Legal issues relating to construction contracts in the United Arab Emirates

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.

Introduction

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.

Federal law

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.
Engineering 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).

Enforcement of arbitral awards under UAE law

Under the now-repealed Article 235 of the CPC, the enforcement process of an arbitral award was longer as it had to begin with the UAE Court of First Instance.

Under Article 55 of the New Arbitration Law, enforcement proceedings of an award before the UAE courts are now shorter and can commence directly in a federal or local Court of Appeal. The party seeking to enforce an arbitral award must file a request for ratification and enforcement of the award to the Chief Justice of the Court of Appeal, which must order the award to be enforced within 60 days from the date of the enforcement request, unless the Chief Justice finds one or more grounds for setting aside the award (listed in Article 53 of the New Arbitration Law). This evidences the fact that the UAE courts now have a positive obligation to enforce an arbitral award, unless they can find a ground for annulment under Article 53. After the court renders its decision to enforce the award, the award debtor has the opportunity to file an objection before the competent Court of Appeal within 30 days from the date following notification of the order of enforcement of the award (Article 57, New Arbitration Law).

Challenge of arbitral awards under UAE law

An arbitral award can only be challenged by an action to set aside the award before the Court of Appeal or during the pendency of an application to enforce the award by the Court of Appeal. An application to set aside must be filed within 30 days from the date on which the award is notified to the party seeking to set aside the award (Article 54, New Arbitration Law).

The old grounds for annulling an arbitral award (in the now-repealed Article 235 of the CPC) have been modified and are now more in line with international standards and best practice. Article 53 of the New Arbitration Law provides for more limited and exhaustive grounds on which a party can seek annulment of an arbitral award, which are the following:

The arbitration agreement does not exist, is invalid or has lapsed under the law to which the parties have subjected it, or under the New Arbitration Law if there is no reference to a specific law governing the arbitration agreement.
A party, at the time of concluding the arbitration agreement, was incompetent or incapacitated under the law governing its capacity.
A person does not have the legal capacity to dispose of the disputed right under the law governing his/her capacity, as stipulated in Article 4 of the New Arbitration Law.
A party to the arbitration fails to present its case as a result of improper notification of the appointment of an arbitrator or the arbitration proceedings or as a result of the arbitral tribunal’s breach of due process rights or any other reason beyond the party’s control.
If the arbitral award excludes the application of the law which the parties have agreed will govern the subject matter of the dispute.
If the formation of the arbitral tribunal or the appointment of one arbitrator was not in accordance with the New Arbitration Law or the agreement between the parties.
If arbitration proceedings were tainted with irregularities in a way that affected the award or the arbitral award has been rendered after the expiry of the specified deadline.
If the arbitral award settles matters not within the scope of the arbitration agreement or exceeded the limits of that arbitration agreement. However, if it is possible to separate parts of the award related to matters submitted to arbitration from those not submitted to arbitration, invalidity will only affect the latter parts.

The Court of Appeal hearing the action to set aside can suspend the setting aside proceedings for up to 60 days if deemed appropriate, at the request of a party, to give the arbitral tribunal the opportunity to take any measures which would eliminate the grounds for setting aside the award without affecting the substance of the award (Article 54(6), New Arbitration Law). This was also provided for under the now-repealed Article 214 of the CPC under which the setting aside proceedings would be suspended for 90 days.

This judicial scrutiny by the UAE courts is limited to form and there is no review of the substance of the award. However, if the UAE courts deem that the award is null and void on the basis of any of the grounds listed in Article 53 (as above), the UAE courts will deal with the merits of the case considering that the arbitration agreement has been exhausted.

Since the New Arbitration Law entered into force only very recently, we have yet to witness how the courts in the UAE will interpret the Article 53 grounds for annulment of an arbitral award. Although it is true that the new grounds for annulment are more restrictive and in line with best practice in international arbitration, the interpretation of those provisions ultimately lies with the courts.

While historically the UAE courts have in some instances rendered judgments favouring arbitration practice and enhancing the enforcement of arbitral awards, they have also occasionally rendered judgments which can be considered as setbacks, in particular, in the area of enforcement.

Construction contracts. In the context of these, and in particular FIDIC contracts, the UAE courts have considered that the intention of the parties to refer the dispute to arbitration can be implied when there is a clear reference to apply the FIDIC General Conditions in any correspondence between the parties to the dispute.

Similarly, the Dubai Court of Cassation has adopted the view that an arbitration agreement was valid, despite the fact that the agreement was not signed by one of the contracting parties, as the tender documents, which included the arbitration agreement, had been accepted by the defendant and the defendant had effectively performed the contract, and therefore should be bound by the arbitration agreement.

On the other hand, on 1 October 2017 in case No. 889/2016, the Dubai Court of Cassation annulled an award on the basis that the arbitration clause had been signed, on behalf of the party seeking the annulment, by a person who was not the “official” director of the company as stated in its trade licence and that therefore, the person who signed the contract lacked the legal capacity to bind the company to the arbitration agreement. The court rendered this decision even though the party seeking the annulment had fully participated in the arbitration and was duly represented by counsel. In addition, at no point throughout the proceedings did the party seeking the annulment raise any objection as to the non-capacity of the signatory to the contract.

The approach to the enforcement of domestic arbitral awards in the UAE is different in the DIFC Courts, ADGM Courts and onshore UAE Courts. We compare the DIFC and onshore courts below to highlight this.

Enforcement of domestic arbitral awards in the DIFC

Arbitration proceedings seated in the DIFC are governed by the DIFC Arbitration Law No. 1 of 2008. As regards enforcement and annulment of arbitral awards under the DIFC Arbitration Law, the grounds of annulment on the basis of which the DIFC courts can refuse to recognise an award are quite restrictive and thus in line with international best practice. The grounds for annulment in the DIFC Arbitration Law largely follow those set out in the New York Convention of 1958.

Conflicts of jurisdiction between the DIFC and Dubai courts

The onshore Dubai courts and DIFC courts both form part of the Dubai courts system and their judgments have the same legal binding effect.

The DIFC courts have confirmed that in the past DIFC law allows the DIFC courts to be used as a “conduit jurisdiction”. This means that it is possible to seek ratification of a domestic or foreign arbitral award in the DIFC courts, whose decision must subsequently be enforced by the onshore Dubai courts. This is possible even if the award debtor’s assets are located outside the DIFC.

As such, a successful party that obtains an arbitral award issued in onshore Dubai can seek to ratify the award through the relatively more straightforward ratification process in the DIFC courts. Once the DIFC court issues an order ratifying the arbitral award, the ratified award has the same status as a DIFC court order and can be sent for execution in onshore Dubai.

This mechanism has created instances of conflicts of jurisdiction and judgments between the DIFC and Dubai courts, which led the Ruler of Dubai to establish by Decree No. 19 of 2016, a judicial committee formed of judges from both the Dubai and DIFC courts (Judicial Committee) whose mission is to resolve these types of conflicts.

Recent decisions of the Judicial Committee have cast some doubts on whether the DIFC courts can really be used as a “conduit jurisdiction” to bypass the more rigid approach of the Dubai courts as regards enforcement of arbitral awards. A conflict of jurisdiction between the Dubai and DIFC courts will arise when an award creditor launches ratification proceedings before the DIFC courts and the award debtor commences parallel annulment proceedings to set aside the award before the Dubai courts. The Judicial Committee has determined that:

If annulment proceedings are pending before the onshore Dubai courts in relation to an award rendered in onshore Dubai, any ongoing recognition and enforcement proceeding in the DIFC courts must be stayed. In Daman Real Capital Partners Company LLC v Oger Dubai LLC, Cassation No. 1 of 2016 (JT), it was held that this is the case even where the project, subject matter of the dispute, is located in the DIFC. Here, the committee held that only the Dubai courts should hear both applications for enforcement and annulment of the award, in the interest of due process and to avoid the risk of conflicting judgments.
If no annulment proceedings are pending before the onshore Dubai courts, an award creditor can choose to enforce the award in either offshore DIFC courts or onshore Dubai courts. This is the case irrespective of the seat of arbitration and irrespective of the location of the assets, whether in Dubai or DIFC.

Enforcement of foreign arbitral awards in the UAE

The UAE is a party to the New York Convention of 1958 thus the provisions of the New York Convention govern the recognition and enforcement of foreign arbitral awards in the UAE. The enforcement of foreign arbitral awards under the New York Convention remains subject to rules of public order of the UAE (see above, Choice of foreign law).

Enforcement of foreign awards and judgments can equally be sought before the DIFC courts regardless of whether there is a connection with the DIFC (Article 43, DIFC Arbitration Law; Article 24, DIFC Court Law).

Key concepts of construction contracts

In the light of the uncertainties relating to the notion of public order in the UAE, a few key concepts of UAE construction law must be addressed to point out the imperative rules and rules of public order (or those that may be deemed as such by a UAE court) that must be respected by the parties. This is in addition to other construction concepts that are not alien to the UAE legal system as further explained below.

Variation in price

Similar to English law, extra costs cannot be recovered for the execution of a design that has been agreed upon. In principle, under a lump sum contract, any request for additional costs or remuneration for the execution of the originally agreed design is prohibited (Article 887, Civil Code).

In a re-measurement contract, the contractor must immediately notify the employer of any significant increase in the price for the implementation of the agreed design, failing which the contractor loses its right to claim extra costs for the implementation of the design (Article 886, Civil Code).

There are exceptions to the “no extra costs” rule in cases of unforeseen circumstances (Article 249, Civil Code) or events of force majeure, including circumstances arising out of the acts of a third party or the employer in connection with the construction contract (Articles 287, 273 and 472, Civil Code). However, the UAE courts have been conservative in applying these provisions.

Additional costs or remuneration can be demanded as a result of variations or additional works to the initial works or design. The reasoning is that a variation to the agreed design may be deemed to have created a new agreement between the parties. The contractor may therefore be entitled to a fair remuneration, in addition to the value of the materials provided. Contractors mistakenly plead unjust enrichment to claim additional costs and/or remuneration in performing variations or additional works. Unjust enrichment can only be claimed outside the context of contractual liability, and it is not possible to combine tort claims and contractual claims.

Most construction contracts contain express provisions for the ordering and valuation of variations, which must be followed. Where the construction contract is silent as to remuneration, the contractor will be entitled to a fair remuneration in addition to the value of the materials provided (Articles 887(2), 888 and 889, Civil Code).

The principles above apply when the contract is governed by UAE law, but do not constitute public order rules (that is, parties can contract out of those provisions). Therefore, if the parties’ agreement is not in line with the provisions of the UAE Civil Code outlined above, the terms must be clearly phrased to avoid the application of these general principles.

Concurrent delay

Issues of competing causes of delay and concurrency are not expressly addressed in the UAE Civil Code. Nevertheless, various general principles of UAE law favour an apportionment approach, where liability for the delay is apportioned between the parties in accordance with their respective degrees of fault. These legal principles can be found in Articles 287, 290 and 291 of the UAE Civil Code and have constantly been applied by the courts in the context of contractual liability even though, from a plain reading of these Articles, one may think that their scope of application is limited to tortious claims.

The issue of concurrent delay will also have to be considered in light of the agreed contractual provisions dealing with extension of time claims. Any issues, such as entitlement to liquidated damages, will also be of relevant consideration.

Disruption

While the concept of disruption is not expressly recognised under UAE law, general UAE law provisions exist to assist contractors with claims associated with breaches of contract and acts of prevention by the employer. To establish a claim for damages or loss suffered as a result of actions by the employer that have hindered the completion of the contractor’s works, the contractor must establish a basic claim for damages, namely:

A breach by the employer of its contractual obligations (that is, a disrupting event).
The damages that have been suffered by the contractor.
Causation, that is, the damages were caused by the employer’s breach.

The contractor is required to establish its right to claim damages suffered as a result of the employer’s disruption and to quantify its claim.

Liquidated damages clauses

In principle, liquidated damages clauses are valid and enforceable (Article 390(1), Civil Code). However, the courts have the power to reassess such clauses, provided that an application in that respect is made by a party and regardless of any agreement to the contrary (Article 390(2), Civil Code).

The burden of proof is on the party requesting reassessment. As it is considered a matter of public order, any agreement or limitation clause that purports to exclude or limit a party’s right to request the court to reassess the damages will be deemed null and void. Therefore, a party can request a judge or an arbitrator to reassess contractually-agreed damages regardless of any agreement to the contrary.

The explanatory note of Article 390 of the Civil Code expressly provides that the judge will have the discretion to increase or decrease the contractually-agreed compensation to make it equal to the damages incurred. UAE law recognises compensation for actual damages, and these can be recovered provided that such damages are:

The direct and only result of the acts of the other party.
Certain and foreseeable at the time of contracting.
Quantifiable.

Compensation for future damages can also be recovered, provided that the above criteria are met, in addition to the criterion of certainty to occur in the future. However, compensation for indirect and hypothetical damages are very unlikely to be recovered under UAE law (Articles 292 and 293, Civil Code).

A contractual penalty for delay in handing over the works can be triggered and ordered by the court if the contractor has performed all its contractual obligations, save for the timely delivery of the works/project.

Warranties

Under the Civil Code, the contractor and the designer/engineer who prepared the design and supervised the contractor’s works are automatically, jointly and severally liable towards the employer for both:

Any total or partial collapse of the building or other fixed structures occurring within ten years from the handover date.
Any defect that threatens the safety and stability of the building occurring within ten years from the handover date.

This applies even when the defect or the collapse arises out of a defect in the land on which the building is erected, and even when the employer consents to the construction of the defective building.

This liability is a matter of public order (Articles 880 and 882, Civil Code). The presumption of liability can only be rebutted by proving either:

An event of force majeure (Article 878, Civil Code).
An event that was not foreseeable by an ordinary person at the time of contracting and could not have been prevented (Article 878, Civil Code).

Any agreement or limitation clause that purports to exclude or limit the liability of the contractor or designer must be considered null and void (Article 882, Civil Code). The limitation period for any claims arising under a warranty for defects is three years from the collapse or the discovery of the defect (Article 883, Civil Code).

In a relatively recent case, the UAE court established that this type of liability does not extend to the subcontractor that delivered the works to the contractor, who was in a position to examine such works.

Regarding other types of defect, where a structure/building in which there is an apparent defect is handed over without any reservation, acceptance amounts to a waiver of the right to claim compensation under the warranty. For latent defects, a statutory warranty period of at least six months applies from the handover date (although this can be extended by agreement between the parties) (Article 111, Commercial Code).

Suspension

In the absence of express contractual rights of suspension, Article 247 of the UAE Civil Code allows a party to a contract to suspend performance of its obligations if the other party has failed to perform its own obligations. This right can be exercised without an order from the court. The test however remains as to who breaches the contract first. A party cannot seek suspension of its obligations if it had breached the contract first.Contractors can, for example, suspend the contract if the employer has failed to make payments under the contract. However, caution should be advised as a court or tribunal is likely to consider the magnitude of the breach and the extent to which the act of suspension was proportionate to the breach.

Termination

The UAE Civil Code recognises (Articles 268 to 271, Civil Code):

Judicial termination.
Termination by mutual consent of the parties.

The UAE courts will recognise out-of-court termination by mutual consent of the parties if the contractual provisions governing termination mechanisms are clear, express and detailed. More specifically, the agreement must expressly provide that any party has the right to terminate the agreement without the need for a court order. Parties must give notice of termination, unless they expressly contract out of this requirement (Article 271, Civil Code).

The effect of termination is relatively unique to the UAE. Parties are restored to their original position before entering into the contract, therefore undoing the contract. Once the contract is terminated by court order or by mutual consent, the terms and conditions of the cancelled/terminated contract will no longer govern the relationship of the parties post-termination. For example, an exclusion of liability for consequential loss is unlikely to survive the termination of the contract and to be enforceable before the UAE courts.

If restoration of the parties to their original position is legally or practically impossible, restoration will be monetary in nature. This is unusual both from a common law perspective and by reference to other civil law systems. However, this rule is clearly provided under Article 274 of the UAE Civil Code and the Explanatory Note of the UAE Civil Code on the articles of termination of contracts (Articles 267 to 275). Additionally, the UAE jurisprudence is consistent in this respect.

Where one party disputes the other party’s right to terminate, the contract remains in force until the court decides whether termination was lawful or not. Therefore, contractual provisions remain applicable between the parties.

Subcontracting

Subcontracting is permitted under UAE law, unless the contract between the employer and the contractor expressly prohibits subcontracting (Article 890, Civil Code). The contractual relationship between the contractor and subcontractor is limited to these two parties and does not extend to the employer. The contractor remains responsible to the employer for the works performed by the subcontractor. “Pay when paid” or “back-to-back” clauses are valid under UAE law and can be used in favour of the contractor, when the contractor has not been paid by the employer. The subcontractor can request payment from the employer directly if the contractor has assigned its right to do so (Article 891, Civil Code).

Subcontractors can lawfully claim damages for actual losses and loss of profits against the contractor if the main contract between the employer and contractor is terminated unilaterally.

Other relevant general concepts of UAE law

These include:

Agency. An agent-principal relationship is established by law between the engineer and the employer. The employer is bound by the acts/decisions of the engineer unless it is proved that the engineer exceeded its mandate or committed a fraud. The concept of apparent agency is favourable to the contractor.
Good faith. UAE law attributes great importance to the concept of good faith and the obligation of the parties to perform their contractual obligations in good faith (Article 246, Civil Code).
Silence. UAE law provides that silence must not generally be deemed to constitute acceptance, although silence in a situation where a statement is clearly called for must be regarded as acceptance (Article 135, Civil Code).
Right to withhold performance. UAE law recognises the legal right of a party to refrain from performing its contractual obligations if the mutual obligations of the other party should have been performed, but were not (Article 247, Civil Code).
Estoppel. Any request made by a person to set aside or revoke what has conclusively been performed by him/her must be rejected (Article 70, Civil Code). This reflects the principle of estoppel that is known in English law.
Agreements must be kept (pacta sunt servanda). In commercial transactions, the contract is the primary source of obligation, provided that it does not contravene UAE imperative laws. Parties must therefore respect the terms of their contract and perform their contractual obligations, or will otherwise be held liable for breach of contract. A person who seeks performance or a right prematurely will be penalised by being deprived of such performance or right (Article 69, Civil Code). This is relevant in construction contracts when, for example, parties do not respect the notice requirements. In addition, UAE law applies where an agreement is silent. If the law is silent, then local custom will apply. If these are silent, international customs must be considered, provided that they do not contravene public order and public morals (Article 2, Commercial Code; Articles 50 and 51, Civil Code). FIDIC contracts are recognised under UAE law and by the UAE courts as custom.
Evidence. A party to a commercial transaction can prove its case by all means of evidence (Article 94, Commercial Code). The burden of proof lies with the claimant (Article 113, Civil Code).