United Arab Emirates: Arbitration Saga For Small And Medium-Sized Subcontractors In The Construction Industry

Last Updated: 15 August 2017
Article by Imad Kassir and Samer Abou Said

Small and medium-sized subcontractors often find themselves unable to recover monies owed to them by main contractors due to the high costs involved in legal proceedings. We explain below what steps you can take for a more positive outcome.

Introduction

Subcontractors, chiefly operating in the construction industry, frequently visit our firm with gloomy faces expressing their anger at main contractors who have failed to pay monies due upon completion of the project as per their clearly agreed contractual terms.

As our lawyers analyse the strengths of the client's case, we often find that they have honoured their obligations and that payment of their monies is unconditionally due. Reading through the contractual documents, we often further discover that the client has agreed to arbitration as a dispute resolution mechanism, which will cost them a substantial amount of the claimed amount, making it virtually unaffordable to pursue their claim. And here lies the problem.

This problem frequently belies small and medium-sized subcontractors who do not have access to good legal advice or to any legal advice at all, and to lesser extent large subcontractors whose legal advisers fail to anticipate the business costs of agreeing to such clauses. For this reason, parties adopt contract templates or resort to the copy/paste of contractual clauses that refer to arbitration without weighing the risks and merits to any potential dispute.

The Arbitration Saga

First, it is not our intention to suggest here in any way that arbitration should not be used as an alternative dispute resolution mechanism. Without doubt, arbitration has its advantages when it is appropriate and convenient for the underlying transaction at hand. However, we believe clients should consider the dispute resolution mechanism carefully after taking into consideration the circumstances of the transaction.

In the UAE, like many other jurisdictions worldwide, arbitration awards must be enforced through the courts. Article 215 et seq of the UAE Federal Civil Procedures Law govern the enforcement of arbitration awards in circumstances where the party that lost the arbitration does not comply voluntarily. Enforcement is effected through the issuance of a claim before the relevant court for an order to enforce the award. This claim, like any other claim, follows the ordinary course of litigation whereby the claim is served upon the defendant who then has the right to reply and to challenge the validity of the award and so on. Such claim may be litigated before the three levels of courts (first instance, appeal, and cassation).

Consequently, in addition to the duration of the arbitration proceedings which may range from one to four years on average depending on the complexity of the case, one must add the time spent to litigate the claim of enforcement of the award before UAE courts, which may range from nine months to two years on average. It is notable here that UAE courts are ranked among the most expeditious courts worldwide in settling claims submitted before them.

Furthermore, litigating the same case twice in arbitration and before the courts will obviously require the payment of double the litigation fees including arbitration and courts costs, expert fees, and attorney fees.

How Will You Know Whether Arbitration is Appropriate for Your Contract?

It is essential that you determine in consultation with your legal adviser the best dispute resolution mechanism to resolve any potential dispute that may arise in the future. For the sake of narrowing the potential scenarios, we shall presume that the transaction is between two private persons (companies and individuals) both based in the UAE.

Some would argue that the language of the contract and the language spoken by its administrators take precedence over any other factors. We beg to differ, although this is significant, particularly if the contract is worded in English and the contract administrators (such as the engineers or quantity surveyors handling the transaction) do not speak Arabic, which is the language of the proceedings before UAE mainland courts. There are capable Arabic-speaking litigation lawyers in the UAE whom clients can trust to handle the case professionally and serve their best interests.

It is submitted that one of the first things to consider should be the value of the contract and, more precisely, the amount that would be the subject of a claim if a potential dispute arises. This is important because arbitration costs and attorney fees for the same are usually much higher than court fees and attorney fees for litigating the case. Dubai courts (mainland courts) have a cap on their fees equivalent to AED 40,000 regardless of the value of the claim, while there is no cap for arbitration cases. By way of example, a claim with a value of AED 3 million before Dubai courts (mainland courts) would not involve more than AED 40,000 of court fees. However, the same-value arbitration would cost AED 130,000 before a single arbitrator, and three times this amount (roughly AED 350,000) if the contract provided for a three-arbitrator panel. Moreover, if you successfully obtained the award, you would have to pay an additional AED 40,000 by way of court fees to enforce the award.

Furthermore, the number of panel arbitrators should be carefully considered because the fees of an arbitration panel of three arbitrators will be three times that of a sole arbitrator. Recently, a client, an international supplier of building materials instructed our firm to commence proceedings against a main contractor to claim an outstanding balance. Upon review of the supply contract, we discovered the presence of a UNCITRAL arbitration clause whereby any dispute was to be resolved through a panel of three arbitrators. When informed of the estimate of arbitration and attorney fees, the client's representative refused vehemently to proceed down that route for economic reasons. In the words of the client's representative, the fees were "exorbitant". However, luckily, after the client submitted to us additional documents, we detected a loophole in the contract, which we used to avoid the arbitration agreement. Hence, the decision was taken to bring proceedings before the Dubai mainland court.

Conclusion

Our client was fortunate in that an exit was found to avoid the high fees of filing an arbitration claim, but this is not always the case. Several prospective clients approached us who were surprised to learn of the level of the fees that they would incur to claim their outstanding balance from main contractors, and they have changed their minds about commencing proceedings due to the relatively high value of the fees in comparison to the value of the claim and the risk of not being able to enforce the award in time.

Therefore, next time a transaction is looming on the horizon, consult your legal adviser and inquire specifically about the dispute resolution mechanism to reach the best decision as to whether there it is advisable to opt out of the court's jurisdiction or not.

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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