Uzbekistan: Construction Guide

Last Updated: 28 November 2016
Article by Otabek Suleimanov and Dilshad Khabibullaev

The purpose of this construction guide is to analyse the current challenges encountered within Uzbekistan's construction industry. This guide will separately assess the organisation of the construction industry, trends and legislative requirements, as well as concerns regarding construction norms and quality, construction plan development, and permission procedures.   

Licensing requirements

Pursuant to Uzbek law, certain types of construction work fall under the category of licensable activities. Depending on the type and category of the objects under construction (for example bridges, tunnels, military buildings, buildings involving high risk and potential danger, high altitudes, telecommunication networks, etc.) applicants must apply for a licence from the commission for the monitoring of the implementation of construction reforms and licences. In addition to the construction itself, activities such as the design of construction planning documents and the expert examination of construction objects must be duly licensed by the state committee on architecture and construction.

In Uzbekistan, licences in the construction industry can only be issued to legal entities that are duly registered under the jurisdiction of Uzbekistan. In cases in which foreign companies are contracted to either design construction projects or carry out construction works that require licences, they must ensure the establishment of their local presence in Uzbekistan as foreign companies cannot generally be licensed.

Each stage, including the design, construction, transportation, installation and commissioning stages, is subject to various approvals, consents and permits. Therefore, it is important that when signing agreements parties clearly agree on their responsibilities relating to the obtainment of permits and licences for certain activities.

Design

Designing architectural and town planning documents is a licensed activity that cannot be performed by a foreign legal entity. Such licences can only be issued to local legal entities with full-time employees and no less than 5 years' relevant previous experience. Even in these cases, first time applicants will not be issued licences for the design and planning of construction documents for works that are categorised as higher than I-II in difficulty. As a matter of general practice, foreign design and engineering companies draft the design, which is then approved by one of the locally licensed design institutions.

The design stage consists of two major parts: 'project documentation' and 'working documentation'. These are often translated as 'basic design' and 'detailed design', but the meaning of these terms is different from in Europe or the United States. Once developed by the contractor, the project documentation must be approved by the customer and then filed for the review of the state expert authority. Only once a positive expert review has been granted may the customer apply for a construction permit. It is highly advisable that a foreign contractor entering the market for the first time liaises with local design institutions in order to gain a deeper understanding of the scope of the design work and its requirements.

Public tenders

All public procurements of materials, components, equipment and services are subject to special tender procedures. In Uzbekistan, construction projects funded by the state budget, the finances of state enterprises, non-budgetary funds of public organisations, state and non-budgetary funds provided by financial institutions under the guarantee of the Uzbek government must go through public tenders. However, it should be noted that in exceptional cases, for example in the case of foreign direct investment, the requirement to conduct a public tender can be waived by the special resolution of the president or cabinet of ministers.

In all other cases, when projects are financed privately there is no requirement to follow specific rules, unless the contracting parties decide so.

Financing schemes

Construction projects funded by the state budget, special purpose funds and other sources of public financing are subject to a mandatory financing scheme. This means that contractors are not generally free to agree on the financing mechanisms found in conventional EPC contracts.

There is usually a maximum permitted payment of up to 30% of the anticipated contract amount within the first two months of the construction phase and consecutive quarterly payments of 95% of the performed works. In the meantime, the remaining 5% of the contract value is payable upon the completion of the guarantee period. In addition, there may be certain requirements relating to performance bonds and termination fees.

In most cases parties therefore try to obtain a special governmental resolution that enables parties to freely negotiate payment terms. If the project is financed using private funds, then the parties are free to choose their pricing mechanisms and payment conditions.

Local content

Uzbekistan does not have special provisions regarding compulsory local sub-contracting under EPC contracts.

However, in specific cases when financing comes from the state budget, special purpose funds and other sources of public financing, depending on negotiations between the contractor and the government, works can be subject to certain local content requirements. Such requirements are usually provided in special government resolutions. In all other cases, the contracting parties are free to negotiate any terms and conditions for the supply of materials and services they deem appropriate.

Contracts

In general, there are no legal requirements for the form of contracts. In Uzbekistan, however, the law recommends certain standard contract forms for construction projects financed by the state. Therefore, large infrastructure projects involving foreign investments and public funds generally need to be backed by governmental decree, which usually grants benefits and exemptions from some regulatory requirements, including the standard contract forms.

In brief, contracts with 10-15 pages are usually used for small and medium-sized projects, while FIDIC forms are usually used for larger projects, especially if such projects are financed by the ADB, IFC, EBRD, JBIC or other international financial institutions. Although local laws do not prohibit the use of FIDIC forms, it must be noted that such contracts still need to be substantially revised in order to comply with local technical regulations, laws and particularities of the construction process. This is why, in practice, FIDIC contracts are usually 'custom-made' for each project.

Some of the major issues in contracting are the choice of law and dispute resolution concepts. It is common for a neutral governing law and international arbitration to be selected for dispute resolution. Although the parties are free to choose any foreign governing law, unless both parties are Uzbek residents they cannot completely opt out of the mandatory requirements of Uzbek laws, such as licensing, taxation, technical standards and other public law requirements. In our experience, the most popular venues for construction disputes are Stockholm, London and Hong Kong. Dubai and Singapore are also becoming increasingly popular.

Limitation period

As a general rule, the limitation period for filing a claim with the local courts for disputes arising from contractual relations is three years.

The limitation period starts at the moment of the final acceptance of the works, even if the contract provides for partial acceptances. However, if a claim is raised during a warranty period stipulated within the construction contract, then the limitation period starts from the moment such claims are filed. It should be noted that once the limitation period has expired it may still be reinstated on the basis of reasonable grounds. It must be noted, however, that local courts require very serious grounds to reinstate the limitation period and therefore such reinstatements are quite rare.

Insurance issues

In Uzbekistan, all construction projects financed by state financial resources and credit lines secured by the guarantee of the government must be insured against any risks associated with construction.

As employers, contractors also have a mandatory responsibility to purchase employee accident insurance and, for some types of hazardous projects, environmental insurance. As insurance is a licensable activity in Uzbekistan, all these mandatory insurance policies must be purchased from duly licensed local insurance companies.

In addition, not all insurance companies may be licensed to underwrite mandatory types of insurance and therefore licence contents must be considered on an individual basis. Furthermore, the risks can be reinsured with foreign reinsurers, provided that some of the risk (usually no less than 5%) is retained by local insurers. It must also be noted that local insurance laws have certain qualification requirements for foreign reinsurances, such as minimum ratings from well-known rating agencies such as Standard & Poor's and Moody's.

Indemnities

The concept and mechanism of indemnities are not recognised as a legal instrument and cannot serve their full legal purpose. Indemnity clauses are usually found in contracts that are concluded with foreign contractors. However, if brought before the local courts, such clauses will either be viewed as void or interpreted as reimbursement clauses. Judicial practice has not yet been settled on this matter in Uzbekistan.

Penalties can be in the form of liquidated damages and fines. Liquidated damages are paid in the event of a delay in the fulfilment of obligations and are calculated based on a percentage of the non-fulfilled part of the obligations for each day of delay. Fines are paid in the event of the non-fulfilment or improper fulfilment of obligations and are usually paid as a lump sum.

The payment of penalties does not relieve parties from the obligation to fulfil any other remaining contractual obligations, including the indemnity of any potential damages, whether incurred or in the form of lost profits. If caused by negligence, the damages are unlikely to be fully covered by a negligent party.

Health, safety and environment requirements

Uzbek environmental protection laws are quite strict and the liability for violating such laws may include civil, administrative or even criminal liability, depending on the type of violation and the extent of the damage caused. Compliance with environmental and ecological laws is a continuous matter and must be considered throughout all stages of construction, starting from land allocation and finishing with the completion of the construction works. Subject to the approval of the state construction regulator, design documentation must contain a separate section on environmental protection, including maximum allowed emissions, use of surface and subterranean waters, waste utilisation, etc. In most cases, special ecological advice from a licensed institution must be obtained.

The basic requirements for environmental protection include measures to ensure public health and safety, as well as to protect the atmosphere, land, forests, water, flora, fauna and other parts of the environment, buildings, installations, reserves, and natural, historical and cultural monuments from the harmful effects of any associated works in accordance with the requirements of environmental legislation.

State Acceptance procedure

In order to ensure that construction works comply with town planning, approved construction design documentations and other regulatory acts related to construction, the State Committee on Architecture and Construction continuously monitors construction works with special inspections.

After the completion of construction works, the contractor must apply to the same state committee in order to take digital photos of the completed buildings, structures and engineering underground communication facilities for further reporting purposes. Finally, completed building or facilities are subject to a state acceptance procedure in order to be accepted for use.

State acceptance is granted by the special operational committee, whose findings are then approved by the state acceptance committee, which is usually appointed by the State Committee on Architecture and Construction. Following the completion of state acceptance, the head of the region or municipality adopts resolutions approving state acceptance. Overall, the entire acceptance procedure usually takes several months.

Taxation

For foreign contractors participating in modernisation, reconstruction and construction projects in Uzbekistan, taxation is one of the central issues.

A foreign contractor working in Uzbekistan will almost certainly have tax consequences when working on EPC projects, which will most likely result in the creation of a permanent establishment for taxation purposes.

According to Uzbek laws, the permanent establishment of a non-resident in Uzbekistan is any place or venue through which a non-resident conducts business activities in the Republic of Uzbekistan, including activities carried out by authorised representatives. However, in certain cases, the definition of permanent establishment can be either wider or narrower depending on double taxation treaties signed with the non-resident's home country.

It should be noted that the notion of permanent establishment is applicable only for taxation purposes and does not have any effect on the organisational legal structure of foreign contractors in Uzbekistan.

Another significant factor is the obligation of foreign contractors to register with authorised state institutions as permanent establishments. Even in the event that a foreign contractor is released from the obligation to pay certain taxes and customs fees based on special government resolutions, the foreign contractor is not released from registering its permanent establishment. Therefore, it is particularly important to conduct tax planning and optimisation prior to contracting on the project.

Immigration

In general, long visits of over one month require business visas, whereas tourist visas are sufficient for short stays. Should expatriates need to travel for longer periods (anything over one year) special work permits may be required for both employees and local entities.

We would also advise you to check to see if there are any bilateral treaties in a country of operation that may grant extended stays for foreign employees. Breaches of immigration regulations may result in deportation and significant fines for the employee and employer.

Liability

Should an accident occur, liability will depend on the severity of the damage. If there are casualties a criminal case will be opened, but in all other cases a special ad hoc committee will be organised to establish the cause of the accident.

Depending on the results of the investigation, the contractor, designer, supplier and state inspection agency that confirmed due compliance with all construction standards will be held jointly or severally liable depending on their contribution and the remoteness of damage.

There is no concept of the criminal liability of legal entities in our legal system. As such, if casualties do occur, the corporate veil will be pierced and the general director or chief engineer or project manager are likely to be convicted either jointly or separately.

Choice of law and forum

The choice of law and jurisdiction is an important factor in reducing political risk and the consequent risk of non-payment.

In general, there are no problems with choosing neutral law and disputes venues for construction contracts that are signed with foreign contractors. As a result, it is possible to choose English, Russian, Swiss or PRC law, or any other foreign law, except in cases relating to real estate and in cases when the contract is signed between two domestic Uzbek companies, meaning foreign law can only be chosen if one of the parties is a foreign entity.

It must be noted, however, that although parties are free to choose foreign law, this does not mean that they can entirely opt out of local fiscal and administrative requirements, such as licensing, taxation, public procurements rules, etc.

Likewise, parties are generally free to choose foreign forums for the resolution of disputes and in most cases parties choose international arbitration. The most popular venues for international arbitration are Stockholm, London, Dubai and Hong Kong. Uzbekistan has been party to the 1958 New York Convention since 1996. It should be noted, however, that arbitrating and particularly enforcing arbitral awards against state-owned companies may prove extremely difficult. We should also reiterate that disputes arising over title to real estate must be resolved exclusively in the local courts.

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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