipulated in the Memorandum.’The alternative is to set up in one of a number of ‘Free Zones’ and to pay an annual licence fee, this is only an option for companies whose work or project is also in the Free Zone. All limited liability companies (LLCs) are regulated by Department of Economic Development (DED) and the local municipality. The DED’s primary role is to regulate companies incorporated under the Commercial Companies Law, keep commercial registers, grant annual trade licences, and issue letters of ‘no objection’ for any proposed new project or activity which affects the planning, construction and development of the emirate. From a construction and engineering standpoint, the most immediate challenge is the weather. UAE cities are almost invariably coastal, and allowance must be made for building in an aggressive coastal environment with a high water table. Temperatures can also reach 50 degrees Celsius, so allowance must be made in programming, and for measures such as overnight working. Concreting, for instance, which is highly time and temperature reliant (ice is understood to have been added to the mix for the Burj Khalifa), may have to be carried out at times that conflict with noise restrictions. Labourers are expatriates. To employ an expatriate employee, an application must be approved by the Ministry of Labour prior to his entry into the UAE. The construction workforce is largely unskilled with a number of languages spoken.

1.4 What are the current trends in the industry? Dubai, in particular, came under a critical spotlight as a result of its highly visible economic problems and the shelving of some major projects such as the Dubai World archipelago. Delay claims and non-payment claims have become the norm and, no doubt will result in increased caution at all levels of the procurement chain for domestic projects. The larger contractors are seeking contracts in regions less affected economically or by social unrest, such as The Kingdom of Saudi Arabia and Qatar. Until the social upheaval in countries which were directly subject to the so-called ‘Arab Spring’ in 2011 dies down, there may be a refocusing on development in MENA region countries perceived by investors to be stable. The UAE must rank highly amongst these. The market will doubtless be of a less international flavour in the short to medium term. A number of consultants have left the UAE with unpaid invoices. We will doubtless see something of a sea change towards more strategic foreign investment and thoughtful

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) inward investment in the future. There has been increased interest from Chinese investors across the MENA region. Although, of course, it is open to the parties to vary and renegotiate any element of their contracts, the tendency is for contractors to seek to enforce their full contractual entitlement which cannot easily be met by cash-strapped developers; conversely, rather than seeking to renegotiate the contract, developers have been known to sustain the development by engaging a replacement contractor, who may also not be paid. Although developers may feel that they have political support in doing so because of the municipality’s drive to complete so-called unfinished ‘ghost buildings’, experience shows that the courts are standing their ground against such practices. Environmental research being undertaken in the UAE may one day perhaps make it an exporter of environmental construction techniques. The Masdar City project in Abu Dhabi is focused on utilising and developing renewable energy sources and academic institutions elsewhere are carrying out research. The Heriot-Watt University in Dubai, for example, is researching the traditional, simple yet effective Persian wind tower (barjeel) building cooling designs to establish whether they are of viable commercial application in modern buildings. 1.5 What competition laws affect the industry? How are they enforced and is regulation effective? There is limited competition law regulation in the UAE. It is principally found in the Consumer Protection Law No. 24 of 2006 and implementing Regulations. A Federal Competition Bill is currently being drafted by the Department of Legal Affairs, Ministry of Economy. The provisions require, as a necessary element of a ‘monopoly’ or ‘price fixing’, that the prohibited acts constitute ‘damage to the national economy’. The Commercial Code also contains provisions on unlawful competition at Articles 64-70. Article 66 states that a ‘trader shall not be allowed to resort to methods of fraud or deceit in the sale of his goods’. This would be of application to the sale of construction materials. 1.6 Does bribery, the making of ‘facilitation payments’ or other corruption exist in the industry? What bribery/anti-corruption laws apply to the jurisdiction? How are those laws policed? Is this effective? Arguably, the necessity for company ‘sponsorship’ by a UAE national amounts to a form of facilitation. The sponsor, who receives a percentage of the company’s profit, is often from a well-connected family who is able to make business introductions, give the sponsored company a leg-up in the procurement of business and solve administrative headaches. This is not a criminal activity but akin perhaps in other jurisdictions to engaging a former politician on the board of directors. In any event, it plays a large part in enabling a foreign company to more effectively do business. There is specific legislation to combat corruption. Articles 234-239 of the Federal Penal Code Federal Law No. 3 of 1987 make acceptance of a bribe by a public official a criminal offence, the offeror or facilitator can also face a penalty. UAE Federal Law No. 4 of 2002 on money laundering criminalises bribery, embezzlement, fraud, breach of trust and related offences. The UAE Federal Civil Service Law prohibits civil servants from performing acts for other persons, either with or without payment, except with the permission of the relevant minister. Further, civil servants may not have interests in businesses or contracts related to the work of their ministry, and may not combine their office with any other offices, although they may serve on the boards of charities or companies with state shareholding. If a company wishes to provide gifts or hospitality to UAE public officials, then certain criteria must be met. The UAE is a member of the IMF, and has ratified the United Nations Convention against Corruption 2003 (UNCAC Treaty) by Federal Decree No. 8 of 2006. In addition to the public sector, the Treaty requires the UAE to take measures ‘to prevent corruption involving the private sector, enhance accounting and auditing standards in the private sector and, where appropriate, provide effective, proportionate and dissuasive civil, administrative or criminal penalties for failure to comply with such measures’. (Article 12) It is also of note that the new UK Bribery Act 2010, which will come into force later in 2011, has overseas reach for UK citizens and companies. Local custom or practice is no defence. The year 2008 saw a number of UAE industry and finance giants embroiled in high-profile corruption and bribery cases and investigations. The Dubai government launched a crackdown, with the aim of implementing a zero-tolerance policy towards corruption in public and private real estate and financial firms. However, no specific data is currently available by which to measure the effectiveness of the policing of the legislation.

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) 2. Legal overview for the jurisdiction 2.1 Is the jurisdiction a ‘common law’ jurisdiction or is the law codified? The jurisdiction is one of codified law. The Law of Civil Transactions of the State of the United Arab Emirates, known as the Civil Code, was brought into force pursuant to Federal Law No. 5 of 1985 on 29 March 1986. Abu Dhabi is the seat of the Supreme Council, which is the highest legislative authority. It approves federal law drafted by the Council of Ministers and the National Assembly. These bodies, together with the Judiciary of the Union, were established by Article 45 of the Constitution, which became permanent in 1996. The primary sources of law are federal laws and decrees, which are applicable throughout the UAE, and local decrees and orders applicable at emirate level and Sharia (Islamic) law. A secondary source of law is trade custom and practice, which is incorporated into the law by Civil Code Article 46(1) and has governing force as long as it is long standing and has not fallen into disuse. The Law of Commercial Transactions, known as the Commercial Code, was brought into force pursuant to Federal Law No. 18 of 1993. There are federal laws to regulate other areas (maritime affairs, intellectual property, etc) but it is primarily the Civil Code that deals with questions of contract law. 2.2 Are there any specific construction laws or codes relating to the standards of design and work? There is currently no federal or, indeed, emirate-level construction law, and no federal construction code. The primary source of law pertinent to construction operations is found in the Civil Code at Articles 872-896. These articles relate to Muqawala contracts, interpreted as the making of things, or carrying out of work or a task. These articles, therefore, govern the formation and operation of construction contracts and issues such as termination of contract and limitation of liability. The Muqawala articles do not govern standards of design and work qualitatively but perhaps obliquely, by rendering a contractor or consultant liable in certain circumstances. Historically, as long as constructing parties conformed to published and accepted international standards, the authorities were satisfied. This approach is changing. Federal Law No. 24 of 1999 for the protection and development of the environment (Environment Law) contains pertinent legislation for instance in relation to pollution. Abu Dhabi At an emirate level, Abu Dhabi is pursuing a green building and sustainable infrastructure policy, and has chosen to adopt codes published by the International Code Council. The new Abu Dhabi Code will be comprised of eight of the International Building Codes, including, amongst others, codes for building, fire, energy conservation, plumbing and mechanical works. Abu Dhabi launched a sustainability initiative in April 2010 called the Estidama programme, with a green building rating system called the Pearl Rating System. The pearl benchmarks range from 1 to 5, with pearl 5 being the highest standard achievable only if the building has a ‘positive net effect on the environment’. Pearl 1 is mandatory for all developments in Abu Dhabi and Pearl 2 is mandatory for all government projects. In January 2011, the Health Authority of Abu Dhabi launched new design standards for healthcare facilities. Dubai Dubai has its own Building Code Regulations & Construction Specifications (February 2004). Further, the plans for all building works in Dubai have had to comply with the green building standards of the Dubai Municipality since 1999. As part of Dubai Strategic Plan 2015, the Dubai Electricity and Water Authority (DEWA) published the Green Building Regulations (2010). The regulations will apply to the design of all new buildings, to achieve efficiency in the use of electricity, water and renewable energy and reduce greenhouse emissions. Permits are required from the Dubai municipality for activities relating to water usage (sewage/drainage, liquid waste) and to air pollution. The environmental standards are monitored by the municipality, which has the power to clean up at the polluter's expense, to enforce discontinuance of drainage or to cancel building permits. Furthermore, the operator of a facility is required to perform monthly tests and to send the results to the municipality. The UAE created the Federal Environmental Authority (FEA) in 1993. The FEA has prepared draft environmental protection legislation to bring cohesiveness to a fragmented system of

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) environmental protection. Civil defence and utility companies have introduced local interpretations on international standards, which are often more detailed than the original international standard. 2.3 What is the inter-relationship of statute/code and case law? There is no tradition of judicial precedent, but although past judgments have no binding effect on subsequent decisions, cassation court judgements can be submitted as evidence and taken into consideration by the court. Notable court decisions are reported in the UAE Gazette, the Dubai Gazette and Ras Al Khaimah Gazette. 2.4 Is the national law subject to/influenced by any supervening authority (such as the European Union)? The national law is not subject to any supervening authority. The UAE is a signatory to a number of international conventions including: the New York Convention, Riyadh Convention, GCC Convention, ICSID Convention, Washington Convention and a number of agreements for judicial cooperation and recognition enforcement of judicial decisions (including arbitral awards). Any award must be consistent with UAE public policy and also enforceable at the point of origin. International jurisdiction of the courts is provided for in Articles 20-24 Civil Procedure Code (Federal Law No. 11 of 1992). Any agreement that seeks to remove jurisdiction from the UAE courts shall be void where the parties have a connection by domicile or an obligation which is to be effected in the UAE (Article 24). In order to enforce foreign judgments, Article 235 Civil Procedure Code provides that certain criteria must be met. These criteria include that: the award or judgment must have been made with proper jurisdiction; that the UAE did not have jurisdiction to hear the dispute; the parties were called to attend and were represented; the matter is finally decided; and the award or judgment does not conflict with a previous ruling or order, or contravene propriety or public order. 2.5 In federal jurisdictions, what is the inter-relationship between state and federal laws? Federal law is applicable to the whole of the UAE. The local governments of the seven emirates are constitutionally permitted to regulate matters that are not the subject of legislation by the federal government. In the event of a conflict of laws, federal law takes precedence. Dubai and Ras Al Khaimah have elected to maintain their own court systems, which have sole jurisdiction to hear cases brought in those emirates. Federal courts, and those of Dubai and Ras Al Khaimah have a three-tier structure (Court of First Instance, Court of Appeal, Court of Cassation). As the Constitution prescribes, the Ras Al Khaimah and Dubai courts apply federal law first and then the law of the emirate. 2.6 Are there registration or licence requirements for consultants or contractors carrying out business in the jurisdiction? All companies must obtain a Trade Licence and Commercial Registration Certificate from the Department of Economic Development. Business activities fall into three categories for the purposes of licences: commercial licences (covering all kinds of trading activity); professional licences (covering professions, services, craftsmen and artisans); and industrial licences (establishing industrial or manufacturing activity). The alternative is to set up in a free zone, but free zone companies are not permitted to trade nationally outside their free zone, although international work or trade is permitted. It would therefore make little sense for a consultant or construction company to set up in a free zone. As part of Abu Dhabi’s ‘2030 Vision’, Regulations 1, 2 and 3 of 2009 have made it compulsory for Engineering Consultants’ Offices, Contractors and Engineers to be classified in order to work in Abu Dhabi. This is an administrative process, which is valid for 2 years, and has a number of requirements such as the submission of evidence of prior experience. 2.7 Is there a specialist construction/civil engineering court and/or body of lawyers? There is no specialist construction/civil engineering court or body of lawyers. 2.8 Is there a limitation period (time limit) for claims arising from the design or

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) construction of works? It is a principle of UAE law that rights do not expire solely by the passage of time except that a lawful excuse is required to justify the delay in bringing a claim (Article 473 Civil Code). The primary limitation period for traders is 10 years from the date that the obligation should have been settled (Article 95 of The Law of Commercial Procedure, Federal Law 18 of 1993.) The ‘traders’ are those who carry out listed activities and this includes contractors pursuant to Article 11 (2). In relation to claims against engineers and experts, the limitation period is five years (Article 475 Civil Code). If an architect’s work is restricted to making plans, to the exclusion of supervising their execution, then they shall be liable only for defects in the plans. (Article 881 Civil Code). In the case of any total or partial destruction of the works, or a defect which threatens the stability and safety of a building, the supervising architect and the contractor under his supervision are jointly liable for 10 years from delivery of the work to compensate the employer unless the contracting parties intend that such installations should last for a period of less than 10 years (Article 880 Civil Code). This is a strict liability provision so regardless of fault, and the court of Cassation has found that it can include problems caused by the land, such as subsidence. Article 883 states that no claim for liability shall be heard after three years from the collapse or discovery of the defect. The limitation long-stop provision is 15 years and without lawful excuse the right to bring a claim does lapse. However, a judge cannot unilaterally decide not to hear a case (Article 488 Civil Code) so limitation is a defence which can be expressly or impliedly waived. Parties cannot contract out of the limitation provisions (Article 882 Civil Code). If there is written acknowledgement (of liability) or ‘paper’ proving any of the rights (cause of action) a claim can be heard up to 15 years from payment becoming due (Article 477(2) Civil Code). 2.9 Are there any commonly used methods for contractors to manage risk (eg decennial insurance)? Insurance is a key feature of risk management. It should be noted that the effect of the strict liability provisions in Articles 880 Civil Code may mean that a consultant or a contractor may not be covered by their policy as some standard insurance policies can be dependent upon a finding of negligence, an element which would not necessarily be present in, for instance, a case of subsidence. Insurance against decennial liability may also not be widely available. Insurance is regularly required from the contractor to cover loss or damage to plant and equipment and workmen’s compensation insurance covering workers’ compensation is mandatory. In essence, it covers the financial implications of an accident and ‘blood money’ compensation payable in the event of a fatal accident. Professional indemnity insurance is typically carried as elsewhere. Parties are free to fix the compensation payable in the contract (Article 390 Civil Code), but such a liquidated damage provision may be altered by a judge to reflect actual loss, any agreement to the contrary will be void. (Article 390(2) Civil Code). Fast-track construction was the norm in the UAE, with inadequately prepared designs, or even concept, leading to massive claims for variations which caused cash flow and financing problems and which made settlements of invoice disputes a Gordian knot. Closer attention to documentation and financial tracking will hopefully follow.

3. Building and civil engineering procurement strategies 3.1 What are the common methods of procurement (ie the structure of the contracts between all of the participants in a construction project) for the jurisdiction? It is perhaps surprising, given the international flavour of the construction community in the UAE and, in particular, the involvement of expatriate construction professionals, that a wider variety of procurement routes has not been more successfully explored. Construction procurement in the UAE is almost invariably traditional, or occasionally design and build. 3.2 What are the legal and commercial advantages and disadvantages of each method of procurement identified? The legal advantage of the traditional procurement route is that the employer retains more control. This form of procurement is valued in the UAE as local employers particularly have

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) historically sought to retain a high level of input and control over design details and to vary works as the works progress. This in turn resulted in a trend for substantial variation claims. 3.3 What methods of procurement are most commonly adopted? Traditional procurement has historically been a more prevalent choice than design and build in the UAE. It is considered that there are a number of reasons for this. A short drive around Dubai, where the majority of construction work took place in recent years, will be sufficient to illustrate what is probably the main reason for this choice, which is the large number of bespoke, highly specified buildings. Transfer of design risk and control to the contractor is more popular in less highly designed, or repeat projects. 3.4 Are early qualification or pre-qualification processes used in public and/or private construction projects? If so, describe how these work. Some public and private sector employers in the UAE require both contractors and consultants to complete a pre-qualification form. For example, Dubai Municipality has a prequalification form which requires information in respect of: domestic and international experience; a company organisation chart; and a financial statement including evidence of the company’s accounts for the previous three years. 3.5 How do contractors work (eg do they maintain a direct labour force and other inhouse capability or is all work sub-contracted)? Contractors tend to maintain a direct labour force, and additionally source labour through agencies. Typically, labour is sourced from India, Pakistan, Bangladesh and Sri Lanka.

4. Building and civil engineering contracts/forms of appointment 4.1 Are standard forms of building contract published? If so, by whom? What are they? How widely are they used? The UAE does not produce its own standard form contracts. Instead, international contracts such as FIDIC are utilised. FIDIC contracts are the most commonly used, in particular the FIDIC 1987 and FIDIC Red Book 1999 Conditions. The latter provides conditions of contract for construction works where the design is carried out by the employer. Standard form design and build contracts such as the FIDIC ‘Yellow Book’ were gaining in popularity prior to the global economic slowdown. Design and build contracts have been used on major projects such as the construction of Dubai Metro, the second phase of which (the Green Line) was completed in September 2011. Other standard forms such NEC 3, are used, but rarely. Government projects in Abu Dhabi have utilised a form of contract based upon FIDIC since 2007. Used by all government departments, it is considered to be weighted in the employer’s favour. Use of a standard form such as FIDIC is less of a benefit in a civil jurisdiction than in a common law jurisdiction where the clauses have been the subject of published judicial scrutiny. Article 258 of the Civil Code provides that the courts may take into account the intentions of the parties particularly in circumstances where the wording of the contract is not clear and of course, subject to negotiation, one always has the opportunity to amend standard forms. The main advantage of the adoption of internationally recognised standard forms is that they are published in English, well known and trusted. This saves time and therefore money, but can also lead to complacency, poor or inconsistent amendments, and amendments which conflict with Federal Law. A project manager recently described FIDIC’s use as ‘blind’. Standard forms typically include a dispute resolution mechanism, usually arbitration, and a choice of law option, which subject to the negotiation powers of the parties might allow for the legal seat to be outside the UAE. Government forms tend to be more heavily weighted in favour of the employer. In some instances this weighting has been codified. According to Law 6 of 1997 the Dubai government departments are entitled to increase the stated quantities in the contract by up to 30 per cent of the original contract price without allowing for any increase in the original contract price. In other words, an increase of up to 30 per cent will be deemed to be within the contract price and will supersede any corresponding conditions of the FIDIC contract. 4.2 What other standard form building and civil engineering documents (eg appointments and security documents) are published?

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) International standard form contracts are used, in whole or in part, or incorporated by reference into bespoke contracts. 5. Anatomy of a building/civil engineering contract 5.1 What are the common constituent parts of a building or civil engineering contract? Building or civil engineering contract documents normally consist of a Form of Agreement, Particular Conditions of contract; General Conditions of Contract; security documents; technical specifications, drawings, pricing information, soil test report. Clauses which cover: the identity of the parties, when the works are to start and finish and what happens if there are delays including whether liquidated damages should be paid, the contract price and payment provisions, variations, insurance and risk provisions, general risk and responsibility clauses, termination provisions for both employer and contractor/consultant, details of whether and in what circumstances the builder can suspend the works, what happens at handover and when the builder reaches practical completion and clauses relating to how to deal with claims/disputes should they arise.

5.2 When and how does a contract become legally enforceable (ie how are contracts concluded)? A binding, legally enforceable contract, is one which has agreement (offer and acceptance) where the majilis (negotiation session) has concluded (Article 136 Civil Code) over the essential elements, a subject matter capable of definition and a lawful purpose (Article 129). Additionally intention to contract, capacity (ie both parties have the mental capacity to understand the contract) and legality. Silence can equate to acceptance particularly where there has been prior dealing between the parties and the offer is related to such dealing or if the offer will bring about some benefit to whom the offer is made. (Article 135 Civil Code). A standard form contract signed by both parties usually covers all requirements. Contracts can also be formed orally or evidenced both orally and in writing. Civil Code Article 246(1) provides that it is a duty of parties to perform their contract in a manner consistent with the requirements of good faith. 5.3 What are the principal obligations of the client under a building/civil engineering contract (eg in relation to possession of the site, payment for the works, etc)? The client's principal obligation is payment of the contract price and to take over the works when completed. The client may also have additional obligations to assist the contractor/consultant, as follows: • to ensure timely access to the building site; • to obtain building permits/approvals (although this is often dealt with by consultants); • to provide timely approvals and instructions that may be necessary for the contractor to proceed with the works; and • coordination with other contractors/consultants retained directly by the employer (one of the consultants may act as lead consultant to undertake this task). 5.4 What are the principal obligations of the contractor under a building/civil engineering contract (eg in relation to standard of performance, time for completion of the works, etc)? Generally, the building contractor is obliged to execute and complete the works in accordance with the provisions of the contract. The contractor normally assumes responsibility for the plant and site until the taking over certificate is issued. Dependent on the contract, the contractor is frequently obliged to complete the work within a certain period of time, failing which liquidated damages might be due to the client. The contractor is also frequently obliged to make known any discrepancies, errors or faults in the contract documentation. 5.5 Is it possible for the client to vary the works being undertaken? If so, how?

With most standard form contracts, including FIDIC, a client can vary works but it is normally subject to a set procedure of approval and valuation to allow additional payment to the

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) contractor. Contractors should bear in mind Article 886 of the Civil Code, which provides that if an estimated quantity is going to be exceeded ‘by a significant amount, the contractor should immediately notify the employer…if he does not do so he shall lose his right to recover the excess costs over the value of the measured quantity’. Further, Article 886(2) provides that the employer is then entitled to ‘withdraw from the contract and to suspend the execution’, albeit that the contractor is entitled to be paid for the works completed. 5.6 What health and safety matters are addressed by the contract? Most standard form contracts include provisions that oblige the contractor to ensure compliance with all applicable safety regulations in the region in which they are working and to take care of the safety of people on site. 5.7 What insurances are required by law? Are any other insurances commonly required by the terms of building and civil engineering contracts? The only insurance currently required by law is medical insurance, which is currently compulsory for all expatriate workers in Abu Dhabi only. It should be noted that in cases of ‘labour accidents and occupational diseases the employer shall pay the employee's treatment expenses at government or private hospitals until he recovers or his disability is proven.’ Article 144 of Federal Law 8 of 1980 Insuring goods is not a legal requirement, and is a matter of risk and dependent on the requirement and negotiation between contracting parties. Areas subject to insurance include insuring the plant, machinery and works and employer’s/public liability.

5.8 How does a building/civil engineering contract address the interests of third parties (such as banks providing funds for a project and occupiers of the completed project)? A common method of addressing third party interests used in other jurisdictions is collateral warranties. With the collateral warranty, the contractor, sub-contractor or consultant warrants to the third party that the main contract, sub-contract or consultancy agreement has been performed in accordance with the contract, failing which the third party has direct recourse against the party providing the warranty. Collateral warranties are not widely used in the UAE and, in general, FIDIC does not provide standard form collateral warranties. It is common for security to be required from the contractor by the employer in the form of tender bonds, advance payment guarantees, performance and retention securities. In PPP contracts there is usually a direct contractual link between the funder and both the ‘hard’ and ‘soft’ contractor. To prevent developers misapplying funds, Dubai Law No. 8 of 2007 provides that an escrow account must be set up to ensure that the funds are being used for the purchaser’s project. This is regulated and enforced by the Real Estate Regulatory Authority (RERA). Penalties include imprisonment and fines of not less than 100,000 dirhams.

5.9 Can a building/civil engineering contract be terminated before completion? If so, how? Article 892 of the UAE Civil Code provides that ‘a contract of Muqawala [contract of work] shall terminate upon the completion of the work agreed or upon the cancellation of the contract by consent or by order of the court’. However, Article 893 provides that ‘if any cause arises preventing the performance of the contract or the completion of the performance thereof, either of the contracting parties may require that the contract be cancelled or terminated as the case may be’. Article 893 therefore allows a contract of Muqawala to be cancelled or terminated if performance is prevented or completion is prevented. Where a contract is silent, a party may seek an order for termination from the court. Such an order may not be granted and the court may simply order the obligor to perform its obligations. Standard form contracts are not usually ‘silent’ but contain specific termination provisions setting out the circumstances in which the contract can be terminated. Article 271 Civil Code provides that it is possible for parties ‘to agree that a contract shall be regarded as being cancelled spontaneously without the need for a judicial order upon non-performance of the obligations arising thereout…’. Cancellation of a contract can occur by order of the court, by mutual consent, or by operation of law (for example through clear impossibility of performance Article 273, or

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) defective work Article 877 Civil Code). As long as there is a clear termination provision in the contract then the courts should respect that agreement. The FIDIC-based standard form adopted by Abu Dhabi government allows for termination by the employer.

5.10 Is the law relating to sub-contracts different to that for the principal or head contract? If so, how? Section 3 of Chapter 3 of the Civil Code Articles 890 and 891 deal specifically with subcontracting. Article 890 provides that a main contractor may sub-contract the works unless precluded from doing so by the contract. In doing so the main contractor unsurprisingly remains liable to the employer. Article 891 is discussed below in 5.11. 5.11 Are contractors fully responsible for the works and products of their subcontractors and suppliers? Do clients have direct rights against sub-contractors and suppliers? Do sub-contractors and suppliers have direct rights against clients? UAE law specifically precludes sub-contractors from filing claims directly against the employer for ‘anything due to him’ from the main contractor unless there has been an assignment of the right (Article 891 Civil Code). Contractors remain responsible to the employer for the works of their sub-contractors (Article 890(2) Civil Code). Subcontractors and suppliers do not normally have rights against client employers (see 5.10). 6. Anatomy of an appointment of a professional consultant (architects, engineers, etc) 6.1 What are the common constituent parts of a consultant’s appointment? A consultant’s appointment normally contains clauses relating to: the contract terms; schedule of services; payment (fee rates or schedule of services with stage payment fees allocated to tasks or stages); limit of indemnity; insurance; termination provisions; and disputes. 6.2 What are the principal obligations of the client under a consultant’s appointment (eg to provide information, to pay for the services, etc)? The client’s principal obligations are usually to: pay the consultant’s fees; obtain and provide the consultant with all necessary information (including reports and other relevant documentation) in the client’s possession which relate to the project/services to be provided by the consultant; to respond to the consultant’s requests for additional information required in a timely manner; to provide instructions/approvals in a timely manner; and instruct other consultants/contractors to provide the consultant with all necessary information. 6.3 What are the principal obligations of the consultant under a consultant’s appointment (eg the standard to which the services are provided, the timing of the performance of services, etc)? The principal obligations of a consultant are to: carry out its services with the skill and care reasonably to be expected of a professional person experienced in the provision of like services; to liaise with other consultants, contractors and any other professionals engaged by the client; and to notify the client of the personnel to be engaged in carrying out the services. 6.4 Who owns the intellectual property (eg copyright) in the work of a designer? Copyright is described in UAE law as a moral right (Civil Code Article 111). Ownership usually depends on the contractual provisions as the client and consultant normally decide who is to retain copyright. If the client retains copyright then normally there will be a clause providing that all fees be paid before the client obtains such right. A compromise can be agreed whereby the consultant retains copyright but grants a licence to the client to allow the client to copy and use the pertinent document for purposes relating to the project. If the contract is silent in relation to copyright then Federal Law No. 7 of 2002 Concerning Copyrights and Neighbouring Rights provides that: ‘Provided that the designs are original, then the owner of copyright in those designs will be the person who created them’. Copyright in plans and drawings does not therefore belong to the main stakeholder in a

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) project unless the contract so provides. 6.5 What health and safety matters are addressed by a consultant’s appointment? Contractually, health and safety matters tend to fall to the contractor. Federal health and safety law tends to relate to employment law only, and local health and safety law is very fragmented, but again tends to relate to employment law rather than specific issues of health and safety on a construction site. 6.6 What insurances are required by law? Are any other insurances commonly required by the terms of a consultant’s appointment? Insurance is not required by law, but frequently consultants are contractually required to provide evidence of workmen’s compensation insurance, public liability insurance and professional indemnity insurance. 6.7 How does a consultant’s appointment address the interests of third parties? Generally, a consultant’s appointment will seek to avoid conferring direct contractual rights on third parties. 6.8 Can a consultant’s appointment be terminated before completion? If so, how? A consultant’s appointment can normally be terminated before completion either in accordance with the Muqawala termination provisions under Chapter 3 section 4 Civil Code or pursuant to the contract usually for material breach of contract by the consultant, or in the event of the insolvency of the consultant. Typically a consultant is contractually entitled to terminate (or suspend) in similar circumstances and for non-payment. Notice is usually required. Fees, expenses and compensation are normally provided for in mutual termination. 7. Disputes 7.1 How are disputes resolved? Are the principal dispute resolution methods effective (in terms of cost, time and providing access to justice)? Is there a system specifically for resolving construction disputes? Disputes are resolved by litigation through the UAE court system, the Dubai International Financial Centre (DIFC) Court or by contractual arbitration. Court litigation involves commencing a case in the Court of First Instance. There is a Court of Appeal and the highest court of appeal is the Federal Supreme Court. The Federal Supreme Court presides over the highest level of appeal from the courts of all of the emirates except Dubai and Ras Al Khaimah, which have opted to maintain their own independent Courts of Cassation. Cases pursued against the federal government must be commenced in the Federal Court (not in Dubai or Ras Al Khaimah). As a civil law system, previous judgments are not legally binding but can be presented as persuasive argument before the court. In terms of effectiveness, the average time to ruling at first instance was 134 days in 2009 (Dubai Courts Annual Report). From a construction dispute perspective the drawbacks of the court system are that most standard form construction contracts have been drafted in English and in line with foreign common law principles; correspondence is also usually in English. For this reason, decisions are harder to predict (especially as there is no specialist court). From a litigant’s perspective, there is a question of whether the key points are lost when documents are translated for the court. There is no automatic disclosure of documents, cross-examination of parties or experts, or of argued oral submissions on the law, although these can be sought. The experts are appointed by the court on technical issues and their evidence is rarely overruled. Perhaps most significantly, although the Civil Code provides for the award of costs, typically only token amounts of less than AED 4,000 are awarded. It should be noted that the Dubai International Arbitration Centre (DIAC) rules are silent in relation to legal costs and are therefore at the discretion of the Tribunal. In a ground breaking move designed to bolster the business sector’s confidence in the legal system, Dubai has introduced a parallel court system as an alternative to the UAE Federal court system. The Dubai International Financial Centre Court (DIFC Court) is based in the DIFC free zone. It is an English common law based legal system currently headed by Chief Justice Michael Hwang SC. The creation of the DIFC required amendment to the Constitution of the UAE because the court falls outside of the Federal court system. Use of the DIFC was

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) for some time restricted to parties licensed to operate within the DIFC and disputes arising from or related to a contract performed in whole or in part within the DIFC. As of 31 October 2011 the limitations on the jurisdiction of the court have been removed and contracting parties can now choose the DIFC Court to hear disputes. There is no specific system for resolving construction disputes in the UAE.

7.2 Is Alternative Dispute Resolution (ADR) used? If so, identify any industry bodies promoting the use of ADR Dubai Law No. 16 of 2009 established the Centre for Amicable Settlement of Disputes, which is affiliated to the Dubai courts. The Centre handles smaller disputes of up to AED 20,000, but not disputes with the government or those under the jurisdiction of the DIFC, or those under ‘the existing jurisdiction of the courts’. It is compulsory for parties to refer disputes to the Centre, which would otherwise be heard before the Dubai courts, for conciliation in order to bring about settlements. Cases proceed to the courts only if parties have been unable to reach settlement within one month of the referral to the Centre. UAE arbitration proceedings are currently governed primarily by Articles 203-218 of the UAE Civil Procedure Code (Federal Law No. (11) of 1992). The Ministry of Economy has produced a draft bill for commercial arbitration based on the UNCITRAL Model Law on International Commercial Arbitration and in collaboration with a number of legal experts from the Abu Dhabi Conciliation and Arbitration Centre. Regulations concerning arbitration and disputes arising out of contracts to which the Dubai government or any of its subsidiary departments is a party are set out in Law No. 6 of 1997. Dubai has its own arbitration centre, the Dubai International Arbitration Centre (DIAC) which operates under the Dubai Chamber of Commerce and Industry. Abu Dhabi has the Abu Dhabi Commercial and Arbitration Centre (ADCCAC). The DIFC enacted its own DIFC Arbitration Law in 2008 pursuant to DIFC-LCIA rules and also based on the UNCITRAL Model Law. In addition, the DIFC has had mediation rules since 17 February 2008.

8. Security documents

8.1 Identify the security documents which are common to construction and civil engineering projects. In relation to each form of security identify the party giving the security, the party receiving the benefit of the security and the purpose of the security. Parent company guarantees are given which come into force at the same time as the contract. Given by the contractor’s parent company to the employer on the project, they usually guarantee the due performance of all the contractor’s obligations and liabilities under the contract, and that in the event of failure by the contractor to perform, the parent company will indemnify the employer from damage, losses and expenses arising from such failure. The reality is that the parent may be based in a different jurisdiction and somewhat insulated from liability. Additional security in the form of bonds, such as ‘on demand’ bonds from the contractor to the employer, are regularly used. Theoretically, a contractor or an architect may register a priority right over buildings or other works in order to secure payment. Article 1527, section 1, of the Civil Code provides that amounts ‘due to contractors and architects who have undertaken to construct buildings or other installations, or to reconstruct, repair or maintain the same, shall have the status of a priority right over such structures, but to the extent to which the value of the land has been enhanced thereby as at the time of sale’. For projects that stalled as a result of the recession, the Tayseer initiative from Dubai Land Department involves evaluation of all such projects based on pre-defined criteria. Projects judged to have the highest possibility of completion will be approved and included in the programme. A number of banks are providing the funding for the scheme and there are over 100 projects under the scheme. Security includes guarantees that suppliers of materials are paid in a timely manner. In essence, banks that have signed up to a Tayseer Programme Agreement with the Land Department provide mortgages for homebuyers in relation to specific approved projects in order to stimulate the homebuyer market and inject capital into the project. A developer can apply to register his project in the programme with the Land Department. Having passed certain qualifying standards, a project becomes eligible for selection by the signatory banks.

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) 9. Health and Safety and Employment Law 9.1 What health and safety laws exist? There is no single federal health and safety law so provisions and protections vary between emirates. Federal Law No. 8 for the year 1980 Regulation of Labour Relations (‘Labour Law’) as amended incorporates health and safety provisions and is supplemented by Ministerial Order 32 of 1982. The Labour Law stipulates that the employer must provide adequate protection (at its expense) from hazards, injuries, occupational diseases, fire and machinery, and protection as approved by Ministry of Labour and Social Affairs. The employee has a duty to use protective equipment and clothing provided and to abide by all the employer’s safetyrelated instructions. Employers must display detailed instructions concerning fire prevention and protect employees from dangers. The instructions must be in Arabic and the language of the employees. There is also provision for first aid kits, washrooms and drinking water. An employer must arrange medical check-ups and cover medical treatment resulting from a workplace injury. Compensation is payable if the employee dies as a result of a labour accident or occupational disease (Article 149). The amount of compensation for permanent partial injury is tabulated and categorised by injury. Ministry of Labour regulations include a prohibition on working in exposed areas between 12 and 3pm during the summer (15 June to 15 September). Abu Dhabi health and safety law is limited to local Law 16 (2005) Article 14, which prohibits an establishment or an individual from practising any work or conducting any activity adversely affecting a person’s health or safety of the environment without a licence from the local authority. Abu Dhabi seems to be at the centre of a drive for comprehensive regulation and has initiated the Environment, Health and Safety Management System Regulatory Framework (EHSMS) Decree 2009 in this sector, which applies to all new projects or those subject to major modification. Other sources of regulation include: the Dubai Municipality Code of Construction Safety Practice; the Abu Dhabi Code of Practice for Construction Projects; and EHS Regulations.

9.2 Is health and safety a significant issue for the industry? The UAE has been in the international spotlight as a result of poor labour camp conditions, and, more recently, poor site safety leading to fatal accidents. Whilst it appears that there are efforts being made to improve conditions, the existing legislation could be said to lack the detail required, thereby allowing poor practice. The primary failing is that of employers and contractors who are in loco parentis of people who often have low levels of literacy in failing to insist on reasonable living conditions and wages for their workforce, and of the inspectorate in failing to police or in levying insignificant fines on offending companies. Greater accountability for the management of companies that permit poor working practices is required. It has fallen to interested bodies to fill the void such as Build Safe UAE which produced Best Practice Guidelines for Labour Camp Accommodation. 9.3 What risks does a client face in relation to health and safety? The employer is strictly liable to make payment in the event of permanent injury or death in accordance with Schedule 2 of the Labour Law (see 9.1). The sums for death of employees are capped at a very low level, however, employers can face a claim for compensation of up to AED 1 million. Workers’ compensation insurance is readily available in the market. It is unheard of for company directors to be prosecuted in relation to breaches of safety regulations, but site foremen or safety officers are usually held by the police in the event of an accident until it has been established that a crime has not been committed. 9.4 What matters should a client address in relation to health and safety? The first matter to be addressed is to obtain and understand the relevant requirements of the legislation, and to ensure that these are implemented and compliance is incorporated into the contract. Where the legislation is inadequate, this should not be used as an excuse for unethical practice. Injuries must be reported immediately to the police and to the relevant labour department.

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) 9.5 Are workers in the construction industry generally members of trade unions? Do the unions effectively represent their members? There was a move in 2006 to introduce legislation providing for trade unions. But by 2008, nothing had materialised and the move was rejected. It is currently illegal to strike in the UAE. 9.6 What ‘employee burden’ do clients face (eg social costs and employment rights)? Employers’ obligations are primarily contained in the Labour Law. Article 42 of the Labour Law makes contractors liable for the entitlements of their subcontractors’ unpaid workers. Chapter 5, as we have seen, obliges the employer to address matters of safety, protection and health and social care. Chapter 8 provides for indemnities for labour accidents and occupational diseases, Articles 142-153. Employers are also obliged to pay for repatriation of employees.

10. Procurement 10.1 What laws govern how public bodies choose their contractors and consultants? Depending on the nature of the project, generally the local municipal bylaws and their regulations will be applicable. Federal Regulation of Conditions of Purchases, Tenders and Contracts, Financial Order No. 16 of 1975 (the Public Tenders Law) applies in respect of public tenders only. Abu Dhabi (a) Contracting and Tendering Law No. 6 of 2008 regulates the tendering/ procurement process in the emirate; (b) Law No. 4 of 1997 concerning Tenders, Auctions and Stores with its Executive Regulation for the Emirate of Abu Dhabi precedes the above. It requires a licensed consultant to supervise the works.

Dubai Law No. 6 of 1997 regulates contracts with the government departments of Dubai and sets out methods of procuring contractors by the government of Dubai, which include open (public) and closed tender processes and procedures.

10.2 Are public construction works procured on standard industry forms or upon particular forms for government works? The Abu Dhabi government has published modified versions of the 1999 FIDIC Contracts for Construction and for Plant and Design-Build. In Dubai, works are procured on the bespoke Conditions of Work for Contracts of Civil Engineering Construction 1999. Dubai’s Road Transport Authority is also reported to be considering PPP for 30 per cent of its projects. The RTA has drafted a law regulating PPPs and a manual for partnerships. 10.3 Is public procurement a significant source of work for the construction/civil engineering industry? Infrastructure investment is playing an increasingly significant part in the industry as the private sector has declined. Significant power, water and health investment is planned across the UAE. The first transport-related Public-Private Partnership (PPP) in the Gulf, the Mafraq-Ghweifat road project, is planned for Abu Dhabi. Infrastructure spending in that emirate alone is anticipated to be in the region of $15 billion.

10.4 Are there particular or unusual issues in undertaking public procurement? Construction on public procurement projects may have to meet higher environmental

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‘Construction Law & Practice’ by Charles Ingmire as featured in The European Lawyer (Thomson Reuters) specifications. Abu Dhabi Law No. 1 of 2007 stipulates strict liability for contractors using hazardous building materials in government projects and any damage caused by them. Unpaid invoices are a common complaint in the industry. A method of increasing pressure on the debtor can be to seek attachment of the building under development, particularly if the building is owned by a non-UAE company. However, attachment or seizing property belonging to the state or government, even following a court judgment, is not permitted under Article 247(i) Law of Civil Procedure Code. Theoretically, an arbitration award might be executed against Dubai government-owned assets elsewhere under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. A list of government owned companies that benefit from this protection has been published. The doctrine of sovereign immunity does not apply domestically in the UAE. The state is a juridical person (Article 92 Civil Code) and as such can be sued. At emirate level, there is provision, for instance in Dubai, requiring consent be given by the Ruler to being sued. Pursuant to a 23 September 1972 order and 4 July 1992 order of the Ruler of Dubai (collectively, the ‘immunity orders’) the ruler’s properties cannot be attached or seized. It is not a total immunity, but it is an extra layer of legal process, and it has the advantage of forcing a meeting between protagonists which may otherwise not have taken place. Permission must be sought prior to commencing arbitration or court proceedings against a government entity. Permission is effectively obtained from the Legal Affairs Department (LAD) (formerly the Ruler’s Court) by complying with the procedure set down in Law 3 of 1996 as amended by Article 3(D)(2) of Law 10 of 2005. Claimants must file a claim with, and obtain approval from, the Legal Advisor's Office before commencing an action in the courts. 11. Other jurisdiction specific matters 11.1 Comment on any other matters of importance to the construction industry/construction law which are specific to your jurisdiction or which are not addressed under any other heading. (a) In relation to arbitration awards, it should be noted that Articles 235 and 236 of the Civil Procedure Code apply notwithstanding any rulings or ‘pacts’ between the UAE and any other state. This means that, theoretically at least, a foreign arbitration award that did not comply with the provisions of Article 235 may not be enforced. The courts have refused to ratify a foreign arbitration award on the basis that the contract containing the arbitration clause was not signed or witness evidence not taken on oath. Dubai Aviation Corporation v. Bechtel (2004) (b) With a number of unfinished buildings in the UAE, an issue for the future is likely to be the identification of the contractor responsible for latent defects under the decennial liability provisions of Article 880 Civil Code. Competition by contractors for work is likely to drive down tendered contract sums, but due diligence of previous construction as carried out on such buildings is of paramount importance to the employer, replacement contractors and the design team, as well of course to the end users. The availability of latent defects insurance and/or decennial liability insurance is likely to be a major consideration for those shouldering such a burden, but employers should be prepared to share in this risk or they will find that the cost will be built in by the contractor elsewhere or, at its worst case, that they are left with a valueless and perhaps unsafe asset followed by lengthy litigation with an uncertain outcome.

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