Key issues of UAE construction law

The UAE Civil Code governs construction (and other) contracts entered into in the UAE. As such, unlike in a common law system where, subject to certain statutory exceptions, the parties are free to agree to the content of their contract, the UAE Civil Code imports a number of requirements into construction contracts. These are mainly to be found between Articles 872 and 896. Some of the main provisions affecting construction contracts are: Decennial liability: Article 880 of the Civil Code imposes a 10-year liability on contractors and consultants in relation to structural defects. This liability can neither be contracted out (of Article 882) nor does it appear that specific decennial liability insurance is available to cover off this risk as is the case in certain other jurisdictions with decennial liability (for example, France). However, the scope of decennial liability is limited to serious structural defects likely to result in the collapse of the building or structure rather than all defects to the works. Liquidated damages/penalties: Either party to a contract may challenge the liquidated damages contained within a contract if the actual loss suffered is more or less than the liquidated damages (Article 390). This differs from the position under most common law jurisdictions where the enforceability of liquidated damages is determined by whether the damages were a genuine pre-estimate of loss at the date the contract was entered into. As is the case in most common law jurisdictions, however, it is rare that the courts will open up the liquidated damages agreed by the parties in their contract.

 Suspension: Article 247 provides that a party may refuse to perform its obligations under a contract where its counterparty does not perform a mutual obligation. In the absence of any right to suspend the contract, a contractor would, therefore, have the ability to suspend performance for non-payment. As always, however, with suspension or termination, a contractor should take advice and be sure that it is actually entitled to exercise this right as a wrongful suspension may permit the employer to terminate for contractor breach.

 Restrictions on termination: The Civil Code provides, in Clause 892, that a construction contract may only be terminated on completion of the works, by mutual consent or by a court order. What is not clear is the effect of a clause in a contract which gives one party a right to terminate if, for example, the other party is in breach. It has been suggested that a party seeking to exercise such a right can only do so with the consent of the other party (unlikely if one party is looking to terminate for alleged breach by the other) or a court order. Many contracts have sought to clarify this issue by including in termination clauses deemed consent if a party is exercising its right to terminate for default of the other party. However, such provisions are largely untested so it is not clear whether this approach will satisfy the requirements of Article 892 or whether a court order will be required in lieu of consent from the defaulting party at the time the non-defaulting party wishes to exercise its right to terminate the contract.

 Rights to terminate under the Civil Code: As well as the right to suspend performance due to the default of the other party to a contract, the Civil Code, in Article 272, provides a party with the right to require that the contract be performed or cancelled if its counterparty is in breach of the contract. As with suspension, a party should exercise caution before seeking to terminate on the basis of this article so as not to be liable for a wrongful termination.

 Good faith: In common with a number of other civil law jurisdictions, the UAE Civil Code imposes a duty of good faith on contracting parties. This is stated to extend not only to an obligation to do that which is expressly contained in the contract but also to that which is relevant by virtue of the law, custom and the nature of the transaction. Consequently, although the prevention principle (under which a party cannot bind another to a contractual completion date if the reason why it cannot be achieved is due to a delay caused by the party seeking to enforce the completion date) is not recognised as such under UAE law, a party seeking to enforce a contractual completion date that it has, by its own actions, prevented the achievement of, may find itself falling foul of the requirement to act in good faith.

 Limitation of liability: The Civil Code provides, in Article 296, that any attempt to exclude liability for a harmful act shall be void. It is fairly typical for a party to be prevented from excluding its liability for personal injury or death or personal injury on grounds of public policy (and such liability would usually be covered by insurance) but this restriction on limiting liability for harm is potentially wider than that.

 Limitation period: Claims must be brought within three years of a defect being discovered (Article 883) with a longstop date of 15 years from the date of the breach (Article 473). Article 487 prohibits the parties from altering the statutory limitation period by contract.

 Indemnities: Under English law, there is a distinction between a damages claim and a claim brought under an indemnity. Although the term ‘indemnity’ is used in local legislation, this is merely a feature of translation. The concept of an indemnity as understood under English law does not exist under UAE law and breach of contract cannot under UAE law give rise to a debt claim. Upon a breach of contract, the recovery permitted to the injured party under UAE law is compensation for those losses that are a direct result of the relevant breach. This includes loss of profit, but only that which reflects certain profits that the claimant can demonstrate that it has actually lost as a direct result of the breach.

Gulf Construction

  1. Hello, i have a question, if I put a daily penalty of 1500/day if the project was not completed within the agreed term (one month) and now three months passed with almost 90% completion but not as per the validated specification. do I have the right to terminate and claim for the penalties? someone told me even if you put this clause you have the right to claim only 10% of the contract value.

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