A Q&A guide to construction and projects law in the United Arab Emirates.
The Q&A gives a high level overview of the main trends and significant deals; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; employment laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of Thomson Reuters Practical Law’s global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-guide.
Overview of the construction and projects sector
1. What are the main trends in the local construction and projects market? What are the most significant deals?
Investment in infrastructure continues to form a substantial part of the construction and projects sector in the UAE. The data provided under BNC’s Construction Analytics confirm that 3,200 projects are active in the Dubai’s urban construction sector alone, amounting to a combined estimated value of over USD245 billion.
There are also 187 active projects with a total value of USD32.4 billion in the transport sector, 203 projects with a total value of USD24.3 billion in the utilities industry, 377 projects valued at USD5.8 billion in the industrial sector and 12 projects in the oil and gas sector with a total value of USD4.6 billion.
In contrast, the oil and gas sector is witnessing a certain amount of volatility in the market. The 2014 oil crash marked the long-predicted structural shift in global energy. The technological innovations that made unconventional oil commercially viable, combined with the rise of renewable energy, meant that oil had peaked and was now on a long, slow decline. However, for many of the Gulf’s producers, population growth and industrialisation in Asia are still driving long-term growth in demand. With close to USD700 billion worth of oil and gas investment programmes announced and underway, some of which are highlighted below, the oil and gas sector appears far from slowing down.
Renewable and nuclear energy projects are also on the rise, with more than 37GW of nuclear power projects, worth an estimated USD165 billion, sunder development in the region.
In preparation for the 2020 Work Expo, Dubai has awarded approximately 47 construction contracts with the total value of AED11 billion (USD3 billion) to local and foreign companies.
Dubai and Abu Dhabi are currently witnessing a number of multi-billion dollar projects, most popular of which are the:
- Expo 2020 initiative of the Dubai Metro Red Line Extension.
- Container Terminal 4 of the Jebel Ali Port Expansion project.
- New Royal Atlantis Resort and Residences located in Palm Jumeirah.
- Gasoline and Aromatics project facility in Abu Dhabi, with the capacity to produce 4.2 million tonnes a year (t/y) of gasoline and 1.6 million t/y of aromatics.
- Abu Dhabi Water & Electricity Authority (ADWEA) plan to develop a 1.5 GW photovoltaic (PV) plant in the Al-Dhafra area in Abu Dhabi.
Dubai International Airport is also currently undergoing a USD7.8 billion expansion, which is expected to increase the airport’s current capacity from 60 to 90 million passengers per year by the end of 2018. Dubai’s second airport, Al Maktoum International, was opened for cargo operations in 2010 and the public in 2012. On completion of the expansion, over 160 million passenger and 12 million tons of cargo will be accommodated per year.
Earlier in the year, the Ruler of Dubai His Highness Sheikh Mohammed bin Rashid Al Maktoum also announced the Dubai Harbour project, which involves the development and construction of an impressive waterfront spanning more than 20 million square feet.
The multi-billion dollar Etihad railway project continues to be Abu Dhabi’s dominant project which is being developed in line with the Abu Dhabi Economic Vision 2030 and UAE Vision 2021. The project is planned to be built in three stages to link the principal centres of the UAE population and industry. This project is also intended to be part of the wider railway network of the Gulf Cooperation Council that will connect the UAE with other GCC states, including Saudi Arabia, Qatar, Oman, Bahrain and Kuwait. In addition, work continues on the construction of the Midfield Terminal at Abu Dhabi airport.
2. Which are the most common procurement arrangements if the main parties are local? Are these arrangements different if some or all of the main parties are international contractors or consultants?
It is possible to appoint one contractor to provide both the design and build elements of the project. However, in the Middle East, a split procurement approach is more popular, where the employer sources the design from a third party consultant and then appoints a separate contractor to execute the project in accordance with the design.
In large-scale projects, involving international contractors, the employer sometimes appoints one contractor to carry out both the design and build aspects of the work. Typically, under this approach, the contractor sources the design from a sub-consultant it appoints directly.
Federal Regulation of Conditions of Purchases, Tenders and Contracts, Financial Order No 16 of 1975 (Public Tenders Law) governs the public federal procurement in the UAE. Open public tenders are required for most tenders with a contract value over AED700,000, with notable exceptions in the defence sector.
The Public Tenders Law applies to federal but not state government projects. Individual emirates have their own methods of public procurement, which typically follow the federal system.
Both international contractors and consultants are bound by the Public Tender Law, which provides that foreign entities must meet one of the following conditions:
- Work through a joint venture with a locally licensed entity.
- Set up an entity with is majority owned by UAE nationals.
- Have a UAE national representative (either a registered commercial agent or a national agent for a branch or representative office).
3. What transaction structures and corporate vehicles are most commonly used in both local and international projects?
Local projects are usually carried out by a contractor established in accordance with one of the corporate structures recognised under UAE law. The most common corporate structures seen in the construction industry are:
- Limited liability companies.
- Private joint stock companies.
International construction projects are usually conducted through joint ventures or special purpose vehicles.
Joint ventures are usually established for mega projects by a consortium of contractors, that is usually a local contractor and an international contractor. SPVs are also commonly used in the context of project finance. SPVs created for project finance purposes are not usually owned by one private investor but a consortium of different private parties, including builders and financers, such as banks or other financial institutions. This consortium is established to ensure the delivery of the project by maintaining the availability of project funding throughout the period of the project. SPVs usually take the form of a limited liability company specifically created for a certain project.
4. How are projects financed? How do arrangements differ for major international projects?
Local, government and public authority projects in the UAE are generally self-financed. However, it is possible that projects which have traditionally been entirely government-financed may in the future be privately financed or funded through a public private finance initiative.
The size of the project will inevitably affect the way it is financed. For smaller projects in the UAE they tend to be financed by lender on a corporate or full recourse basis, while larger projects will be financed on a project finance basis. Generally this will involve the raising of finance on a limited recourse basis for the purposes of developing a large capital intensive project, where the borrower is a special purpose vehicle. Repayment will depend on the terms of the financing agreement. Typically these large-scale projects will be based on the Loan Market Association standard finance documents.
In the UAE, some local banks are taking an active role in the financing of landmark projects. In some cases, Islamic finance structures have been incorporated, which provide another alternative to conventional financing.
Security and contractual protections
5. What forms of security and contractual protections do funders typically require to protect their investments?
Security typically taken by lenders in the UAE does not differ significantly from other jurisdictions. Generally under UAE security law a mortgage or a pledge does not necessarily guarantee the right of priority (unless it is registered).
In practice, there are the following types of securities (or documents used for security purpose) which are widely used
- Pledge over movable property.
- Commercial mortgage (UAE law does not recognise the concept of a floating charge).
- Mortgage over immovable property.
- Pledges over bank accounts.
- Assignment of receivables.
In addition to these five securities, guarantees are also commonly used in the UAE to protect investments.
In the UAE appropriate transfer of risk to the contractor is essential under the construction documentation. In more complex projects this will also be through direct agreements and collateral warranties from the relevant contractors.
Standard forms of contracts
6. What standard forms of contracts are used for both local and international projects? Which organisations publish them?
The common forms of construction contracts in the UAE are based on the International Federation of Consulting Engineers (FIDIC) forms of contract. These are mainly:
- The Conditions of Contract for Construction (Red Book).
- The Conditions of Contract for Plan and Design Build (Yellow Book).
- The Conditions of Contract for EPC/Turnkey Projects (Silver Book).
The 1999 editions of these FIDIC forms are the most commonly used versions in the UAE.
FIDIC contracts are also common in international projects. However, there has been an increase in the use of tailored bespoke contracts in mega projects, including PPPs.
7. What risks are typically allocated to the contractor? How are these risks offset or managed?
FIDIC contracts contain reasonable and impartial provisions dealing with the allocation of risk between the employer and the contractor. The Construction Chapter of the UAE Civil Transactions Code also contains a number of provisions dealing with the allocation of risk and impossibility of performance. These are summarised below as follows:
- Article 875(2) deals with the contractor’s care of works and duty to observe proper technical standards in preserving the material provided by the employer. The contractor must also return any surplus material to the employer. Any damage or loss caused to the material in this case will be allocated to the contractor.
- Article 894 deals with the consequences of force majeure and provides that the contractor will be entitled to the value of the works performed if it becomes incapable of completing for a cause beyond the contractor’s control to the extent of the attributed benefit to the employer.
- Article 887(1) deals with the contractor’s non-entitlement to demand payment over and above the lump sum agreed in the contract for the execution of the works.
- Article 889(2) deals with the contractor’s entitlement to fair remuneration if any unforeseen event occurs preventing the completion of the work in accordance with the prepared design.
8. How can liability be excluded or restricted under local law?
Limitation of liability clauses are commonly used in construction contracts in the UAE and are generally enforceable by the UAE courts. However, limitation of liability clauses will not always be upheld by the UAE courts or by extension an arbitration tribunal. Statutory provisions on the limitation of contractual liability can be found in numerous provisions of the UAE Civil Code, for example:
- Article 296 deals with tortious liability and provides that any provision which exempts a guilty party from liability will be void;
- Article 880 deals with decennial liability and provides that contractors, designers and architects will be liable for ten years following completion and handover of the construction works for structural defects or total or partial collapse of the building.
Under Article 390 of the UAE Civil Code (regardless of the parties’ agreement), a court and, by extension, an arbitral tribunal, can adjust a contractually agreed compensation to a reasonable figure that equates to the actual loss suffered. This is relevant in the context of liquidated damages which are commonly applied on contractors in cases of attributable delay. In this case, a judge or arbitration tribunal can revise the agreed damages upwards or downwards to equal the actual loss suffered. This provision has been invoked by contractors to reduce the amount of liquidated damages agreed in the contract.
Caps on liability
9.Do the parties usually agree a cap on liability? If yes, how is this usually fixed? What liabilities, if any, are typically not capped?
Contractual liability is usually capped subject to the statutory exceptions set out above. In construction contracts,the cap is usually determined in accordance with the agreed contract price. The most commonly negotiated cap in the construction industry is the one related to damages for delay in completion of the works, which is usually capped at 10% of the contract price.
10. Are force majeure exclusions available and enforceable?
Force majeure clauses are commonly seen in construction contracts in the UAE. The UAE Civil Code also contains numerous provisions dealing with force majeure and hardship (see Question 8). Article 249 of the UAE Civil Code also illustrates a number of reliefs in case of a force majeure event or extraneous cause leading to hardship in performance of a contractual obligation. Specifically, a court and, by extension an arbitration tribunal, can adjust an onerous contractual obligation to a reasonable level if unforeseen exceptional circumstances of public nature occur. In such case, the debtor can seek termination of the contractual arrangement because the performance of the contractual obligation has become burdensome as a result of the force majeure event.
11. What contractual provisions are typically negotiated to cover material delays to the project?
The most common provision negotiated in construction contracts are liquidated damages or variation clauses which usually come into play in cases of delay in completion of the works. As set out above, a contractor will try to carve out a number of events from being captured under the liquidated damages clause to void a high delay penalty from being imposed. This includes delays caused as a result of variations requested by the employer, force majeure events, delays in getting access to the site or in the issuance of drawings or approvals from the competent authorities.
Under UAE law, if a variation or addition is made to the design with the employer’s consent, the contractor will be entitled to recover for the cost of the additional works even under a lump sum contract within the meaning of Article 887(2) of the UAE Civil Code. The UAE courts have recognised that additional work is compensable provided the employer was aware of the additional works performed. It is common for employers to include certain notification provisions for contractors to comply with to request an extension of time or submit a claim under the contract, failing of which may lead to the loss of the contractor’s claim. In this context, the UAE courts have consistently confirmed that a failure of a contractor to comply with certain condition precedents under the contract in relation to the procedures and time limits to bring a claim, will lead to the contractor’s claim being dismissed.
12. What contractual provisions are typically negotiated to cover variations to the works?
The standard FIDIC wording is often the starting point for any negotiation. These provisions detail the employer’s entitlement to order a variation to the works to either alter the material quantity of the work or broaden/reduce the contractor’s scope of work. These standard provisions that granted the employer the authority to instruct variations are not often departed from. However, it is not unusual for these provisions to be amended.
The contractor will be entitled to an extension of time and additional payment as a result of the variation instructions issued by the engineer (see Question 12). This is of course dependent on the contractor’s compliance with the specified time limits for bringing a claim under the contract.
Other negotiated provisions
13. What other contractual provisions are usually heavily negotiated by the parties?
In addition to the clauses set out in Questions 8 to 12, the most commonly negotiated terms in construction contracts include:
- Payment terms.
- Termination rights.
- Back-to-back provisions.
- Suspension rights.
Architects, engineers and construction professionals
14. How are construction professionals usually selected? Following selection, how are they formally appointed?
Construction professionals (which include design and non-design professionals) can be selected in a number of ways dependent on the specific nature and scope of the project. It is common practice in the UAE to appoint such professionals through a tender process. The project procurer/employer will generally issue a formal request for proposals, to which interested parties will respond with a formal pitch/response. The price and demonstrable
relevant experience will usually be key considerations for the employer. Following selection, which can only occur after completion of a pre-qualification process determined by the employer, construction professionals are generally appointed under conventional professional service contracts. Non-design professionals with a minor role considering the scope of the proposed project can be appointed under an engagement letter.
15. What provisions of construction professionals’ appointments are most heavily negotiated? Are liabilities commonly limited or capped in construction professionals’ appointments?
The most heavily negotiated provisions in professional appointments in the UAE typically include the following:
- The level of the standard of skill and care to be adopted by the professional.
- Exclusion of liability (generally and for indirect and/or consequential losses).
- Liquidated damages/compensation for delay (and how such provisions are contractually structured).
- Intellectual property provisions.
- Payment provisions.
- Any back-to-back provisions with the construction contract or other third party agreements.
- Anti-bribery and corruption provisions.
Payment for construction work
16. What are the usual methods of payment for construction work? Are there ways for the contractor and consultants to secure payment or mitigate risks of non-payment under local law?
Methods of payment
Advance payments for construction work are relatively common for projects in the UAE. These usually take the form of a bank guarantee or a bond. Payment for construction work is usually made periodically, against invoices raised or pre-determined project milestones. Before any payment is made, the completed works relating to the underlying payment must be certified by the person identified in that capacity in the contract (this is usually the engineer or employer’s representative or a project manager acting for a funder).
Contractors generally rely on contractual bonds and guarantees. However, paid-when-paid provisions in back-toback relationships are common.
17. How do the parties typically manage their relationships with subcontractors?
The contractor’s relationship with the subcontractor will be in accordance with the terms of the relevant subcontract. Contractors will usually seek to incorporate certain provisions from the main construction contract with the employer into the terms of the relevant subcontract, to ensure that the risks and liabilities that are relevant to the subcontract are appropriately back-to-back.
Employers often include express provisions in the main construction contract requiring employer approval of the subcontractor before the contractor can enter into any subcontract. Further, in projects that involve a funder commonly include provisions into the main construction contract which make approval of the subcontractor conditional on the subcontractor entering into a warranty, duty of care or a direct agreement, allowing the employer direct recourse against the subcontractor.
In subcontracts, to minimise the risk to the contractor in terms of its payment obligations, pay-when-paid clauses may be incorporated. These are generally enforceable under UAE law, as opposed to paid-if-paid clauses that are generally not enforceable. For these types of provisions, the bargaining and negotiating strength of a subcontractor will generally not be as strong as that of the contractor/employer (the paying party).
18. What licences and other consents must contractors and construction professionals have to carry out local construction work? Are there any specific licensing requirements for international contractors and construction professionals?
To work in the UAE, contractors and construction professionals must establish a local onshore entity, which can take the form of either a:
- Branch office.
- Local limited liability company.
Once established, the company can apply for a trade licence. Each of the seven emirates in the UAE has its own authority (usually departments of economic development) responsible for issuing trade licences. The type of the trade licence required depends on the business activities of the company:
- Commercial licence is required if the company intends to conduct construction related activities.
- Professional licence is required if the company intends to conduct activities that include project management.
- Industrial licence is required if the company intends to conduct industrial or manufacturing activities.
19. What licences and other consents must a project obtain?
Before the commencement of a construction project, parties must first obtain a building permit and the relevant non-objection certificates from the government bodies in the emirate where the project is planned. These nonobjection certificates include permissions regarding road access, electrical wiring, water and sewage connections and permissions from the Civil Defence Authority.
During the project, various stages inspections are carried out, including inspections of the foundations, concrete work, structure and septic tanks.
On completion, final inspections must be carried out by the:
- Relevant authorities that completed the inspections on different stages.
- Civil Defence Authority.
Building occupancy permits must also be obtained, where applicable.
20. What types of insurance must be maintained by law? Are other non-compulsory types of insurance maintained under contract?
The UAE federal law does not require any specific construction related insurance to be taken out in respect of projects. However, the UAE Labour Law includes comprehensive indemnity and gratuity provisions in the event of an employee’s labour accident, occupational disease or death. As such, employers generally take out workers’
compensation insurance to cover these requirements.
The Federal Health Insurance Law, introduced in 2014, requires the companies to provide health insurance for all employees.
Generally, the responsibility for the insurance programme is primarily a matter for pre-contract negotiation. Usually, in the UAE, as in other jurisdictions, contractors take out and maintain all risks insurance.
21. What are the main requirements for hiring local and foreign workers?
The UAE Labour Law governs all onshore employee-related matters and is applicable to both public and private employees, whether UAE nationals or expatriate workers. The Labour Law does not apply to:
- Federal Government employees.
- Members of the armed forces, police or
- Domestic servants working in private residences.
- Workers employed in agriculture.
In addition, there are specific labour-related regulations applicable in some of the free zones. For example, the Dubai International Financial Centre (DIFC) is an offshore free zone with its own legal system, where employees are subject to the DIFC Law No. 4 of 2005.
The UAE Labour Law provides the following types of standard form employment contract:
- Fixed-term employment contract. A fixed-term contract has a commencement and completion date, is terminated at the end of the specified term (unless extended by mutual consent), and cannot exceed four years.
- Unlimited employment contract. An unlimited employment contract has a commencement date but no completion date. Such contract can be terminated subject to a 30-day notice period, which is commonly extended by the parties.
To hire a foreign employee, an application must be made to the Labour Department, to obtain a work permit. The criteria for approving a work permit are set out by the Ministry of Labour and Social Affairs, and require the employee to:
- Possess educational qualifications demonstrating the professional competence required.
- Have entered the UAE lawfully.
- Comply with the UAE residence regulations.
Foreign workers must be hired under the same employment contracts as local workers (see above, Local workers).
22. Which employment laws are relevant to projects?
All regulations under the UAE Labour Law apply to all construction employees, including the following rules:
- Emiratisation. The Emiratisation policy in place in the UAE encourages the employment of the UAE national workers. The UAE Labour Law provides that, in the event of non-availability of national workers, preference must first be given to workers who are nationals of an Arab country, followed by workers of other nationalities.
- Working hours. Under the UAE Labour Law, employees cannot work more than eight hours a day or more than 48 hours a week. However, this does not apply to persons holding management or supervisory positions. Employees of hotels, restaurants and commercial establishments are subject to a nine-hour daily limit. Working hours during the holy month of Ramadan are reduced by two hours per day.
- Overtime. Under the UAE Labour Law, overtime must not exceed two hours per day (unless necessary to prevent substantial loss or serious accident). Employees are entitled to an additional 25% of their usual hourly remuneration, increasing to 50% between 9pm and 4am.
23. Must an employer pay statutory redundancy or other payments at the end of a project? Are all employees eligible?
Under the UAE Labour Law, an employee who completes one year or more of continuous service is entitled to an end of service gratuity (ESG). ESG is calculated on an annual basis, with 21 days of salary being paid for every year for the first five years, and 30 days of salary for every additional year afterwards. In addition, a worker who voluntarily
resigns from their position between one to three years of service is entitled to one third of the ESG (Article 137, Labour Law). Where voluntary resignation occurs within three to five years, two thirds of the ESG are payable. Full severance must be paid following the completion of five years of continuous service. Additional payments for unused leave and repatriation expenses must also be made.
While there is no statutory redundancy payment under the UAE labour laws, similar entitlements applicable to voluntary resignations may apply to redundancies, in that, an employee is entitled to notice, payment in lieu of accrued untaken holidays and a payment of ESG. These are payable to an employee on termination, regardless of whether the employee resigns or the employer terminates employment and is always payable, unless the employment is terminated for gross misconduct.
Employers of Gulf Cooperation Council (GCC) or UAE nationals must enrol their employees in a federal pension scheme. Once registered, these employees cannot receive both a benefit under the pension scheme and the ESG, but can generally elect to receive whichever is more beneficial to them.
Health and safety
24. Which health and safety laws apply to projects?
There are several laws setting out health and safety requirements, both at the federal and individual emirates levels. At the federal level, laws such as the UAE Labour Law, the Penal Code and various other ministerial regulations contain provisions that must be complied with to ensure employees’ safety. These include:
- Providing employees with suitable protection from injury and fire hazards.
- Making available first aid kits.
- Providing a clean and hygienic working environment.
- Providing specific day-time rest periods for outside workers during the height of summer.
Individual emirates also set out additional health and safety requirements in respect of construction projects. For example, both Abu Dhabi and Dubai issued guidelines to improve safety standards in the construction sector.
25. Which local laws regulate projects’ effects on the environment?
Federal Law No. 24 of 1999 for the protection and development of the environment (Environment Law) provides for the protection from air pollution. It sets out permissible limits in respect of exhausts, gases, emission of air pollutants, chimney gas and smoke, and regulates the burning of waste and the use of pesticides. Among other protections, the Environment Law regulates drilling and construction, and requires that necessary precautions are taken when storing and transporting waste and dust.
The Environmental Law criminalises the introduction of any substance into the water environment which:
- Has an adverse effect on living or non-living resources.
- Endangers human health.
- Impedes water activities and tourism.
- Impairs the quality of water.
The Environmental Law sets out protections regarding the handling of hazardous substances and waste. It requires that all facilities established for the treatment of such waste must be licensed and strictly regulates the importation of hazardous waste.
Environmental impact assessments (EIAs)
Under the Environmental Law, all projects and establishments must, before the commencement of the intended activity, carry out a study and an analysis of the:
- Environmental feasibility of the activity.
- Establishment and practices that may affect environmental safety.
Various green regulations have been introduced in both Abu Dhabi and Dubai.
The Abu Dhabi Department of Municipal Affairs has introduced the Abu Dhabi Building Codes, which is a set of construction standards designed to address safety, fire protection and energy conservation, among other issues. These codes are applicable to all projects in Abu Dhabi, both private and commercial.
Dubai has also recently introduced its own set of regulations. The Green Building Regulations and Specifications sets out specific green building specifications applicable to all buildings within Dubai, with the aim of reducing the consumption of energy, water and materials in the emirate.
26. Do new buildings need to meet carbon emissions or climate change targets?
The UAE is estimated to have one of the largest carbon footprints in the world. While the country is currently under no legal obligation to reduce its footprint, it is actively participating in the United Nations Framework Convention on Climate Change conferences and establishes its own initiatives and sustainability targets to reduce its yearly emissions.
For many years, momentum has been building for a “greener” UAE, but it is in recent years that the country has seen the most developments in this area. In addition to the implementation of the Abu Dhabi Building Codes and the Green Building Regulations and Specifications (see Question 25, Sustainable development), the effort is furthered by the Dubai Strategic Plan 2015, which sets out ambitious targets to be met by 2021 regarding the use of sustainable resources and renewable energy sources.
Prohibiting corrupt practices
27. Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?
Although not specifically targeting the projects sector, laws regulating corruption in the UAE are contained in the UAE Federal Penal Code (Penal Code). The Penal Code regulates anti-bribery practices in the UAE, both at government level and in the private sector, criminalising bribery, or attempted bribery, of both private and public sector employees. Some emirates also have their own specific regulations (for example, the Dubai Human Resources Law also regulates the acceptance of gifts).
More recent developments in the UAE include the creation of an Anti-Corruption Unit in 2015 by General Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces. This unit will be tasked with identifying gaps in legislation and investigating irregularities and accusations
The Penal Code sets out separate penalties for the public and private sector. In the public sector, both those offering and accepting bribes are subject to penalties. Persons offering bribes are subject to a fine equivalent to the benefit offered, return of the benefit offered and up to five years of imprisonment. Public officers accepting bribes will be subject to a fine equivalent to the benefit accepted, reimbursement of the benefit accepted and, in certain circumstances, five to ten years of imprisonment. By contrast, in the private sector, only persons who accept bribes are subject to penalties, with the offender being subject to the same penalties as persons offering bribes in the public sector (see above).
Bankruptcy or insolvency
28. What rights do the client and funder have on the contractor’s bankruptcy or insolvency?
A valid contract cannot be terminated unless by mutual consent or court order (Article 267, UAE Civil Transactions Law). Therefore, it is common for clients and funders to insist on the inclusion of additional termination provisions in the contract in the case of bankruptcy or insolvency.
Public private partnerships
29.Are public private partnerships (PPPs) common in local construction projects? If so, which sectors commonly use PPPs?
With the publication of the Dubai Law No. 22 of 2015 (PPP Law) and the UAE Cabinet Resolution No. (1/1) of 2017 on the procedures manual for partnerships between federal entities and the private sector, there has been an increase in PPP projects in the UAE.
Currently, there are PPPs underway in the following sectors:
Examples of PPP in both existing and planned infrastructure include:
- Three utility scale renewable projects based on photovoltaic solar technology.
- Abu Dhabi’s Masdar solar and wind projects across the region.
- Dubai’s Roads and Transport Authority projects including the Union Square development.
- The upcoming Route 2020 project, expected to extend Dubai Metro from Jebel Ali to the Expo 2020 site.
30. What local laws apply to public private partnerships (PPPs)?
In 2017, the UAE government issued the UAE Cabinet Resolution No. (1/1) on partnerships between federal entities and the private sector. The manual intends to diversify the mechanism for developing the strategic infrastructure projects and improve the quality of services. It also provides a general framework for project lifecycles of partnerships with the private sector.
In 2015, the Government of Dubai enacted Dubai Law No. 22 of 2015 (Dubai PPP Law) which sets up the regulatory framework of PPP in the Emirate of Dubai. The Dubai PPP Law aims at encouraging the private sector to participate in the development of projects and increase investments. Under the Dubai PPP Law projects can either be proposed by a government entity or by the private sector.
31. What is the typical procurement or tender process in a public private partnership (PPP)
transaction? Does the government or another body publish standard forms of PPP project agreements and related contracts?
The tendering process for federal entities is conducted by the Ministry of Finance (MoF) procurement system, where it announces purchases related to MoF or other federal entities. Through this system, it also invites tenders and announces the contracts. To register with the MoF, suppliers must meet the requirements set out by MoF, submit the required documents, as well as pay the fees. The registration must be renewed annually.
Emirate of Abu Dhabi. To bid for contracts of the government of Abu Dhabi, contractors and suppliers must have an established presence in the Emirate of Abu Dhabi and must possess the licence needed to carry out business activities there.
Emirate of Dubai. The Dubai government uses the online eSupply portal operated by Dubai eGovernment and Tejari. This has an official eSupply procurement portal for the government of Dubai and for all suppliers interested in dealing with Dubai government entities.
Emirate of Sharjah. The Sharjah government follows a similar procedure to the one in Dubai to register contractors and issue contracts. The Sharjah government bodies will verify the company that applied for registration and on successful verification, the company will appear in its “list of approved suppliers”. This will allow contractors to bid for tenders.
32. Which are the most common formal dispute resolution methods used? Which courts and arbitration organisations deal with construction disputes?
Dispute resolution clauses
In many construction contracts, whether using a standard form or bespoke provisions, arbitration clauses seem to be the most commonly used form of dispute resolution. Some construction contracts provide for formal jurisdiction clauses, appointing the UAE courts as the required medium for settling disputes arising between employers, contractors and subcontractors.
On 15 May 2018, the UAE enacted a stand-alone Federal Arbitration Law No. 6 of 2018, which entered into force on 16 June 2018. The Arbitration Act was published in the Official Gazette No. 630/2018 and consolidates the various arbitration principles that have been confirmed by the decisions of the UAE Courts over the past years. With the Arbitration Act now in place, there is expected to be a surge in disputes being referred to arbitration, whether institutional or ad hoc, which is now the most preferred dispute resolution method in the construction industry.
In some instances, a dispute resolution clause in a construction contract can be multi-tiered, referring to the Dispute Adjudication Board (DAB) in the first instance then to arbitration. This is commonly applied in the Clause 20 of the FIDIC Books (1999 edition). However, the DAB is not always attractive to FIDIC users especially with the costs and hassle that come with exhausting this form of dispute resolution before allowing any of the parties to resort to arbitration. On the other hand, negotiation and amicable discussion is almost always required before arbitration (or litigation). Although negotiation can be an effective dispute resolution method, parties to a construction contract in the UAE do not effectively negotiate a settlement agreement and often use this cooling-off period to allow any required time period to elapse before resorting to arbitration.
Courts and arbitration organisations
Almost all courts in the UAE hear construction disputes.
The commonly used arbitration institutions in the UAE are the:
- Dubai International Arbitration Centre (DIAC) (www.diac.ae).
- Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC) (www.adccac.ae).
- International Chamber of Commerce (ICC) (www.iccwbo.org).
- DIFC-LCIA Arbitration Centre (www.difc-lcia.org).
The DIAC and the DIFC-LCIA Arbitration Centre are mostly identified as arbitration centres for handling any dispute arising from construction contracts. The ADCCAC remains a go-to arbitration centre in Abu Dhabi, specifically for Abu Dhabi government entities. The ICC is also widely relied on, especially for contracts based on the FIDIC forms. In 2017 a specialist court was created in the Dubai International Financial Centre (DIFC) for hearing construction disputes. The Technology and Construction Division (TCD) is a sub-division of the DIFC courts that will streamline the resolution of legal cases involving complex construction disputes.
Formal dispute resolution methods
Institutional arbitration is the most commonly used method for settling disputes arising from construction contracts, even more used than UAE courts. This is due to the significant expert engagement in arbitration for technical issues, as well as the qualification, flexibility and dedication that are usually expected from an arbitration tribunal.
There are no specific differences between local and international projects when it comes to identifying institutional arbitration as a dispute resolution method. The distinction between local and international projects is usually seen in the choice of the arbitration centre, the language of the arbitration and the governing law provisions.
33. What are the most commonly used alternative dispute resolution (ADR) methods?
Institutional arbitration is the most commonly used method of dispute resolution. Parties very rarely resort to ad hoc arbitration, although this method is not uncommon especially when the parties fail to agree on a choice of arbitration centre. While clause 20 of the FIDIC (1999 edition) provides for a multi-tier dispute resolution procedure, which requires a dispute to be referred in the first instance to DAB, parties often strike it out due to costs and complexities associated with having two dispute resolution methods (adjudication and arbitration). Some users even consider that the DAB might delay the final resolution of the dispute through arbitration, which can take years before an award is issued. The same concerns apply to expert determination and this method is not very common in construction projects in the UAE.
Negotiation is often relied on as a cooling-off period before initiating any arbitration. Mediation [is less popular, however,] the parties to an arbitration can see its true value when they decide to settle the dispute through mediation at a later stage, after the arbitration is initiated.
34. What are the main tax issues arising on projects?
The UAE Ministry of Finance published Federal Decree Law No. (8) of 2017 on Value Add Tax (VAT) which came into force on 1 January 2018. The construction industry will be included in the VAT regulations and will attract the standard VAT rate of 5%.
The introduction of VAT will affect construction costs and the cost of building materials and will therefore impact the contract price for construction projects.
Clause 14.1 (b) of the FIDIC Red Book, provides that:
- The contractor must pay all taxes as required under the contract.
- The contract price will not be adjusted for such costs except as stated in Sub-Clause 13.7. Sub-Clause 13.7 allows a contractor to claim an increase in costs due to a change in the laws of the country where the works have been executed.
Clause 13.7 appears to allow a contractor to claim adjustments in the contract price from the employer due to the introduction of the new VAT laws. This may be excluded by particular provisions of the construction contract which can modify the requirements of Clause 13.7. Therefore parties to construction contracts should specify at the outset
whether VAT is paid on top of the contract price or if it is included in the contract price.
35. Are any methods commonly used to mitigate tax liability on projects? Are there any tax incentives to carry out regeneration projects?
The implementation of the new VAT laws (see Question 34) may lead the project sector to explore taxation and mitigation methods. However, given that the VAT law was enacted in January 2018 it is difficult to predict how any such mitigation schemes will be used.
Other requirements for international contractors
36. Are there any specific requirements that international contractors or construction professionals must comply with?
As detailed in Question 2,after being awarded a project following a public sector tender, a foreign contractor or relevant construction professional must either:
- Enter into a formal contract with a local agent or partner.
- Establish a local onshore company.
More generally, to undertake construction works outside of a public sector tender, the contractor or relevant construction professional must also establish a local onshore entity. This legal entity typically takes the form of a:
- Branch office. With a branch office, the parent company retains 100% ownership and is responsible for all the branch’s liabilities.
- Local limited liability company (LLC). An LLC has a separate legal identity from its parent company. UAE nationals must hold a 51% ownership in the LLC and there must be between two and 50 shareholders.
Both branch offices and LLCs must be registered in the relevant emirate’s commercial register (Federal Law No. 8 of 1984 concerning Commercial Companies (as amended)).
37. Are there any proposals to reform construction and projects law?
The introduction of the PPP Law (see Questions 29 to 31) and the VAT law and corporate tax laws (see Questions 34 and 35) will have an effect on the construction and project sector.
With the World Expo 2020 only two years away, and the effect that the current oil price is having on the oildependent Middle Eastern states, current trends are clearly geared towards encouraging private and international investment in the UAE. The introduction of the PPP Law is a large step in this direction.
However, it is not currently possible to predict further developments in this field.