Construction and Projects: United Arab Emirates
A Q&A guide to construction and projects in the United Arab Emirates. This Q&A is part of the PLC multi-jurisdictional guide to Construction and Projects. For a full list of jurisdictional Q&As visit www.practicallaw.com/constructionhandbook.
The construction sector
The economic crisis has had various effects on the construction sector in the United Arab Emirates (UAE):
Projects have been reduced in scope or placed on go-slow. This has created novel legal challenges. For example, to accommodate the employer's reduced spending power, supplemental contracts have had to be negotiated to:
define a new scope; and/or
cap monthly values of work to reduce productivity and artificially extend completion dates.
During the last 12 months, there has been a rapid rise in referrals of construction-related disputes to arbitration and other forms of dispute resolution, because of the termination or long-term suspension of many projects, and consequent non-payment of contractors and consultants. (See Questions 32 to 35.)
Payment demands under unconditional performance and advance payment bonds have proliferated, with some startling results. UAE courts have on a number of occasions been persuaded to "attach" or prevent payment of bonds, particularly if they are not convinced of the merits of the demand.
Some say the courts have been too easily persuaded that the beneficiary is abusing his position in demanding payment. This has shaken confidence in the viability of "on demand" bonds. Commentators have even suggested that there is a political dimension at work, with the courts protecting the banks from having to pay out on bonds, knowing that their customers are unable to meet their counter-indemnities because of overtrading before the recession.
There has been a huge reduction in the availability of new work, particularly in Dubai. This has caused contractors and consultants to investigate new markets in the wider region, including Saudi Arabia and North Africa. Despite the slowdown, some Dubai projects surprisingly are still going ahead (see below).
As is typical during a downturn, many speculative projects have been shelved, but infrastructure or projects which help the economy recover from recession continue or have been launched. The following projects are currently going ahead:
The Dubai Pearl project in Media City, and the Pentominium in Dubai Marina, both of which incorporate a large residential offering. The aim may be to offer the market completed projects rather than off-plan sales, which have had their credibility damaged by project delays and cancellations.
The completion of the first line of the Dubai Metro by the end of 2010.
A US$5.59 billion (about EUR4 billion) nuclear power plant project, which has been awarded to a Korean joint venture.
Plans are well advanced in preparing tenders for a federal rail system at a projected cost of US$30 billion (about EUR22 billion). This should "open up" the smaller Northern Emirates, making them less economically dependent on the larger Emirates of Dubai and Abu Dhabi.
Transaction structures and finance
A wide variety of transactional structures and corporate vehicles are used in the UAE, including:
Joint ventures. Joint ventures are common. They are often used between a local contractor and a much larger international contractor, and particularly in the case of "mega" projects where it is impossible for a single contracting entity to carry out the whole project. Joint ventures can be contractual or based on more complex partnership arrangements. The contractual joint venture is by far the most common.
Special purpose vehicles (SPVs). SPVs are also often used in "mega" projects, where a local contractor, an international contractor and, say, a facilities management contractor, form a vehicle to deliver the project. This ensures effective risk management. SPVs generally take the form of a limited liability company (LLC) specifically created for the project (see Question 38).
A variety of financing structures are used in the UAE, ranging from debt/equity finance to government funding. After government funding, conventional project finance is most common.
The financial turmoil of the last two years has resulted in a rapid decline in the availability of debt finance. The majority of projects proceeding in the jurisdiction are heavily reliant on government funding. Looking forward, it is difficult to see this situation changing in the short term.
The employer typically requires bonds and/or parent company guarantees from the contractor and/or its parent company, to secure performance of the contractor's obligations. Contractors typically give these bonds and guarantees directly to the employer but can, in exceptional circumstances, give them directly to a funding institution.
Appropriate risk transfer to the contractor in the construction documentation is a key factor in the funder's assessment of the strength of the security package available. Due diligence is carried out on the construction documentation to ensure there is an effective risk transfer.
In more complex projects, in particular those involving limited recourse financing, a funding institution will generally require either:
Direct agreements. These agreements give the funder "breathing space" when a contractor's termination right has become exercisable. The contractor allows the funder an opportunity to replace the project sponsor, complete construction and recover its debt.
Collateral warranties. These agreements create a direct contractual relationship between a contractor and a funding institution. The contractor simply undertakes to the funder to comply with the construction contract.
The main players in construction projects in the UAE are, as in other jurisdictions:
The project developer, generally referred to as the employer.
Employers tend to fall into one of the following categories:
Commercial and leisure real estate developers (often wholly or partly government-owned).
Public works authorities and public utilities (again usually government-owned although there are examples in the UAE of power, water and infrastructure facilities being procured through PPP structures (see Question 29)).
Oil and gas companies.
Consultants are typically engaged to provide the following services:
Civil and structural engineering.
Mechanical and electrical engineering.
Under the most commonly used procurement and contractual arrangements, the employer engages design, supervision and project management consultants. However, if procurement is on a design/build basis (that is, the contractor is responsible for design as well as construction) or EPC/turnkey basis (that is, the contractor is responsible for the engineering, procurement and construction of a ready-to-use asset), the contractor provides design services, by hiring an external design team as sub-consultants (see Question 17).
Standard forms of contracts
Construction contracts are typically based on the International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils) (FIDIC) suite of contracts. An employer will often use the following forms of contract (or local adaptations of them), depending on the type of procurement:
Traditional "owner-design" procurement (that is, the owner, not the contractor, takes design risk): the FIDIC Red Book (Conditions of Contract for Construction) (FIDIC Red Book).
Design/build projects: the FIDIC Yellow Book (Conditions of Contract for Plant and Design Build).
EPC/turnkey projects: the Silver Book (Conditions of Contract for EPC/Turnkey Projects) (FIDIC Silver Book).
Government departments tend to use FIDIC-based forms. It is still common to encounter the 1987 edition of the FIDIC Red Book rather than its successor, the 1999 edition. The Abu Dhabi Government has recently adopted the 1999 edition, with some amendments, for use by government departments.
Other well-known English language standard form contracts, including the NEC 3 engineering and construction contracts, are occasionally used.
Procurement approaches involving concepts such as "partnering" and "alliancing" have not yet entered mainstream procurement in the UAE.
The considerations which determine the choice of risk allocation in the UAE are no different from elsewhere in global construction markets. There is a tendency, particularly on major real estate and other large building projects, for the:
Employer to assume design and site conditions risk.
Contractor to assume all other construction risks, including escalation in the cost of materials, plant and labour.
Lack of clarity in the allocation of these risks often results from poorly drafted amendments or supplements to standard form contracts.
The risks that have adversely affected the UAE construction industry from late 2008 to 2010 have been connected to lack of liquidity and the scaling-down or cancellation of projects following the global economic turmoil (see Question 1).
Clauses excluding liability for consequential losses, loss of production, loss of revenue and so on are generally enforceable under UAE law.
However, contracts governed by UAE law are subject to certain statutory terms which cannot be excluded. For example:
Contractors and architects (and other designers) are bound by strict decennial liability (that is, liability for ten years following completion and handover of the construction works) for dangerous or structural defects in buildings or other structures (Articles 880-883, Civil Code).
Any provision which entirely exempts a guilty party from liability for breach of contract will be void (Article 296, Civil Code).
Either party can apply to the court (or arbitral tribunal) to override a contractually agreed compensation arrangement and adjust the specified compensation to make equal to the actual loss suffered (Article 390, Civil Code). This is particularly important in the context of construction contracts, which routinely include provisions imposing liability to pay liquidated damages for culpable delay.
A court or arbitrator can, after weighing up the interests of each party, reduce a contractual obligation to a "reasonable level", if all of the following apply (Article 249, Civil Code):
the obligation is "oppressive". This means that the clause must be onerous, although it does not have to be impossible to perform;
there are "exceptional circumstances" of a public nature; and
the obligor is threatened with "grave loss".
There is some uncertainty surrounding the circumstances in which Article 249 can be successfully invoked, but any attempts to exclude it will be void.
Overall caps on liability, as well as sub-caps for delay and performance penalties or liquidated damages, are common. They may be subject to pre-contract negotiation, and are susceptible to challenge under Article 390 of the Civil Code (see Question 10).
Contractual force majeure provisions are common, and can be expected to be enforceable as written. Typically, the force majeure event:
Excuses non-performance of an obligation (other than a payment obligation).
Does not entitle the affected party to compensation from the other party.
In exceptional circumstances a court or arbitrator can reduce an oppressive obligation to a reasonable level (Article 249, Civil Code) (see Question 10).
Construction professionals are usually appointed under conventional professional services contracts. The FIDIC White Book (Client/Consultant Model Services Agreement) is widely but not invariably used as the platform document, often with supplementary additional conditions.
It is common for construction professionals' contracts to include:
Provisions imposing the familiar standard of "reasonable professional skill and care".
Exclusions of liability (for example, for indirect and consequential losses).
However, these provisions are subject to mandatory statutory terms such as decennial liability (see Question 10).
Typically, contractors are paid in arrears under periodic payment certificates issued by the employer's supervising architect or engineer. Advance payments, secured by bank guarantees or bonds, are customary.
There is no statutory or other extra-contractual legal procedure by which contractors can secure payment. There is no equivalent legal mechanism to the "constructor's lien". Employers rarely, if ever, grant instruments such as payment bonds and parent company guarantees. Contractors, however, will invariably be required to provide these securities.
Mitigation of risk of non-payment is generally viewed as a matter for pre-contract due diligence (see Question 4).
Contractual extension of time clauses often list categories of events which will entitle a contractor to an extension of time to the completion date. The starting point may be FIDIC-based (see Question 6) but negotiated amendments are the norm.
Contractors typically bear the risk of delays caused by the following events, over which they have little control:
Failure to procure permits.
Authorities' failure to issue approvals.
Delay-related liquidated damages clauses, including termination options where an agreed liquidated damages cap is exceeded, are also normally subject to pre-contract negotiation.
Typically, the starting point will be a FIDIC-based clause (see Question 6). This usually provides that:
The employer (or engineer) can direct a variation to the works at any time before they are taken over.
The contractor must comply with this direction.
The variation will entitle the contractor to an extension of time, to be assessed in the first instance by the engineer.
The contract can also require the contractor to provide its estimated cost of implementing a proposed variation before the engineer directs it.
Otherwise, the contract will generally detail a tiered valuation method, for example:
The contractor and employer initially attempt to agree the valuation.
Failing that, the cost is determined by:
bill rates, if there is a bill of quantities in the contract; or
the engineer, according to a clause which allows the engineer to assess value based on reasonable rates.
If the contractor or the employer is dissatisfied with the engineer's ultimate determination, they can refer the determination to the dispute resolution procedure specified in the contract (see Questions 32 to 35).
Employers often seek to insert provisions in the main contract which enable them to pay subcontractors directly if the contractor fails to pay the subcontractors. Contractors will typically seek to "back-to-back" their contracts with those of their subcontractors (that is, full pass-down of risk, obligation and liability for the relevant work to the subcontractor).
An employer will sometimes seek to incorporate provisions in the main contract which make its approval of a subcontractor conditional on the subcontractor signing a collateral warranty. This gives the employer direct rights against the subcontractor (see Question 4). Subcontractors are rarely willing to sign these warranties.
Each Emirate's department of economic development (DED) issues trade licences to conduct specific activities. The DEDs distinguish between:
"Commercial" activities, which include construction-related activities.
"Professional" activities, which include design, engineering and project management.
Generally, a licence cannot include both commercial and professional activities. Therefore, contractors wishing to undertake design/build contracts have faced difficulties, although these can usually be surmounted by establishing two entities, one undertaking commercial activities and the other professional activities.
The categories of permitted construction-related activities vary from Emirate to Emirate but typically include:
Steel construction contracting.
Sewage and drainage contracting.
Water pipelines and stations contracting.
Electric power station contracting.
Bridge and dam contracting.
Land digging, filling and levelling.
Port and marine construction contracting.
Licensing requirements vary according to the activity. For example:
Experience (for example, type and length of experience).
Approval from the relevant authorities.
Requirements (particularly documentation requirements) differ depending on whether the entity is a branch office or an LLC.
Additional requirements apply in the following cases:
Projects with an environmental impact. Any entity seeking to undertake a project in the UAE which may have an impact on the environment must apply for a licence (see Question 25).
Abu Dhabi government projects. In Abu Dhabi, contractors must obtain appropriate classification if they wish to carry out government projects (applications should be made to the planning section of the Abu Dhabi DED). Classification depends primarily on the value of the project. Conditions attach to each classification, for example, the:
number of engineers on the ground;
engineers' experience; and
company's (or its shareholders') experience.
Dubai skyscrapers. The Dubai Municipality issues "building contracting" licences, but these do not necessarily allow the construction of high-rise buildings. To construct high-rise buildings, a contractor must apply to the Dubai Municipality to amend its "building contracting" activity to a higher level (for example, G+20, G+30, G+40 and so on). The Dubai Municipality carries out an assessment process before allowing this change. The procedure and time frame of the assessment varies. The Municipality can request:
certified experience statements (showing experience of constructing buildings of similar heights); and
evidence of qualified and adequately experienced staff.
There are no specific construction-related insurances that a contractor must maintain by law. Responsibility for the insurance programme is a matter for pre-contract negotiation. Typically, in the UAE as elsewhere, contractors take out and maintain:
All risks insurance.
Worker's compensation insurance.
Federal Labour Law No. 8 of 1980 concerning labour relations (as amended) (Labour Law) governs all employment-related matters.
The Federal Ministry of Labour enforces the Labour Law, which applies to both national and foreign workers in the private sector.
The Labour Law provides a standard specimen employment contract for UAE nationals. Any contract governing employment in the UAE must comply with this contract.
There are certain obstacles to employing foreign workers:
An "Emiratisation" policy is in place. This means that certain companies (primarily government departments and companies operating in the banking and insurance sector) are encouraged, or in some cases required, to employ UAE nationals. Preference is to be given to UAE nationals, and then Arab nationals, over foreign workers.
This policy is set out in the Labour Law. In practice, it is encouraged rather than enforced, although in some situations companies have been required to employ UAE nationals as a condition to employing new non-UAE nationals.
There have also been moves to reserve some employment categories for UAE nationals, including:
public relations officers; and
The Ministry of Labour regularly issues circulars on this policy, so the situation changes from time to time.
Foreign nationals can only be employed in the UAE after having obtained:
a work permit from the Ministry of Labour; and
a residence visa from the Department of Immigration and Naturalisation in the relevant Emirate.
There is currently no statutory minimum wage in the UAE. Although the Labour Law states that there is a minimum wage which is fixed by ministerial decision, there does not appear to have been a ministerial decision issued in this respect.
The maximum number of working hours is:
Eight hours per day.
48 hours per week.
These maximum working hours do not apply to:
Specific categories of work to which a Ministry of Labour resolution has attributed higher or lower maximum working hours (for example, hospitality workers and security workers can work nine hours per day).
Persons holding senior executive, managerial or supervisory positions, if these positions grant those persons the powers of an employer over workers.
In addition, working hours vary:
During the holy month of Ramadan.
According to various resolutions and directives issued by the Ministry of Labour. For example, Resolution No. 467 requires workers working outdoors to be allowed to rest between 12:30 pm and 4:30 pm during July and August.
Employers must pay a lump-sum end-of-service gratuity to a worker on termination of his employment in the UAE, provided the employee:
Has completed at least one year of continuous service.
Is not taking part in a UAE pension plan. If an employer has a pension plan for its workers (which is compulsory for UAE nationals), a worker can elect to receive either:
the benefits under the pension plan; or
the end of service gratuity.
This is generally on the condition that the amount received under the pension plan is equal to or higher than the gratuity.
This payment is in addition to any other amounts that are payable, for example, for:
Any contractual termination benefits.
Health and safety laws
Employers must ensure the health and safety of workers by:
Implementing measures approved by the Ministry of Labour to protect workers against occupational injury and disease, fire and other hazards. Ministerial Order No. 32 of 1982 sets out detailed measures, including:
fire prevention; and
construction site requirements.
Complying with local or Emirate-level codes or regulations. For example, the Code of Construction Safety Practice (Guidelines for the Construction Industry in the Emirate of Dubai) applies to construction workers.
Workers must obey safety instructions and use safety equipment provided.
Environmental impact assessments.
Environmental legislation exists both at the federal level and within each Emirate.
The relevant authority and regulations will generally depend on the location of the project. The structure of environmental legislation is as follows:
Federal law. The key federal environmental law is Federal Law No. 24 of 1999 for the protection and development of the environment (Environment Law).
The relevant authority, the Ministry of Environment and Water, has published a number of resolutions and regulations that have effect across the UAE.
The Environment Law and its accompanying regulations address the following key areas:
environmental impact assessments (Chapter 1, Section 1);
protection of the marine environment (Chapter 2);
pollution from land sources (Chapter 2, Section 2, Part II);
soil protection (Chapter 3);
protection of air from pollution (Chapter 4); and
handling of hazardous substances and wastes (Chapter 5).
Any entity seeking to undertake a project in the UAE which may have an impact on the environment must apply to the Ministry of Environment and Water or the relevant local authority for a licence.
Local law and regulations. Within each Emirate, local agencies supplement the federal laws at a local level, by passing binding regulations and orders. For example, the following agencies are responsible for environmental matters:
the Environment Agency in Abu Dhabi; and
the Dubai Municipality (Environment Department) in Dubai. This agency has issued Local Order No. 61 of 1991, which governs environmental law at the local level.
Local laws and regulations are not always available in English. Sometimes they can only be obtained on request from the relevant authority.
Federal laws should prevail in the case of any inconsistency with local laws or regulations, although in practice, local authorities can and often do enforce the more onerous local regulations.
Municipalities and town planning departments also regulate certain areas, including:
pollution control; and
Local guidelines. Regulators issue technical guidelines and codes of practice. For example, the Dubai Municipality has published technical guidelines and codes of practice which cover matters such as hazardous waste disposal approval requirements. It is not always clear whether these guidelines are binding.
Industrial company regulations. Some large industrial companies have a semi-regulatory function in relation to environmental issues. For example:
The Abu Dhabi National Oil Company group has its own guidelines with which any parties engaging with it must comply. These guidelines deal with environmental issues such as the:
elimination of hydrocarbon flaring;
abolition of continuous venting of hydrocarbon disposal;
optimisation of land use and energy resources;
re-injection of produced water and other effluents;
minimisation of the use of oil-based muds; and
disposal of drilling muds and cuttings.
The Environment, Health and Safety in Dubai controls, regulates and enforces environment, health, safety and fire protection rules. It has jurisdiction over all Dubai World Business Units including:
Air standards are regulated by the Environment Law.
Water pollution is regulated by the Environment Law.
UAE environmental legislation regulates the handling of waste and hazardous substances, including its:
Environmental impact assessments
Projects that may have an impact on the environment can be subject to environmental study requirements such as environmental impact assessments and/or various environmental feasibility studies, depending on the specific project and the requirements of the relevant authorities in this respect.
There is considerable momentum in the UAE in relation to developing green building codes, regulations and guidelines:
A new Green Building Code is due to be launched imminently in Dubai. It is generally expected that the code will incorporate US Leadership in Environmental Energy and Design (LEED) standards, certain European requirements and other matters specific to Dubai's climate.
In early 2008, the Abu Dhabi government launched a sustainability programme which included a voluntary green build rating system known as the Estidama Pearls Design System. The system is now at an advanced stage of development, having been progressively implemented across projects in Abu Dhabi.
In the first half of 2010, the Abu Dhabi Department of Municipal Affairs intends to introduce a set of building codes based on International Code Council standards (the standards for US building codes). The new codes will include certain mandatory energy conservation measures for new buildings.
A federal green building code that will regulate all green building codes being developed by the individual Emirates should be implemented in the near future.
UAE authorities can impose criminal sanctions for:
In December 2009, in response to a number of high-profile corruption cases, the Ruler of Dubai issued Law No. 37 of 2009 which introduced new sanctions in respect of unlawfully acquired funds (any funds directly or indirectly acquired as a result of an act punishable by law) and, separately, "Public Funds", which encompasses funds belonging to private entities in which the government is a shareholder or has an interest. The precise scope of the law is uncertain.
The potential penalty for breach of this law is imprisonment of between five and twenty years, unless the embezzled amount is returned or settlement agreed. If the infringer is a private-sector company, an individual can be deemed to bear responsibility for the company's actions, in which case the debt is attributed to him and he can be imprisoned.
PPPs are not common in the UAE, although examples exist, particularly in Abu Dhabi, of infrastructure being procured and maintained under long-term concession contracts. The Abu Dhabi Water and Electricity Authority (ADWEA) programme of procurement of power and water facilities under PPP structures has been famously successful.
Construction dispute resolution
Litigation and arbitration remain the usual dispute resolution methods. Most construction disputes are resolved through arbitration before one of the local institutions (see Question 35).
The leading institutions for construction arbitration in the UAE are the:
A number of government departments (for example, the Dubai Municipality and the Dubai Roads and Transport Authority) have their own arbitration rules which they expect to be incorporated into their agreements.
Value added tax (VAT)?
Stamp duty/transfer tax (or equivalent)?
Contractors operating in the UAE are not subject to specific construction-related taxes. There are no income, personal, withholding, capital or payroll taxes levied in the UAE (with the exception of pension contribution obligations for employed UAE nationals). There are no consumption taxes currently levied in the UAE.
There has been recent press speculation that VAT or a similar consumption tax regime will shortly be introduced in the UAE. Customs duty in the UAE is levied at 5% of the value of the goods or services (including insurance and freight).
Special licensing or other requirements for foreign contractors.
Legal or practical considerations that may restrict foreign contractors.
To carry out construction work in the UAE, a contractor must satisfy the following requirements:
Establish a legal entity in the relevant Emirate. Typically, contractors set up either:
An LLC. Foreign ownership of an LLC is limited to 49% of the share capital. A UAE national or an entity wholly owned by UAE nationals must hold the remaining 51%; or
A branch office. A branch office, unlike an LLC, is merely an extension of the foreign entity and therefore the parent bears the branch office's liabilities.
Register the legal entity in the relevant Emirate's commercial register.
(Federal Law No. 8 of 1984 concerning Commercial Companies (as amended).)
In addition, a contractor for a public sector tender must be either:
A UAE citizen (individual or company) and registered with one of the UAE Chambers of Commerce and Industry.
A foreigner with a local partner or agent under a formal contract (Article 8, Federal Regulation of Conditions of Purchases, Tenders and Contracts, Financial Order No. 16 of 1973 (as amended)).
There may also be restrictions on employing non-UAE nationals (see Question 21, Foreign workers).
Foreign contractors should also be aware that licences are required, and that additional obligations may apply, for example in relation to government projects and skyscrapers (see Question 19).
There are no reform proposals specifically related to construction law. However, there are urgent moves afoot to comprehensively overhaul the UAE's insolvency regime, which is currently undeveloped.
Various green building codes are also currently being promoted or developed (see Question 25, Sustainable development).
Main construction organisations
Society of Construction Law (Gulf) (SCLG)
Main activities: The SCLG aims to promote the study and understanding of construction law among construction industry players in the UAE and Gulf region. It promotes individual business interests and acts as a forum for the better understanding of construction law and its practical application in the industry in the Gulf region.
The SCLG is affiliated with the Society of Construction Law (UK) (www.scl.org.uk). It is open to everyone with an interest in construction law and how it affects their work. It welcomes members from the Gulf region and beyond. The SCLG is strictly independent of commercial interests.