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  • Writer's pictureSomya Priyadarshin

Construction Contracts: The Essentials

Introduction


Construction contracts in the UAE are fundamental legal instruments delineating the terms and conditions governing construction projects. These documents govern the relationships among the involved parties, including the client, contractor, and subcontractors. Essentially, a construction contract embodies an agreement between an employer (often termed as the client) and a contractor to undertake construction, repair, modification, renovation, or demolition within a stipulated timeframe, at an agreed-upon price, and to specified standards. 


These agreements elucidate the rights, duties, and liabilities of each party, ensuring the project's successful execution in accordance with the agreed terms. A comprehensive grasp of the fundamental components of construction contracts in the UAE is imperative for both contractors and clients, mitigating disputes and fostering a seamless construction trajectory.


Legal Requirements


The principal legal framework governing construction law across the Gulf region, with the exception of Saudi Arabia, derives from the civil codes of each respective state. These civil codes encompass provisions governing muqawala contracts, which pertain to contracts for materials and services.


In addition to civil codes, each Gulf state has enacted a commercial code or equivalent, which outlines general principles governing commercial transactions. In the UAE, the foundational legal framework for construction contracts is provided by the Civil Transaction Law 5 of 1985, as amended by Federal Law No. 1 of 1987 (Civil Code), and the Commercial Transactions Law No. 13 of 1993 (Commercial Code).


As per UAE Civil Code, Article 872, a muqawala is defined as:

“a contract whereby one of the parties thereto undertakes to make a thing or to perform work for consideration which the other party undertakes to provide.”


The formation of a legally binding contract is governed by Articles 125 to 132 of the Civil Code. Specifically pertaining to construction contracts, Articles 872 to 896 of the Civil Code outline the provisions governing Muqawala Contracts and other general principles of UAE law codified in the Civil Code and the Commercial Code. Notably, Article 874 of the Civil Code, within the Muqawala provisions, stipulates the requisite elements for construction contracts, including a description of the subject matter, the type and extent thereof, the manner of performance, the duration of performance, and the agreed-upon remuneration.

 

Types and Forms of Construction Contracts


Among the prevalent types of construction contracts in the UAE, the lump sum contract stands out as one of the most common. Here, the contractor undertakes to complete the project for a predetermined fixed price. Another frequently encountered contract type is the cost-plus contract, where the owner agrees to reimburse the contractor for the actual project costs along with a predetermined fee. Unit price contracts, wherein the contractor commits to completing the project for a specified price per unit of work, are also widely utilized in the UAE construction landscape. Beyond these standard contract types, the industry sees the application of various specialized contracts, such as design-build contracts, which are gaining popularity in the UAE.


In the realm of construction procurement, contracts typically fall into two categories: standard forms with minor adjustments and bespoke contracts. While every construction project presents its unique set of risks and challenges, standard form contracts offer predefined terms that address common issues and risks likely to arise. These standard forms encompass both construction work and related professional services. Their predefined terms streamline the agreement process compared to drafting a contract from scratch. Parties can focus on tailoring specific changes to the standard terms to suit the project's requirements.


On the other hand, bespoke contracts are entirely customized to cater to the specific needs and requirements of the parties involved. They are not based on standard forms and are drafted from scratch to accommodate unique project circumstances. Bespoke contracts find utility not only in complex construction projects but also in simpler supply agreements where standard forms may prove overly intricate and rigid.


In the Gulf region, the FIDIC suite of contracts holds significant sway, with the majority of UAE contractors opting for its adoption. Whether utilizing the FIDIC Short Form of Contract ("Green Book") for straightforward projects or the Conditions of Contract for Construction for more complex building and engineering works ("Red Book"), FIDIC contracts are widespread. However, it's common practice to make substantial amendments to the standard FIDIC General Conditions through Particular Conditions, often to the advantage of the employer.

 

Important Terms


1.      Scope of Work

The contractual delineation of the scope of work is paramount, requiring meticulous detailing of the services to be rendered. This entails a comprehensive description encompassing materials, quality, grade, work schedule, and other specifications germane to property construction. Such detailed articulation serves to ensure a lucid comprehension of each party's roles and obligations, thereby mitigating the likelihood of disputes and misconceptions. Notably, construction contracts in the UAE ought to incorporate provisions for alterations to the scope, commonly referred to as change orders. These provisions facilitate adjustments to the scope of work throughout the project's duration, accommodating tasks addition or removal, deadline adjustments, or specification changes. By integrating provisions for change orders within the contract framework, parties can systematically address unforeseen exigencies or evolving project requisites, thus curtailing the risk of disputes and project delays.


2.      Payment Terms

Payment obligations arise upon completion of the work, unless otherwise stipulated by agreement or custom. Under the standard payment provisions of FIDIC contracts, the contractor receives compensation based on either the actual quantities of work performed or, more commonly, a fixed lump-sum amount.


In bespoke construction contracts, payment terms delineate the schedule and modalities of payment for the project. This encompasses specifics such as payment amounts, timing, and any prerequisites for disbursement. These provisions are pivotal for both contractor and employer, ensuring seamless project progression and timely fulfillment of financial commitments. Clarity regarding the included services' costs and any additional expenses beyond the project's scope is imperative. Additionally, payment terms should specify penalties for delayed payments, including interest accrual and invoicing protocols.


UAE courts have affirmed that, given the continuous nature of construction contracts, termination does not nullify parties' accrued entitlements, including compensation for work completed, which persist despite contract cessation.


3.      Termination and Suspension Clauses

The entitlement to suspend or terminate, whether derived from statute or contractual provisions, delineates the extent and nature of available remedies, applicable to all indeterminate contracts. Defining the conditions warranting contract termination, requisite notice periods, and ramifications of premature cessation is imperative. This provision offers clarity regarding circumstances permitting contract dissolution, wherein absence of such conditions renders unilateral withdrawal a breach of contract. It encompasses delineation of rights and obligations of all involved parties in the event of termination. Certain construction contracts in the UAE may include "termination for convenience" clauses, allowing unilateral contract termination.


Additionally, Article 267 of the Civil Code prescribes three grounds for automatic termination of a construction contract: completion of the project, mutual consent, or court decree. Commonly, a contractor's entitlement to suspend work is grounded in non-payment by the employer, whether contractually stipulated or under UAE law. Upon certification of an interim payment application by the engineer, the employer is obligated to remit the specified amount within a defined period. Failure to comply prompts the contractor to issue a suspension notice, affording the employer a final payment opportunity. Should payment not materialize within this window, the contractor typically suspends work after the notice period lapses.


4.      Liquidated Damages

Liquidated damages (LDs) are commonly understood as a predetermined sum specified in a contract to be paid as compensation for breaches. In construction contracts, LDs specifically address delays in project completion. They establish a fixed amount payable in case of late completion. These provisions serve the dual purpose of discouraging tardiness by outlining the costs to a contractor for failing to meet deadlines and compensating the employer for damages resulting from the delay. In the absence of an agreement, local law does not impose a predetermined or fixed financial penalty on a contractor for late completion of private sector works. The liquidated amount is typically recoverable regardless of whether a loss occurred and irrespective of remoteness. While UAE law recognizes liquidated damages, developers, project managers, and contractors should be mindful of the discretion vested in UAE courts (and arbitral tribunals applying UAE law) when the specified amount in the contract is contested in formal proceedings.


According to Article 390(1) of the Civil Code, parties may pre-agree on compensation for a breach of contract. Contracts often stipulate that liquidated damages are not punitive but rather a genuine estimate of potential losses to the aggrieved party. Article 390(2) empowers the court, upon application by either party (employer or contractor), to adjust the agreed compensation to reflect actual losses. Any agreement to the contrary is deemed void. While parties may invoke this article to increase compensation beyond the agreed amount, it is more commonly used to reduce compensation.


5.      Dispute Resolution

Construction and engineering disputes span a wide spectrum of subject matter, detail, and complexity. At one end, there are straightforward cases involving the collection of owed debts for completed work. At the other end, some disputes are among the most intricate and legally convoluted encountered in commercial law, characterized by extensive factual detail and complexity. The potential for prolonged trials and substantial legal expenses in construction and engineering disputes is well-known.


Given the intricate nature of construction projects, disputes are an unavoidable reality. Hence, it is crucial to include a dispute resolution clause in any contract to outline the process for resolving disagreements. Common methods of dispute resolution include mediation, arbitration, and litigation.


Most standard form contracts encompass a dispute resolution mechanism outlining the procedural steps for addressing disputes. In bespoke contracts, it is advisable to include a clause specifying a dispute resolution mechanism, including the governing law and jurisdiction. Given the technical complexities inherent in construction disputes, arbitration emerges as the primary method for resolution in the UAE. Standard contracts such as the FIDIC Conditions of Contract and Conditions of Subcontract, prevalent in UAE construction projects, stipulate arbitration as the final means of dispute resolution, as per the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC), either during or after project completion. Typically, parties amend these standard conditions to designate arbitration under the auspices of UAE-based institutions such as the Dubai International Arbitration Centre (DIAC) or the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC).


Mediation is another widely utilized dispute resolution mechanism in UAE construction contracts. It entails a voluntary process wherein parties collaborate with a neutral third party, the mediator, to craft a mutually agreeable resolution. Mediation is often favoured in UAE construction contracts for its potential to preserve relationships and circumvent the burdensome and protracted nature of litigation.


Careful consideration of dispute resolution mechanisms is paramount for parties entering into construction contracts in the UAE. By selecting the appropriate mechanism, parties can expedite the resolution of disputes in a cost-effective manner, ensuring seamless project progression devoid of unnecessary delays.

 

In conclusion, executing a construction contract in the UAE demands meticulous planning, effective communication, and meticulous attention to detail. By adhering to these best practices, parties can safeguard the smooth execution of their construction projects and pre-empt any potential disputes or legal complications in the future.



Somya Priyadarshini

Senior Associate - Arbitration

NHB LEGAL

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