This article examines a range of issues relating to construction contracts in the UAE and sets out practical steps which should be considered by parties entering into such agreements.
The article examines the interaction between international and UAE provisions applicable to construction contracts, including in relation to the choice of dispute resolution mechanisms in construction contracts, the possibility of enforcing foreign judgments and arbitral awards and key concepts of UAE construction laws that can assist employers, engineers, contractors and subcontractors in setting out their respective rights and obligations.
The article is part of Thomson Reuters Practical Law’s Construction and Projects Global Guide. For a full list of jurisdictional Q&As visit global.practicallaw.com/construction.
The construction industry in the United Arab Emirates (UAE) mainly adopts and follows international best practices for construction contracts governed by UAE law or implemented in the UAE. These contracts are heavily modelled on International Federation of Consulting Engineers (Fédération Internationale Des Ingénieurs-Conseils) (FIDIC) forms of contracts.
However, domestic law considerations should not be ignored. It is true that, in principle, the UAE courts recognise and accept the standard terms and conditions set out in the FIDIC contracts. However, there are several UAE law principles that have a direct impact on the parties’ contractual terms and prevail over such terms in some cases.
As the UAE is a civil law jurisdiction, UAE law principles are mainly codified in the Civil Transaction Law No. 5 of 1985, as amended by Federal Law No. 1 of 1987 (Civil Code) and in the Commercial Transactions Law No. 13 of 1993 (Commercial Code).
More specifically, construction contracts are regulated by Articles 872 to 896 of the Civil Code dealing with muqawala contracts (that is, contracts to build), and other general principles of UAE law codified in the Civil Code and the Commercial Code.
Some of these provisions are imperative, which means that they are default provisions and that parties must explicitly contract out of them.
Other provisions are rules of public order, which means that parties cannot contract out of these rules when they seek enforcement in the UAE, even where a foreign law is applicable to their contract and/or a foreign court or arbitration tribunal is competent to rule on a dispute arising from the contract.
Therefore, opting for the application of a foreign law to a construction contract, or for the submission of disputes to a foreign court or to an arbitration tribunal, does not make the construction contract immune from being subject to certain rules of UAE law.
Understanding the legal framework applicable to construction contracts in the UAE requires shedding light on what the parties can and cannot agree in their contract. To this end, this article outlines:
The extent to which a foreign law can govern a construction contract performed in the UAE.
The choice of dispute resolution mechanisms in construction contracts.
The possibility of enforcing foreign judgments and arbitral awards relating to construction contracts.
Key concepts of UAE construction laws that can assist employers, engineers, contractors and subcontractors in setting out their respective rights and obligations, at the stages of negotiation, implementation or dispute resolution.
Practical steps that parties should take before entering into a construction contract.
Choice of foreign law
The UAE, and in particular Dubai, has emerged as one of the leading regional commercial hubs, attracting foreign investors from all over the world. Therefore, it is understandable that parties to a contract based in the UAE commonly elect a foreign law as the law applicable to their contractual relationship, even where contracts are executed or performed in the UAE. However, it is crucial to understand the consequences of choosing a foreign law.
In principle, electing a foreign governing law is permissible (Article 19(1), Civil Code), except for contracts:
Relating to rights in rem (that is, pertaining to property located in the UAE).
Entered into with a governmental or quasi-governmental body of the UAE.
UAE law applies to procurement contracts with governmental and quasi-governmental entities, and parties cannot agree to a different choice of law. At the federal level, Ministerial Decision No. 20 of 2000 concerning the government procurement rules (Federal Procurement Regulations) and Cabinet Resolution No. 32 of 2014 set out requirements for contracts concluded with the UAE federal government, ministries and federal agencies.
In addition, certain specific laws apply to the procurement and tendering activities of certain public authorities. For example, the Dubai Procurement Law applies its own laws and regulations. Most public authorities have a set of standard procurement contracts and documentation for the provision of contracting work, services and supplies, among others.
Consequences of choosing a foreign governing law
Before opting for a foreign governing law, parties must avoid certain legal pitfalls and consider certain matters.
If the party that invokes a contractual choice of foreign law before a UAE court fails to prove it and to determine its effects, UAE law will apply regardless of the parties’ agreement. In practice, the UAE courts have held in several instances that UAE law will apply instead of a choice of foreign law clause where the parties either:
Fail to present satisfactory and tangible evidence as to the existence of the contractually agreed foreign law.
Fail to determine its effects.
This issue does not arise if the dispute is referred to arbitration. Parties are free in arbitration to elect their own choice of governing law. as local courts looking at enforcing foreign awards in the UAE will apply the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), which only provides for very limited grounds for refusing the enforcement of an international arbitral award (for example, where the foreign award violates a rule of public order in the country in which enforcement is sought). If it is a domestic arbitral award, the procedure under the new UAE Arbitration Law will apply. This is discussed further below.
In addition, a contractual choice of foreign law only applies to the extent that it does not contravene sharia law, or the public order or morals of the UAE (Article 27, Civil Code) (this provision must be interpreted in accordance with the definitive provisions and fundamental principles of sharia under Article 3 of the Civil Code).
In this context, domestic public order, as interpreted in the UAE, includes, among other things, matters of personal status, freedom of trade, circulation of wealth and rules of individual ownership, to the extent that these matters do not contravene the imperative provisions and the essential principles of Islamic sharia from which UAE laws are drawn.
The concept of public policy is very broad and creates a certain degree of uncertainty and risk as to what may be deemed against public policy in the UAE.
This issue is not only raised where a matter is handled by a UAE court, but may also come into play where foreign judgments or arbitral awards are being enforced in the UAE (see below, Enforcement of foreign judgments and arbitral awards).
Choice of dispute resolution mechanisms
In principle, parties to a construction contract performed in the UAE can agree to refer their disputes to the UAE courts, to a foreign court or to arbitration (either domestic or international).
Where the parties have agreed to refer a dispute to arbitration in the UAE, a UAE court will equally override the parties’ agreement and accept jurisdiction over the matter if the defendant fails to object to the competence of the UAE court and fails to raise the existence of the arbitration agreement in the first court hearing in which the defendant is duly represented.
Disputes arising from procurement contracts with governmental and/or quasi-governmental entities are generally referred to the UAE courts. Additionally, these disputes can now be referred to the Dubai International Financial Centre (DIFC) courts, which form part of the Dubai judicial system. These entities can also agree to resort to domestic arbitration in their respective emirates.
A recent development is the establishment of a Technology and Construction Division (TCD) of the DIFC courts for the purposes of dealing with technically complex cases in the technology and construction fields. The TCD is composed of specialist judges and applies a new set of industry-specific rules to fast-track dispute resolution. A claim can only be brought as a TCD claim if it involves issues or questions that are technically complex. Part 56 of the DIFC Court Rules provides a non-exhaustive list of the types of disputes that can be brought as TCD claims, which include:
Building and other construction disputes.
Claims by and against engineers, architects, surveyors, accountants and other specialised advisers relating to the services they provide.
Enforcement of foreign judgments and arbitral awards
Enforcement of judgments
Execution proceedings can be initiated by the judgment creditor as soon as the judgment becomes final and binding. In practice, Court of Appeal judgments are generally subject to execution regardless of whether a further appeal is pending before the Court of Cassation.
The enforcement of foreign court judgments is governed by Article 235 of the Civil Procedure Code, which applies in the absence of a bilateral or multilateral treaty/convention.
Judgments issued by a foreign court can be executed in the UAE under the same conditions provided in the law of the foreign state (Article 235(1), Civil Procedure Code). This general provision applies subject to certain qualifications, including that a petition for an execution order must be filed before the competent court of first instance in the UAE, and provided that the following conditions are met:
The UAE courts have no jurisdiction over the dispute and the foreign courts have jurisdiction. The rules on the competence of UAE courts are set out in Articles 31 to 41 of the Civil Procedure Code.
The judgment or order was passed by the competent court according to the law of the respective foreign country.
Parties to the dispute on which the foreign judgment was issued were summoned and duly represented.
The judgment or order is final and binding under the law of the issuing foreign country.
The judgment or order does not conflict with or contradict a judgment or order previously passed by another court in the UAE.
The judgment does not violate the concepts of public morals or UAE public order.
The UAE is a party to few international conventions/treaties for the enforcement of foreign judgments. The UAE is a party to reciprocal enforcement agreements with other members of the Gulf Co-operation Council (GCC), as well as bilateral treaties with Saudi Arabia and France.
The DIFC courts have executed a number of agreements with other jurisdictions in the form of memoranda of understanding and memoranda of guidance. The purpose of these agreements is to help facilitate closer co-operation, specifically in relation to judicial co-operation and the recognition of judicial awards and judgments.
Enforcement of domestic arbitral awards in the UAE
The new UAE Arbitration Law. Following the entry into force on 15 June 2018 of the first stand-alone UAE federal arbitration law, No. 6 of 2018 (New Arbitration Law), the process of enforcement of arbitral awards under this new law has been simplified, providing for a more arbitration-friendly framework.
The New Arbitration Law applies to all ongoing or future arbitrations, whether they arise out of a previously existing arbitration agreement or whether the proceedings have already begun under the provisions of the old arbitration chapter of the Civil Procedure Code (CPC) (Article 59, New Arbitration Law). Articles 203 to 218 of the CPC are therefore repealed, however all proceedings which took place thereunder remain valid (Article 60, New Arbitration Law).
Article 52 of the New Arbitration Law provides that an arbitral award is binding on the parties and is res judicata (already judged), however, for it to be executed in the UAE, the party seeking execution must bring enforcement proceedings before the UAE Court of Appeals to have the award recognised (Article 52, New Arbitration Law).