UAE law provides security in construction deal risks

By Jim Delkousis

The UAE has seen a major slowdown of construction projects in recent months, particularly in Dubai. The situation is far from being ideal for players in the construction market.

Trapped with stagnating projects, developers and contractors are facing a recurrent question. What can we do when a project is frozen? Do we take drastic measures such as cancellation of the project? Or shall we wait until conditions improve?

Clearly, it is not possible to provide a universal answer. Each project has its own particularities and objectives, which will dictate its options for survival. Therefore, the parties should first undertake a pragmatic “introspection” to objectively assess their current situation and their liabilities. Such an internal due diligence process, which can be conducted in conjunction with experts in the field (lawyers, auditors, independent experts), will shed light on each party’s commercial and contractual position and allow them to reasonably assess their options.

This article will seek to examine the legal aspects applicable to construction contracts governed by UAE law where a project has stalled or is at risk.

In considering the various options, the parties should always bear in mind the effect of applicable UAE laws.

Fortunately, relevant UAE law provisions take into consideration the unique aspects of construction contracts and provide a wide range of options, ranging from variations to the contractual arrangements to the suspension of the project or as a last resort, its cancellation. One cannot emphasise enough the importance of negotiation at this stage.

Negotiation is critical
In addition to its importance from a commercial perspective, the UAE law indicates negotiation is the most convenient way out from the impasse. In fact, it specifically provides that a contract can only be varied or terminated, without recourse to courts, pursuant to mutual agreement between the parties. Accordingly, the representatives of the parties should meet and openly discuss their respective situations and the commercial viability of the project in order to identify the options available. The parties are bound under the UAE law to perform their contractual obligations and thus to enter into and conduct those negotiations in a manner consistent with the requirements of good faith.

The negotiations can lead the parties to a variety of scenarios, which we cannot cover entirely in this column. However, we will try to provide an overview of the main scenarios and their validity under the UAE law. In doing so, however, it should be recognised that the observations made in this article are always subject to the terms of the particular contract entered into between the parties. The express terms of a contract always play a primary (although not exclusive) role in determining the options available to contracting parties.

The first and “ideal” scenario would be a negotiation leading to a variation of the contractual arrangements between the parties accommodating their mutual needs and ensuring the survival of the project. The UAE law recognises the validity of a variation for contracts in general and considers it to be an inherent part to the contract once agreed upon by both parties. In addition, for construction agreements, if a variation or addition is made to the design of the project, with the consent of the parties, the UAE law expressly provides that remuneration to the contractor should be revised accordingly.

The second option that the parties might consider is the temporary suspension of the project. As a general contractual principle, the UAE law recognises the right of any of the parties to a binding agreement, when their mutual obligations are due for performance, to refuse to perform their obligation if the other party does not perform their obligations.

However, whether this is an appropriate course of action will depend on the specific nature of the construction contract and the importance to both parties in continuing work on the relevant project. In addition, unilaterally stopping work will lead to additional liabilities in the absence of any express contractual right to do so. Accordingly, it is preferable if the parties are able to reach a consensus on how best to deal with the issues in contention prior to any temporary suspension of the project. Such suspension should be recognised as an agreed variation to the contractual arrangements as discussed above.

Thirdly, the parties can agree to cancel the construction agreement and the underlying project. Such arrangement is valid and provided for expressly under the UAE law, which provides for mutual consent as a possible cause of cancellation of a construction agreement.

Evidently, one should contemplate this serious option if the parties have failed to reach agreement on the other options discussed above. If mutual agreement to cancel the contract cannot be reached, the parties are then faced with two main options: unilaterally terminating the agreement and/or recourse to the competent arbitral tribunal or courts.

A controversial matter
The unilateral termination of a construction agreement remains a controversial matter under the UAE law as the boundaries, which limit the exercise of such termination rights, remain uncertain and the interaction between the Civil Code and any express contractual terms concerning termination rights and remedies is not always clear.

Even in cases where the right to unilaterally terminate exists, doing so may risk exposing the party which terminated the contract to compensate the counterparty for its expenses and loss of profits arising from the termination. Consequently, prior to proceeding with a unilateral termination of a construction agreement, the contractual terms of the agreement should be thoroughly reviewed and legal advice sought in order to reduce the risk of potential liabilities.

As a last resort, any of the parties can request cancellation of the agreement from the competent courts. The parties should review the jurisdiction clause in their agreements to ensure that they are addressing the relevant tribunal. The UAE law provides that the relevant parties can invoke to request cancellation of the agreement for various reasons. These include termination for failure to perform, termination for force majeure or foreign cause rendering the obligations impossible to perform. Finally, on a positive note it should be noted that parties may (subject to the terms of the contract) claim compensation from the relevant courts in the case of termination, even in the absence of contractual terms to this effect. In fact the right to compensation for damages resulting from the cancellation of a construction contract is expressly recognised under the UAE law.

This should provide very important security for the various parties in this unsettling climate.

– Jim Delkousis is partner at DLA Piper. Dima Sari, legal consultant at the firm, also contributed to the article

Emirates Business 24/7

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