UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for May 19, 2010

When Can a Contractor Suspend Works Based on Delay in Payment in the UAE?

In the UAE, the contractor can only suspend works based on delay in payment only after the payment certificate is issued.  If the contractor suspends work and there is still no payment, then the contractor may elect to proceed with litigation in the UAE courts unless the jurisdiction of the courts has been waived and the parties to the contract have mutually agreed to subject themselves to arbitration. 

In this scenario, the contractor may want to rely on Article 879 of the Civil Transactions Law,  Federal Law No. 5 of 1985.                                                    

Article 879 states:

  1. If the contractor’s work has an effect on the real property, he may withhold it until he receives the payment due to him and if it deteriorates in his hands before payment of his remuneration, he shall neither be liable for damages nor shall he be entitled to payment.
  2. If his work has no effect on the real property, he must not retain it until he receives payment.  However, if he does retain it, and it deteriorates, he shall be liable for damages of usurpation.                                                                                                                                                                                  

According to this provision of UAE law, a contractor can place a lien on the subject property until the contractor receives the payment due to him or her.  If the employer cannot pay the contractor, the contractor can then seek to attach the assets of the employer. 

In contrast, in the FIDIC Contract (1999 Red Book):

The engineer can instruct the contractor to suspend works at anytime. 

Clause 8.8 on the Suspension of Works states:

“The Engineer may at any time instruct the Contractor to suspend the progress of part or all of the Works.  During such suspension, the Contractor shall protect, store and secure such part of the Works against any deterioration, loss or damage.

The Engineer  may also notify the cause for the suspension.  If and to the extent that the cause is notified and is the responsibility of the Contractor, the following Sub-Clauses 8.9, 8.10, and 8.11 shall not apply.” 

Clause 8.9 on the Consequences of Suspension states:

“If the Contractor suffers delay and/or incurs Cost from complying with the Engineer’s instructions under sub-Clause 8.8 [Suspension of Work] and or from resuming the work, the Contractor shall give notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to:

a.)  an extension of time for any such delay, if completion is or will be delayed , under Sub-Clause 8.4 [Extension of Time for Completion] and

b.)  payment of any such Cost, which shall be included in the Contract Price.

After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine these matters.

The Contractor shall not be entitled to an extension of time for, or to payment of the Cost incurred in, making good the consequences of the Contractor’s faulty design, workmanship or materials, or of the Contractor’s failure to protect, store or secure in accordance with Sub-Clause 8.8 [Suspension of Work].” 

If there is delayed payment by the employer to the contractor, the contractor is entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay.  In contrast to UAE law, the contractor is entitled to this payment on the date the payment as specified in Clause 14.7 irrespective of the date of which the Interim Payment Certificate is issued.  Therefore, if only familiar with FIDIC, contractors may be unaware that in the UAE, suspending works based on delayed payment is only possible after the issuance of a payment certificate.

Clause 14.8 on Delayed Payment states:

“If the Contractor does not receive payment in accordance with sub-clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay.  This period shall be deemed to commence on the date for payment specified in Sub-Clause 14.7 [Payment] irrespective (in the case of its sub-paragraph (b) of the date on which any Interim Payment Certificate is issued.

Unless otherwise stated in the Particular Conditions, these financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment, and shall be paid in such currency.

The Contractor shall be entitled to this payment without formal notice or certification and without prejudice to any other right or remedy.”

Clause 14.7 on Payment states:

The Employer shall pay the Contractor:

  1. The first installment of the advance payment within 42 days after issuing the Letter of Acceptance or within 21 days after receiving the documents in accordance with Sub-Clause 4.2 [Performance Security] and Sub-Clause 14.2 [Advance Payment] whichever is later;
  2. The amount certified in each Interim Payment Certificate within 56 days after the Engineer receives the Statement and supporting documents; and
  3. The amount certified in the Final Payment Certificate within 56 days after the Employer receives this Payment Certificate.

 

Payment of the amount due in each currency shall be made into the bank account nominated by the Contractor in the payment country (for this currency) specified in the Contract.”

Architects Should Insure Designs in the UAE

Although not required by UAE law, architects working in the UAE should consider purchasing insurance for their liabilities resulting from their designs.  Under UAE law, an architect may be jointly liable for ten years with the contractor for major defects affecting the stability and safety of a structure.  Therefore, it is advisable for an architect to take out professional indemnity insurance to cover legal liability for faulty designs.  Architects should also consider purchasing insurance to cover legal expenses required to hire lawyers to defend an action by the employer against the architect for faulty designs which have led to major defects affecting the stability and safety of the structure.  According to Al Tamimi, with this insurance, if the insured wins the case or a settlement is reached which is in favor of the insured, the insurer has no liability to pay out.  Otherwise, the insurer will pay both sides legal costs.

In the UAE, the designing architect also acts as supervising engineer and acts to ensure that safety measures are correctly implemented.  Therefore, architects should also consider purchasing health and safety liability insurance.  The architect should also contemplate purchasing environmental insurance in the UAE as architects may be liable for ‘the natural or non natural contamination of the environment resulting from introduction of pollutants directly or indirectly, deliberately or non deliberately by man to the natural elements of the environment which may jeopardize the health of humans, plants or animals, or harm the resources and ecological systems.”  An architect would be liable due to the fact that architects carry out various assessments to determine the level of risk and types of potential pollution. 

Although the liability or architects working in the UAE may seem disproportionately large, it is possible to purchase insurance to cover the risk as well as take the time to carefully draft construction contracts in order to minimize risk.  Under the FIDIC Contract (1999 Red Book), it is not envisioned that that architect would need insurance cover as the main parties to the FIDIC Contract are the employer and contractor.  Refer to Section 18 on Insurance of the FIDIC Contract (1999 Redbook).

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance