United Arab Emirates: Liens and Priority Rights - ‘self-help' remedies for the disgruntled contractor under UAE Law?

Last Updated: 12 May 2016
Article by Andrew MacCuish and Nicole Newdigate

This is the second of two articles[1], which provide an overview of two 'self-help' remedies available under the general law in the United Arab Emirates (UAE), for the unpaid and, no doubt, disgruntled contractor.  We say 'self-help', as in the first instance the remedies do not require the assistance of the courts.

Securing payment for services and goods supplied is a common point of contention between a contractor and an employer. It is not uncommon for a contractor to face a very real struggle to receive payment.  As mentioned in our first article, the prospect of being required to work, but yet not be paid, is distinctly unattractive to a contractor.

In this article, we address what may conveniently be called a 'lien', and the registration of a priority right over real property, as potential remedies available to the contractor.  These points will, of course, need to be considered against the background of the parties' relevant contractual arrangements and the particular circumstances that apply, in each given case.

We conclude with some brief comments concerning the use of such remedies against the governments of the UAE and the various Emirates, in particular Dubai.

Lien

A right exists in many jurisdictions for the 'unpaid contractor' to retain possession of property on which it has worked, until paid for that work.  In most jurisdictions, this right of retention is known as a "lien", or "workman's lien", or "common law lien".  It manifests itself in many forms.  For example, in English law, a lawyer will have the right to retain his or her client's papers, or a mechanic to retain possession of a vehicle he or she has worked on, until paid.

A convenient definition of a lien is:

"a right conferred by law upon a person who has put money or money's worth into a property of another, of retaining such property in his possession until he has been compensated"[2].

Depending on the jurisdiction, certain requirements need to be met before the right to a lien can be exercised lawfully.  For example, in South Africa the right to exercise a lien is a common law remedy and a contractor would need to prove possession of the property and that the owner of the property had been enriched by the contractor's efforts.

In the UAE, Article 879 of Federal Law No. 5 of 1985, The Civil Transactions Law ("Civil Code"), provides a remedy that closely resembles, if not replicates, the concept of a common law lien, albeit the word 'lien' is not used.

Article 879(1) and (2), on one translation into English[3], reads as follows:

"(1)If the work of the contractor produces (a beneficial) effect on the property in question, he may retain it until the consideration due is paid.  And if it is lost in his hands prior to the payment of the consideration, he shall not be liable to the loss, nor shall he be entitled to the consideration.

(2)If his work produces no (beneficial) effect on the property, he shall not have the right to retain it pending payment of the consideration, and if he does so and the property is lost, he shall be liable in the same manner as if he had misappropriated it."

There is, however, very little judicial authority and guidance available in the UAE on the exercise of the Article 879 "lien".  Court judgments are not readily available to non-parties in the UAE, and in any event one judge is not usually bound by the decision of another judge.

Further, on a practical level, as far as we are aware, liens do not appear to be frequently used by contactors in the UAE.

As is evident from Article 879, the key lies in whether the work undertaken by the contractor produced a beneficial effect on the property. The production of a beneficial effect on the property is imperative for the contractor to lawfully exercise rights under Article 879.  In other words, if no beneficial effect is created, the contractor may not retain possession of the property; to do so in those circumstances would be unlawful.

This begs the question as to what constitutes a 'beneficial effect', as the term is not defined.  In the absence of available judicial authority or guidance, we can only hazard our best (albeit considered) guess.  On a simple interpretation, a 'beneficial effect' would be an effect which created any increase in the value of, or in some way improves, the property. 

There may be cases where there is clearly a beneficial effect, but that is not always to be the case. For example, if the works are said to be defective, in whole or in part, how does that leave matters – does that negate any beneficial effect?  If work had been commenced but, for good reason, not completed, it may be argued that at the point work stopped the work has not produced a beneficial effect.  Or what if the nature of the work is not intended to be beneficial; for example, the work is the removal materials that are no longer needed and only have scrap value?  There is no immediate or clear answer in such circumstances.  But what is clear is that the onus is on the person alleging that there has been a beneficial effect, and if that fails, so does the entitlement to claim a lien and lawful possession.

Another practical issue is the fact that there may be more than one contractor who wishes to exercise a right of retention for unpaid works over the same property, potentially leading to a situation in which a plurality of independent contractors simultaneously exercising their rights under Article 879; on the face of the Article there is no requirement for exclusive retention of the relevant property.  Unlike under Article 1527(2) of the Civil Code (which is discussed below), an order of priority is not provided for in Article 879, and the various contractors in possession will continue simultaneously to retain the property until they receive compensation, or cease to retain the property, or a court determines the matter.  The solution here may be found in the old phrase, 'possession is nine-tenths of the law'.

Should the contractor unlawfully retain the property under Article 879(1) and the 'property is lost', the contractor will be liable in the 'same manner as if it had misappropriated it'.  Therefore, in order to minimise the risk of being exposed to a damages claim, the contractor will need to be certain that it can prove a beneficial effect, before it seeks to claim a right of retention under Article 879.

The remedy under Article 879 may, by the mere virtue of the contractor remaining in possession of the property, prove to be commercially effective in procuring payment from the employer, as it may frustrate the employer's need for the property.  That said, it does not come without its disadvantages, which include (i) the allocation of additional resources to keep continuous possession of the property, and (ii)  the exposure to a damages claim in the event that the attempted exercise of the Article 879 right is found to be unlawful and damage is suffered by the owner of the property.

Finally, it is important to note that Article 879 is not available to a subcontractor against the employer.  Article 891 of the Civil Code provides that a subcontractor, "shall have no claim against the employer for anything due to him from the first contractor" unless an assignment has taken place.

Article 1527 of the Civil Code

Chapter 3 of the Civil Code is titled, in a commonly used English translation, "Priority Rights (Liens)". However, while it provides a remedy for our unpaid and disgruntled contractor, the use and meaning of the word 'lien' in this chapter of the Civil Code is not entirely consistent with the use and meaning in a common law jurisdiction. 

There is very little commentary and guidance as to the application and workings of Article 1527 and, from what we can gather, it does not appear to be a popular remedy amongst contractors.  Our comments above about publicly available court decisions, and their non-binding nature on other judges, are of equal application here.

Article 1527 is particular to contractors and engineers translated into English[4] states:

"(1)Amounts due to contractors and building engineers who have undertaken to construct buildings or other installations, or to reconstruct, repair or maintain the same, shall have the status of a priority right over such structures, but to the extent to which it exceeds the value of the land at the time of sale, by reason of such works.

(2)Such priority right must be registered and it shall rank as from the time of registration."

In accordance with Article 1527, an amount due to a contractor or building engineer has the same status as a priority right.  A priority right is somewhat inelegantly defined in Article 1504 of the Civil Code as, "a specific right over property following (such property), conferring upon the obligee priority status in obtaining his right in accordance with his bargain and as acknowledged by law". 

The priority right is over the "structures" listed in Article 1527 and the value appears to be limited to "the extent to which it exceeds the value of the land at the time of the sale by reason of such works".  The priority right must be registered in order to be effective and to rank accordingly.  Law No. (7) of 2006 concerning Real Property Registration in the Emirate of Dubai requires, at Article 9, that all transactions that 'create, transfer, change or cancel rights' over land are recorded in the Land Register in order to have effect. 

Article 1508(1) provides that the provisions relating to pledges of security are applicable to priority rights over real property, provided that such provisions are not in conflict with the nature of such rights.  As such, the contractor/building engineer, provided that they have registered the right, will be entitled to satisfy such a right out of the sale of the proceeds of the land.

There is very little guidance on this self-help remedy and there is disparity and lack of clarity when it comes to the application of Article 1527.  For example, at what point is an amount considered to be 'due' for the purposes of triggering the provisions of Article 1527[5]? By exercising this remedy and registering a priority right, a contractor will have the comfort of priority ranking upon the sale of the property, whether the sale is instigated by the contactor or some other person.  However, given the uncertainty that surrounds this 'self-help' remedy, it should be approached with caution by the unpaid and disgruntled contractor.

In practical terms we know of one case where, following the global financial crisis and the cancellation of a project, a contractor retained its presence on site (including maintaining site security), on the basis that when the site was eventually needed, necessity would dictate that the employer/developer would need to come to terms with and settle or resolve the contractor's claims, in order to obtain possession of the site.  The lawfulness of the contractor's actions has not been tested.

Application to UAE and Dubai Government Entities

In brief, the right of attachment cannot be exercised against the Ruler of Dubai or the Government of the UAE.  Accordingly contractors can only exercise this remedy in respect of non-governmental contracts.

Article 247(1)(i) of the Civil Procedure Law No. 11 of 1992 prohibits the attachment of public property owned by the State or of any of the Emirates, and Article 103(2) of the Civil Code precludes attachments against governmental property. 

Furthermore, Dubai Law No. 3 of 1996 concerning Government Claims, as amended, provides that there can be no recovery of debt against the Ruler or Government of Dubai through seizure or attachment or obtaining possession.

Conclusion

Articles 879 and 1527 may prove helpful as 'self-help' remedies for the contractor in respect of claims against non-government entities. However it is advised that they are approached with care, and the benefit of detailed legal advice.


[2]  P.C. Loots, "Engineering and Construction Law" (1985).

[3]  There is no "official" translation, and the Arabic is definitive.

[4]  Supra.

[5]  Is it from the date that the amount becomes due and payable in accordance with a payment certificate or upon default of the employer? The right of attachment is over 'the structures' but it is common for there to be more than one direct contractor.  Would an HVAC contractor exercise attachment over the entire structure or only over the heating, ventilation and air conditioning that it has installed in the structure?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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