1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

The primary source of law governing construction projects in the United Arab Emirates is the Civil Transactions Law, otherwise known as the Civil Code. Within the Civil Code, particular provisions are applicable specifically to construction contracts, also referred to in Arabic as ‘muqawala' contracts.

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

A secondary source of law is found in the Commercial Transactions Law, which governs the conduct of business between entities and commercial contracts. Unlike the Civil Code, the Commercial Transactions Law does not contain a chapter specifically applicable to construction projects; however, various provisions and principles apply to construction contracts as they do to any commercial contract.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The enforcement of laws and regulations is the responsibility of the national courts which preside over construction disputes in each of the seven emirates. Sharjah, Ajman, Fujairah and Umm Al Quwain have a federal court system comprised of three tiers:

  • first instance courts;
  • appeal courts; and
  • supreme courts.

The emirates of Dubai and Abu Dhabi have their own three-tiered court systems which are independent from the federal courts of the remaining four emirates, but identical in terms of structure. The powers of the court are wide and the judiciary may exercise discretion when determining any lawsuit or application with due regard to the overriding legislative principles of law.

1.4 What is the general approach in regulating the construction sector?

The construction sector is regulated by various laws, including the Civil Transactions Law – which contains special provisions applicable to construction contracts – and the Labour Law. The government's general approach is to support growth in the construction sector in order to achieve the United Arab Emirates' overall expansion objectives, including:

  • the Dubai 2040 urban development plan;
  • the Sheikh Zayed Housing Programme; and
  • Energy Strategy 2050.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

In the United Arab Emirates, the traditional method of procurement remains the most commonly used. Employers often adopt a single-stage selective tendering process whereby the design consultant is engaged to complete the design before employing the contractor on a build-only basis.

More recently, however, the two-stage tendering process has become increasingly attractive to developers involved in complex and large-scale projects. In the first stage, the contractor is engaged during the design phase to develop the design and concept together with the employer on the basis of a pre-construction services agreement. In the second stage, the contractor and employer enter into a design-and-build lump-sum contract.

2.2 What are the advantages and disadvantages of these different methods?

By adopting a two-stage tendering method, the employer and contractor may exchange a substantial amount of information on the requirements of the project during the design stage. Moreover, most subcontract packages will have been tendered at the first stage. In fact, by way of a pre-construction service agreement, the employer and contractor may agree on:

  • the total value of the subcontract packages;
  • the price for preliminaries;
  • overheads; and
  • profit margins.

Having this agreement in place prior to entering into the building contract enables the employer and contractor to agree on a realistic lump-sum price for construction as early as possible.

Notwithstanding the above, involving the contractor at such an early stage of the design may result in the contractor gaining significant leverage when negotiating the price for construction, given its familiarity with the design and concept by the end of the first stage. This leverage may be exploited to inflate the contract price.

2.3 What other factors may influence the choice of procurement method?

The choice of procurement method is influenced by, among other things:

  • the employer's management capabilities;
  • the desired quality standards; and
  • cost objectives.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

Small to medium-scale projects are often executed by limited liability or private joint stock construction companies. Larger projects are often carried out by joint venture companies or special purpose vehicles.

For medium to large-sized government projects, public procurement regulations applicable in each emirate may require non-UAE or international contractors and consultants to form partnerships with UAE partners, often in the form of joint ventures or special purpose vehicles.

3.2 What are the advantages and disadvantages of these different structures?

Collaborations between designers and contractors have proven to be an effective way to increase efficiency, particularly when implementing complex designs. By involving the contractor at the design phase, the design consultant and contractor can collaborate to develop turnkey projects from concept design to completion. For this reason, joint ventures can be advantageous.

3.3 What other factors may influence the choice of project structure?

Aside from the size and complexity of the project, the availability of skilled staff and the technical capacity of the contractor and/or design consultant are factors to be considered when selecting the appropriate project structure.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

Small to medium-sized private developments are typically funded by international and local banks adopting conventional and Islamic financing structures or corporate lenders. Larger private developments are normally project financed. Government projects are generally self-financed; however, an increasing number of government projects are funded through public-private finance arrangements.

4.2 What are the advantages and disadvantages of these different structures?

For large-scale projects funded by project finance, joint ventures and special purpose vehicles comprised of a consortium of investors can ensure that funding remains available throughout the life of the project. By involving multiple investors, the individual consortium members can manage their risk exposure.

4.3 What other factors may influence the choice of financing structure?

The size and cost of the project are the primary factors that influence the selection of financing structure. Relatively small projects are often financed by financial institutions through conventional financing structures; whereas larger projects requiring considerably more investment over extended periods typically adopt project finance arrangements.

4.4 What types of security and other protections are available to lenders to safeguard their position?

In the United Arab Emirates, it is common for corporate loans to be secured by bank guarantees. Otherwise, various security mechanisms can be used to safeguard lenders including:

  • mortgages;
  • pledges over movable property or bank accounts; and
  • assignment of receivables.

4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Project finance agreements are not governed exclusively by a single source of law or regulation; however, the Commercial Transactions Law contains the majority of provisions relevant to project financing in the United Arab Emirates.

5 Bribery and corruption

5.1 What measures are in place to combat bribery and corruption in your jurisdiction?

The Federal Penal Code regulates corruption and anti-bribery practices in the United Arab Emirates. The law is applicable to the public and private sectors. Enforcement is carried out by economic crime units within the police forces of each emirate, as well as the office of the public prosecution. For example, the Dubai Economic Security Centre is responsible for investigating corruption and bribery practices in Dubai. The UAE government ratified the United Nations Convention against Corruption in 2006 and is a signatory to the Arab Convention to Fight Corruption since 2010.

6 Standard form contracts

6.1 Which standard form contracts are typically used for construction projects in your jurisdiction? Does this vary depending on whether international parties are involved?

Standard form contracts by the International Federation of Consulting Engineers (FIDIC) are the most common form of contract adopted in the United Arab Emirates. While the 2017 editions introduce much-anticipated improvements, the 1999 editions remain the most popular versions, including:

  • the Short Form of Contract (Green Book);
  • the Conditions of Contract for Construction (Red Book);
  • the Conditions of Contract for Plan and Design Build (Yellow Book); and
  • the Conditions of Contract for EPC/Turnkey Projects (Silver Book).

Some government-drafted bespoke forms of contract also come into play in the public sector. However, they are generally based on adapted forms of the FIDIC standard forms in any event.

6.2 What are the advantages and disadvantages of using the different standard forms?

Standard form contracts such as the FIDIC suite enable parties to align their agreements with best international practices. The provisions of standard form contracts are familiar to industry professionals in the United Arab Emirates and their use thus boosts confidence, as the parties have less room for deviation. If applied correctly, the parties may reduce overall costs too.

6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?

As in most jurisdictions, the allocation of risk between employers and contractors or consultants is key. International projects often attract participants from different jurisdictions, all of which may be familiar with entirely different legislative frameworks. In such instances, the adoption of internationally recognised standard form contracts can resolve many issues that might otherwise prove problematic.

6.4 Where standard form contracts are used, do parties typically modify their provisions?

Amending standard form contracts with particular conditions is common practice across the United Arab Emirates.

7 Contractual issues

7.1 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application?

The parties are free to prescribe any law of their choosing within their contracts. However, certain mandatory provisions may not be circumvented by mutual agreement of the parties. For example, provisions relating to the exemption or limitation of liability will not limit tortious liability. Equally, the parties may elect to exclude the jurisdiction of national courts in the United Arab Emirates; however, certain matters may not be subject to arbitration such as claims arising from breaches of the Penal Code.

7.2 What formal, substantive and procedural requirements typically apply to construction contracts in your jurisdiction? Are there any mandatory terms? What terms are typically included? Are any terms prohibited?

Construction contracts are generally required to identify a defined scope of work and provide for an agreed price in consideration of performance. The provisions that one would typically expect to find in such contracts will cover the following matters:

  • allocation and transfer of risk as between the employer and contractor;
  • site conditions;
  • extensions of time;
  • variations;
  • payment;
  • security in the form of performance bonds;
  • termination;
  • pay-if-paid (sometimes referred to as ‘back-to-back') provisions; and
  • caps and exemption on liability.

7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?

In the United Arab Emirates, employers typically assume risk for the site condition, design and force majeure events; whereas the contractor will assume risk for inflation and labour. Mitigation of these risks often occurs by way of insurance.

The construction chapter of the Civil Transactions Law contains provisions for the allocation of risk between employers and contractors.

7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?

Provisions limiting or excluding liability are generally valid, binding and enforceable in the United Arab Emirates, subject to compliance with certain statutory provisions, such as laws concerning tortious liability or decennial liability, which are mandatory.

Normally, construction contracts will impose caps on overall contractual liability (typically equal to 10% of the contract price) and individual caps for delay and performance-related liquidated damages.

Unlike in many other jurisdictions, where liquidated damages are agreed within a contract, the UAE courts are empowered to adjust the pre-agreed value of compensation to reflect the actual loss suffered, if any.

7.5 In the event of delay to the project, what consequences will this typically have for the parties?

Delays attributable to the contractor will typically be met with liability for delay liquidated damages. Employer delays will result in liability for all costs contemplated within the construction contract.

7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?

Force majeure is a recognised concept in the United Arab Emirates. The Civil Code provides that relief may be sought by a party which may otherwise be considered liable for damages by its counterparty if it can demonstrate that the harm caused to the other party was the result of an event of force majeure such as an unforeseeable nature disaster. In such case, the court may amend the contract to ease the onerous contractual obligation on such party within reason.

7.7 What scope do the parties typically have to make material variations to the works?

The employer's right to instruct variations to either the material quantity of the work or contractor's scope of work is very rarely omitted from construction contracts. In such case, the contractor becomes entitled to additional time and money, subject to the timely submission of a claim and the engineer's fair determination thereof, if a standard form contract is adopted.

7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?

Employers are normally required to issue:

  • a taking-over certificate upon handover of the project; and
  • a final completion certificate upon expiry of the defect liability period.

7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?

For termination to be considered valid, one must consider:

  • the materiality of the breach of an obligation;
  • the mutuality of the obligations breached;
  • whether the terminating party is itself in breach; and
  • whether the terminating party is ready to perform the corresponding obligation.

Notwithstanding the above, unless otherwise agreed, parties are generally required to obtain a court order in order for termination of their contracts to be valid and binding. Judgments by the UAE Federal Supreme Court as well as the Cassation Court of Dubai have endorsed the requirement for a court order for termination, prohibiting any unilateral termination of commercial contracts.

7.10 How are delay or liquidated provisions dealt with in your jurisdictions?

Terms prescribing delay liquidated damages are commonly found in construction contracts and are enforceable before the UAE courts. Nonetheless, irrespective of the parties' agreement, Article 390 of the Civil Code grants the court (or arbitral tribunal) the power to adjust the value of any pre-agreed liquidated damages to a value that equates to the actual loss suffered by the non-defaulting party (if any).

8 Subcontractors and suppliers

8.1 Are there any particular issues which arise when dealing with subcontracts and/or subcontractors which are different from the issues discussed elsewhere?

Common issues arising in construction disputes relate to the premature or unwarranted liquidation of performance bonds, often prior to the commencement or conclusion of formal dispute resolution proceedings.

8.2 Are there nominated subcontractors in your jurisdiction?

Yes, nominated subcontractors may be appointed by employers in the United Arab Emirates.

9 Payment

9.1 Are there any statutory or other requirements which govern how parties are paid?

Contractors will typically receive advance payment prior to commencing construction on UAE projects, in the form of either a bank guarantee or bond. During the construction phase, payments are most often made periodically against invoices or pre-determined project milestones. As is common in standard form contracts, certification of each application for payment is carried out by the engineer or employer's representative as a pre-condition to payment by the employer.

9.2 Are ‘pay when paid' clauses valid? In what circumstances?

Pay when paid clauses are valid and enforceable, provided that the parties exercise their contractual rights and obligations with due regard to the requirements of good faith. ‘Pay if paid' provisions are much more difficult to enforce and are rarely upheld by the UAE courts.

9.3 How are retentions typically dealt with?

Employers will normally retain 10% of the contract price by deducting 10% from each interim payment certificate as security for the performance of all the contractor's obligations, including in respect of the defect liability period. Normally, employers will release the retention in two equal instalments: 50% upon issuance of the taking over certificate and the remaining 50% upon expiry of the defect's liability period, subject to completion of all remedial works justifying issuance of the final completion certificate.

10 Health and safety

10.1 What key health and safety requirements apply to construction projects in your jurisdiction?

Mandatory health and safety requirements exist at both the federal and individual emirate levels. Federal requirements are contained in the UAE Labour Law and the Penal Code, in addition to various ministerial regulations issued from time to time. Noteworthy basic requirements include:

  • the provision of:
    • medical insurance for all employees;
    • health and safety training programmes; and
    • protective equipment on site; and
  • limited daytime working hours at the height of the summer period.

10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?

Local regulations prescribe the mandatory requirements for reporting accidents at project sites in each emirate. These include reporting safety issues arising in respect of equipment as well as dangerous site conditions. The governments of Dubai and Abu Dhabi have led the way in reforming and improving the minimum health and safety standards for a number of years.

10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?

Violating health and safety requirements can lead to a variety of sanctions, including fines and the suspension and/or cancellation of trade licences. In exceptional cases where death or serious injury is caused as a result of contractors ignoring such requirements, criminal proceedings may be brought against individuals by the public prosecution service.

10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?

Regular health and safety training programmes aligned with best international practices are essential to maintain adequate safety standards on construction sites. The formation of independent government ‘watchdog' committees responsible for ensuring that the utmost standards of care are observed at all times is always welcomed to achieve such standards.

10.5 Which bodies are responsible for enforcement of health and safety obligations?

In each emirate, the General Directorate of Municipality Affairs (or its equivalent) and the Ministry of Public Works are primarily responsible for the enforcement of health and safety regulations.

10.6 What is the general approach in regulating the construction sector from a health and safety perspective?

As health and safety standards are enhanced over time, the director general of the respective municipalities in each emirate is authorised to issue subordinate legislation introducing new requirements as and when appropriate. Given the high volume of construction activity occurring at any given time across the United Arab Emirates, strict compliance is demanded at all times. The objective is to maintain the highest standards of safety across all UAE projects in line with the latest and best international practices.

11 Environmental and sustainable development issues

11.1 What environmental authorisations are required for construction projects in your jurisdiction? Do these vary depending on the type of project or the location of the site?

The Federal Environment Law (24/1999) sets out all authorisations and approvals that must be obtained by developers and contractors. The primary areas of protection cover air, water and waste. Environmental impact assessments (EIAs) must be approved by the respective municipalities and/or Ministry of Works in each emirate.

Sustainable development regulations are also issued by each municipality in the form of environmentally friendly building codes, such as the Green Building Regulations and Specifications applicable to all buildings in Dubai.

11.2 What is the process for obtaining environmental authorisations?

The Environmental Law obliges parties to prepare and submit EIAs to the relevant municipality in each emirate prior to commencing any construction activities. EIAs must cover environmental feasibility and practices affecting environmental safety. The analysis must be submitted to the relevant municipality for approval.

11.3 What environmental requirements must the contractor observe while the site is operational?

The Environmental Law contains requirements for all aspects of the environment, including in relation to permissible levels of gas emissions and air pollutants, as well as minimum standards for the storage of waste and hazardous material.

11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?

Violations of environmental requirements are normally met with fines. Contractors also risk having their trade licences suspended or withdrawn altogether.

11.5 What environmental requirements apply to new buildings?

Each emirate applies its own environmental regulations and building codes applicable to new buildings. Abu Dhabi has introduced the Estidama Pearl Rating System, which requires all new buildings to achieve a minimum 1 Pearl rating; whereas government buildings must achieve a 2 Pearl rating. Similarly, Dubai Municipality has introduced the Al Safat rating system for new buildings for the promotion of sustainability.

11.6 Which bodies are responsible for enforcement of environmental obligations?

At the federal level, the following bodies are primarily responsible for regulating the various environmental obligations and policies:

  • the Federal Environment Agency;
  • the Federal Ministry of Climate Change and Environment;
  • the Air Quality Department of the Ministry of Environment and Water; and
  • the Ministry of Agriculture and Fisheries.

At the individual emirate level, local regulatory agencies are mandated with the supervision of sector-specific environmental issues.

11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?

Environmental health and sustainability are prioritised as key objectives for the UAE government. As such, regulations aligned with the latest and best international practices and standards are consistently being implemented, particularly in Abu Dhabi and Dubai.

11.8 What is the impact of Net Zero in your jurisdiction?

As part of its efforts towards achieving the global Net Zero Carbon Buildings Commitment, the United Arab Emirates launched the Emirates Green Building Council (GBC), which identifies and assesses activities that promote net-zero carbon buildings. The Emirates GBC established the Net Zero Centre of Excellence in 2018 to encourage the exchange of knowledge between government and research centres, including universities. Leading by example, the new headquarters of the Dubai Electricity and Water Authority will be the first net-zero building currently under construction.

12 Insurance

12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?

Compulsory insurance requirements include health insurance for all employees as per the Federal Health Insurance Law. In addition, the Federal Labour Law requires that employers have insurance policies in place that cover indemnity and gratuity payments in the event of occupational accidents or death.

12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Assignment of reinsurance contracts is permitted in the United Arab Emirates.

12.3 Is it possible to obtain insurance for fitness for purpose design obligations?

Fit for purpose policies are not common in the United Arab Emirates. However, such policies are possible to obtain. Most professional indemnity policies will only cover the contractor in the event that it has failed to exercise reasonable skill and care.

12.4 What other forms of insurance feature in construction projects in your jurisdiction?

Typical insurance policies featured in construction projects include:

  • employer's liability insurance;
  • third-party liability insurance; and
  • contractor's all risk insurance.

13 Employment

13.1 What legislation must employers and contractors be aware of when hiring labour?

The following requirements of the UAE labour regime are important for employers to consider:

  • Workers are entitled to a minimum of 30 days' annual leave per year.
  • Working hours should generally not exceed eight hours per day or 48 hours per week. Exceptionally, management positions are not restricted as such; and hospitality employees are subject to a nine-hour daily limit.
  • Overtime may exceed two hours per day only in exceptional cases where the employer would otherwise face serious loss. Remuneration for overtime should be equal to 25% of the employee's hourly remuneration and 50% between 9:00pm and 4:00am.

14 Tax

14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?

Value added tax (VAT) was introduced in January 2018 and applies to the supply of goods and services at a rate of 5% in the United Arab Emirates. VAT is levied at each stage of a project's supply chain.

14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?

Given that VAT was only introduced very recently, there are very limited mechanisms available to reduce exposure.

14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?

These are largely unknown at present, given the lack of legislation on VAT in place. However, having a VAT group for affiliated companies may reduce some liability.

15 Technology

15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?

Dubai is the first emirate to mandate the use of BIM for large-scale projects – in particular, mechanical, electrical and plumbing projects exceeding 40 storeys or spanning more than 300,000 square feet, as well as government projects.

15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?

Smart contracts are not currently used in the United Arab Emirates. However, there is an expectation that they will come into practice in the future.

15.3 What developments in digital technology do you see having a major impact on the construction industry?

Cloud technology and 3D printing will play a key role in the modernisation of the UAE construction sector. As mega projects across the region – particularly in the United Arab Emirates and Saudi Arabia – become larger in scale than ever before, contractors will have to adopt non-traditional methods to deliver them.

16 Disputes

16.1 In which forums are construction disputes typically heard in your jurisdiction?

National courts have jurisdiction to hear construction disputes – and any other disputes, for that matter – unless the parties have excluded such jurisdiction by way of written agreement prescribing an alternative dispute resolution (ADR) mechanism.

16.2 What issues do such disputes typically involve?

The most common categories of construction claims adjudicated in the United Arab Emirates include:

16.3 How are disputes typically resolved?

In smaller projects, disputes are typically referred to the courts for final judgment; whereas medium to large-size projects will tend to refer disputes to arbitration. Arbitral awards must be ratified by the national courts in order to be enforceable. Parties rarely refer construction disputes to mediation in the Gulf Cooperation Council (GCC) region.

16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?

Arbitration is by far the most commonly used form of ADR adopted throughout the United Arab Emirates and the wider GCC region. Legislation on arbitration was substantially enhanced with the introduction of the Federal Arbitration Law (6/2018), which annulled certain provisions of the UAE Civil Procedures Law. As a result, the UAE arbitration regime is more closely aligned with the UNCITRAL Model Law. The United Arab Emirates is also a signatory to the New York Convention

16.5 Is the use of dispute boards common in your jurisdiction?

The use of dispute boards or dispute adjudication boards is not common practice in the United Arab Emirates. They are viewed as ‘quasi-arbitrations' from a time and costs perspective.

16.6 Have there been any recent cases of note?

No answer submitted for this question.

17 Trends and predictions

17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?

The impact of the COVID-19 pandemic on the construction sector has been considerable, primarily due to severe government restrictions on movement of goods and personnel. However, the UAE government was swift in introducing various regulations which, if complied with, allowed contractors to regain control of their projects.

17.2 How would you describe the current construction landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

We are witnessing a trend in the construction sector of increased collaboration between designers and contractors at early stages in projects for the joint development of design from concept to completion. This has enabled employers to enjoy better efficiency during execution of works and achieve challenging design objectives.

18 Tips and traps

18.1 What are your top tips for smooth completion of construction projects in your jurisdiction and what potential sticking points would you highlight?

Successful completion of projects depends on a combination of many things, beginning with the strength of the contractual basis upon which the project is executed. Clients should strive to maintain clarity in their contractual provisions and avoid drafting contracts from scratch or amalgamating from other projects. Standard form contracts such as the 1999 and 2017 International Federation of Consulting Engineers suites are useful in this respect. They are easily adaptable to various project structures and deemed reliably bankable from a finance perspective.

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