UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for May 20, 2010

Limitation of Liability in UAE Construction Contracts

Under UAE Law, a contractor cannot limit his or her liability in the construction contract.  However, a contractor can use liquidated damages in regards to the actions of delay or defect, however, this can be subject to the employer’s challenge in the UAE courts.  Furthermore, an architect can limit the scope of his or her activity to design and not include supervision of the execution of the design to avoid being jointly liable with the contractor for ten years for major defects affecting the safety and stability of the structure.

Article 882 of the UAE Civil Transactions Law Federal Law No. 5 of 1985 states:

“Every condition which tends to exempt the contractor or the architect from his or her liability for damages or to minimize such liability shall be void.”

Keep this in mind when contemplating using the following FIDIC 1999 Red Book Contract provisions in a UAE construction contract.   Remember that UAE law supersedes the construction contract.

Article 17.6, Limitation of Liability:

“Neither party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than under Sub-Clause 16.4 [Payment on Termination] and Sub-Clause 17.1 [Indemnities].

The total liability of the Contractor to the Employer, under or in connection with the Contract other than under Sub-Clause 4.19 [Electricity, Water, and Gas], Sub Clause 4.20 [Employer’s Equipment and Free-Issue Material], Sub-Clause 17.1  [Indemnities] and Sub-Clause 17.5 [Intellectual and Industrial Property Rights] shall not exceed the sum stated in the Particular Conditions or (if a sum is not so stated) the Accepted Contract Amount.  This Sub-Clause shall not limit liability in any case of fraud, deliberate default or reckless misconduct by the defaulting Party.”

Article 17.1, Indemnities:

“The Contractor shall indemnify and hold harmless the Employer, the Employer’s personnel and their respective agents, against and from all claims, damages, losses and expenses (including legal fees and expenses) in respect of:

a.)  bodily injury, sickness, disease or death, of any person whatsoever arising out of or by reason of the Contractor’s design (if any), the execution and completion of the works and the remedying of any defects, unless attributable to any negligence, willful act, or breach of the Contract by the Employer, the Employer’s personnel, or any of their respective agents, and

b.)  damage to or loss of any property, real or personal (other than the Works), to the extent that such damage or loss:

  1. arises out of or in the course of or by reason of the Contractor’s design (if any), the execution and completion of the Works and the remedying any defects, and
  2. is attributable to any negligence, willful act or breach of the Contract by the Contractor, the Contractor’s personnel, their respective agents, or anyone directly or indirectly employed by any of them.

 

The Employer shall indemnify and hold harmless the Contractor, the Contractor’s Personnel and their respective agents against and from all claims, damages, losses, and expenses (including legal fees and expenses) in respect of (1) bodily injury, sickness, disease or death, which is attributable to any negligence, willful act or breach of the Contract by the Employer, the Employer’s Personnel, or any of their respective agents, and (2) the matters for which liability may be excluded from insurance cover, as described in sub-paragraphs (d)(i), (ii), (iii) of Sub-Clause 18.3 [Insurance Against Injury to Persons and Damage to Property].”

It is advisable to ensure that FIDIC provisions are adjusted to comply with the UAE law in terms of  liquidated damages and limiting the liability of the contractor, architect, engineer, and employer in order to avoid having the clauses struck out by the court in the event of a dispute.

Termination of a Construction Contract Under UAE Law

Article 892 of the UAE Civil Transactions Law, Federal Law No. 5 of 1985 states:

“The job contract shall expire either on completion of the job agreed upon or by termination of the contract consensually or lawfully.”

Article 893 states:

“If there occurs an excuse that prevents the performance of the contract or completion of its execution, either party to the contract may request its termination or rescission, as the case may be.”

Article 894 states:

“If the contractor starts the execution and then becomes unable to complete the job for reasons beyond his control, he shall be entitled to the value of the completed work, and to the expenses incurred by him in the course of the execution to the extent of the benefit acquired by the client.”

Article 895 states:

“The party who suffers from the rescission shall request the other party to indemnify him within the limits decided by custom.”

Article 896 states:

  1. “The job contract shall expire upon the death of the contractor if it is agreed that he shall work by himself, or if his personal qualifications have a significant consideration in the contract.
  2. If such a condition does not exist in the contract or if the contractor’s personal qualifications have no a significant consideration in the contract, the client may request rescission of the contract if the heirs fail to provide sufficient guarantees for performance of the contract.
  3. If both cases, the value of completed works and expenses shall pass to the inheritance according to the conditions of the contract and as per the custom.”

 

In the UAE it is possible to cancel a construction contract upon completion of the works, if mutually agreed upon, or by obtaining a court order.  Completion of the works must be evidenced by a taking over certificate.  A contractor may wish to obtain a court order to allow the cessation of works and an employer may seek a court order to remove the contractor from the site.  In the case of the contractor, he or she is required to continue with the works until the court order is issued.  However, if the court order is successfully issued in the contractor’s favor, he or she may be entitled to compensation for works done between the period from the filing of the complaint until the issuance of the final order.  During the trial itself, the burden of proof is on the contractor to show that the employer has breached the construction contract.  The Court will also take into account the documentation and arguments submitted by the employer before issuing the final order.   Under UAE law, it is important to note that the law provides for no additional compensation if the variations are within 30% of the total contract value. 

Article 48 of the Law No. 6 of 1997, On Contracts of Government Departments in Dubai states:

  1. “The department shall have the right to amend the quantities of the contract by increase or decrease within 30% of the total contracted value before or during execution or upon extension of the execution period.  However, the setting-off shall not be made between the increase and decrease processes whatever the date of performing it may be.
  2. The amendment may exceed the extent mentioned in the foregoing paragraph provided that the necessary allocations are made available and the contractor agrees not to increase the prices stated in the contract if such prices are still suitable and do not exceed the market prices.
  3. The amendment may include addition of new items, works or services not stated in the contract but are related to its subject matter and they can be directly agreed upon with the contractor.
  4. All amendments shall be subject to submission to the committee to take a decision thereon and shall refer it to the competent authority for approval.  An appendix to the contract containing the approved amendments shall be made and signed by the contract parties.”

 

In order for an employer to apply for a court order to remove a contractor from the site, the employer should apply to the court through a local advocate together with a bank guarantee for the value of the works.  According to Al Tamimi, ‘In an application for termination filed by the contractor, it is usually difficult for the Court to determine the amount that would be required by way of bank guarantee to cover the potential loss of the opposing employer.  The Court is therefore more likely to look into the merits of the contractor’s reasons for termination before it issues an order.’ 

An interesting point under UAE law is that if a contractor starts the works but is unable to finish due to an act beyond his or her control, the contractor is entitled the full contract price from the employer.  (see Article 894) 

Compare this with FIDIC Contract (Red Book 1999) Article 19.6 and 19.7.

Article 19.6, Optional Termination, Payment and Release states:

“If the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of Force Majeure of which notice has been given under sub-clause 19.2 [Notice of Force Majeure], or for multiple periods which total more than 140 days due to the same notified Force Majeure, then either Party may give to the other Party a notice of termination of the Contract.  In this event, the termination shall take effect 7 days after the notice is given, and the Contractor shall proceed in accordance with sub-clause 16.3 [Cessation of Work and Removal of Contractor’s Equipment].

Upon such termination, the Engineer shall determine the value of the work done and issue a Payment Certificate which shall include:

a. the amounts payable for any work carried out for which a price is stated in the Contract;

b. the Cost of Plant and Materials ordered for the Works which have been delivered to the Contractor, or of which the Contractor is liable to accept delivery; this Plant and Materials shall become the property of (and be at the risk of) the Employer when paid for by the Employer, and the Contractor shall place the same at the Employer’s Disposal;

c. any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works;

d. the Cost of removal of Temporary Works and Contractor’s Equipment from the Site and the return of these items to the Contractor’s works in his country (or to any other destination at no greater cost); and

e. the Cost of repatriation of the Contractor’s staff and labor employed wholly in connection with the works at the date of termination.”

Article 19.7, Release from Performance Under the Law:

“Notwithstanding any other Provision of this Clause, if any event or circumstance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both Parties to fulfill its or their contractual obligations or which, under the law governing the Contract, entitles the Parties to be released from further performance of the Contract, then upon notice of either Party to the other Party of such event or circumstance:

a.) the Parties shall be discharged from further performance, without prejudice to the rights of either Party in respect of any previous breach of the Contract, and

b.) the sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6 [Optional Termination], Payment, and Release] if the Contract had been terminated under Sub-Clause 19.6.”

In addition, Articles 893 and 896 of the UAE Civil Transactions Law offer further basis for rescission of the contract.  Under Article 893,  ‘If there occurs an excuse that prevents the performance of the contract or completion of its execution, either party to the contract may request its termination or rescission.’  Under Article 896, the construction contract may terminate upon the death of the contractor.

 

Contrast to FIDIC 1999 Red Book Contract:  (Ch. 15 and 16)

 

TERMINATION BY EMPLOYER

15.1, Notice to Correct:

“If the Contractor fails to carry out any obligation under the Contract, the Engineer may by notice require the Contractor to make good the failure and to remedy it within a specified reasonable time.”

15.2, Termination By Employer:

“The Employer shall be entitled to terminate the Contract if the Contractor:

a. fails to comply with Sub-Clause 4.2 [Performance Security] or with a notice under Sub-Clause 15.1 [Notice to Correct].

b. abandons the Works or otherwise plainly demonstrates the intention not to continue performance of his obligations under the Contract,

c. without reasonable excuse fails:

          a. to proceed with the works in accordance with Clause 9 [Commencement,      Delays, and Suspension] or

          b. to comply with a notice issued under Sub-Clause 7.4 [Rejection] or Sub        Clause 7.6 [Remedial Work] within  28 days after receiving it,

d. subcontracts the whole of the Works or assigns the Contract without the required agreement,

e. becomes bankrupt or insolvent, goes into liquidation, has a receiving or administration order made against him, compounds with his creditors, or carries on business under a receiver, trustee or manager for the benefit of his creditors, or if any act is done or event occurs which (under applicable Laws) has a similar effect to any of these acts of events, or

f. gives or offers to give (directly or indirectly) to any person any bribe, gift, gratuity, commission, or other thing of value, as an inducement or reward:

  1. For doing or forbearing do any action in relation to the Contract; or
  2. for showing or forbearing to show favor or disfavor to any person in relation to the Contract,

of if any of the Contractor’s personnel, agents or subcontractors gives or offers to give  (directly or indirectly) to any person any such inducement or reward as is described in this sub-paragraph (f).  However, lawful inducements and rewards to Contractor’s Personnel shall not entitle termination.

In any of these events or circumstances, the Employer may, upon giving 14 days notice to the Contractor, terminate the Contract and expel the Contractor from the Site.  However, in the case of sub-paragraph (e) or (f), the Employer may by notice terminate the Contract immediately.

The Employer’s election to terminate the Contract shall not prejudice any other rights of the Employer, under the Contract or otherwise.

The Contractor shall then leave the Site and deliver any required Goods, all Contractor’s Documents, and other design documents made by or for him, to the Engineer.  However, the Contractor shall use his best efforts to comply immediately with any reasonable instructions included in the notice (i) for the assignment of any subcontract, and (ii) for the protection of life or property or for the safety of the Works.

After termination, the Employer may complete the Works and/or arrange for any other entities to do so.  The Employer and these entities may then use any Goods, Contractor’s Documents and other design documents made by or on behalf of the Contractor.

The Employer shall then give notice that the Contractor’s Equipment and Temporary Works will be released to the Contractor at or near the Site.  The Contractor shall promptly arrange their removal, at the risk and cost of the Contractor.  However, if by this time the Contractor has failed to make a payment due to the Employer, these items may be sold by the Employer in order to recover this payment.  Any balance of the proceeds shall then be said to the Contractor.”

15.3, Valuation at Date of Termination:

“As soon as practicable after a notice of termination under Sub-Clause 15.2 [Termination by Employer] has taken effect, the Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine the value of the Works, Goods and Contractor’s Documents and any other sums due to the Contractor for work executed in accordance with the Contract.”

15.4, Payment After Termination:

“After a Notice of Termination under Sub-Clause 15.2 [Termination by Employer] has taken effect, the Employer may:

a.)  proceed in accordance with Sub-Clause 2.5 [Employer’s Claims]

b.)  withhold further payments to the Contractor until the costs of execution, completion and remedying of any defects, damages for delay in completion (if any) and all other costs incurred by the Employer, have been established and/or

c.)   recover from the Contractor any losses and damages incurred by the Employer and any extra costs of completing the Works, after allowing for any sum due to the Contractor under Sub-Clause 15.3 [Valuation at Date of Termination].  After recovering any such losses, damages and extra costs, the Employer shall pay any balance to the Contractor.”

15.5, Employer’s Entitlement to Termination:

The Employer shall be entitled to terminate the Contract at anytime for the Employer’s Convenience by giving notice of such termination to the Contractor.  The termination shall take effect 28 days after the later of the dates on which the Contractor receives this notice or the Employer returns the Performance Security.  The Employer shall not terminate the Contract under this Sub-Clause in order to execute the Works himself or  to arrange for the Works to be executed by another contractor.

After this termination, the Contractor shall proceed in accordance with Sub-Clause 16.3 [Cessation of Work and Removal of Contractor’s Equipment] and shall be paid in accordance with Sub-Clause 19.6 [Optional Termination, Payment and Release].” 

SUSPENSION AND TERMINATION BY CONTRACTOR

16.1, Contractor’s Entitlement to Suspend Works:

If the Engineer fails to certify in accordance with Sub-Clause 14.6 [Issue of Interim Payment Certificates] or the Employer fails to comply with Sub-Clause 2.4 [Employer’s Financial Arrangements] or Sub-Clause 14.7 [Payment], the Contractor may, after giving not less than 21 days notice to the Employer, suspend work (or reduce the rate of work) unless and until the Contractor has received the Payment Certificate, reasonable evidence or payment, as the case may be and as described in the notice.

The Contractor’s action shall not prejudice his entitlements to financing charges under Sub-Clause 14.8 [Delayed Payment] and to termination under Sub-Clause 16.2 [Termination by Contractor].

If the Contractor subsequently receives such Payment Certificate, evidence or payment (as described in the relevant Sub-Clause and in the above notice) before giving a notice of termination, the Contractor shall resume normal working as soon as is reasonably practicable.  * (In UAE law, the Contractor cannot suspend works until after the payment certificate is issued)

If the Contractor suffers delay and/or incurs Cost as a result of suspending work (or reducing the rate of work) in accordance with this Sub-Clause, 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 plus reasonable profit, 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 to determine these matters.”

162., Termination by Contractor: (Contrast to Article 15.5, Termination by Employer, the criteria for termination by Contractor is much more burdensome and extensive than for the Employer).

“The Contractor shall be entitled to terminate the Contract if:

  1. the Contractor does not receive the reasonable evidence within 42 days after giving notice under Sub-Clause 16.1 [Contractor’s Entitlement to Suspend Work] in respect of a failure to comply with Sub-Clause 2.4 [Employer’s Financial Arrangements],
  2. The Engineer fails within 56 days after receiving a Statement and supporting documents, to issue the relevant Payment Certificate,
  3. The Contractor does not receive the amount due under an Interim Payment Certificate within 42 days after the expiry of the time stated in Sub-Clause 14.7 [Payment] within which payment is to be made (except for deductions in accordance with Sub-Clause 2.5 [Employer’s Claims],
  4. The Employer substantially fails to perform his obligations under the Contract,
  5. The Employer fails to comply with Sub-Clause 1.6 [Contract Agreement] or Sub-Clause 1.7 [Assignment],
  6. a prolonged suspension affects the whole of the Works as described in Sub-Clause 8.11 [Prolonged Suspension] or
  7. the Employer becomes bankrupt or insolvent, goes into liquidation, has a receiving or administration order made against him, compounds with his creditors or carries on business under a receiver, trustee or manager for the benefit of his creditors, or if any act is done or event occurs which (under applicable Laws) has a similar effect to any of these acts or events.

In any of these events or circumstances, the Contractor may, upon giving 14 days notice to the Employer, terminate the Contract.  However, in the case of sub-paragraph (f) or (g), the Contractor may by notice or terminate the Contract immediately.  The Contractor’s election to terminate the Contract shall not prejudice any other rights of the Contractor, under the Contract or otherwise.”

16.3, Cessation of Work and Removal of Contractor’s Equipment:

“After a notice of termination under Sub-Clause 15.5 [Employer’s Entitlement to Termination], Sub-Clause 16.2 [Termination by Contractor] or Sub-Clause 19.6 [Optional Termination, Payment and Release] has taken effect, the Contractor shall promptly:

  1. cease all further work, except for such work as may have been instructed by the Engineer for the protection of life or property or for the safety of the Works;
  2. hand over Contractor’s Documents, Plant, Materials and other work, for which the Contractor has received payment; and
  3. remove all other Goods from the Site, except as necessary for safety and leave the Site.”

 

16.4, Payment on Termination:

“After a notice of termination under Sub-Clause 16.2 [Termination by Contractor] has taken effect, the Employer shall promptly:

a.)  Return the Performance Security to the Contractor;

b.)  Pay the Contractor in accordance with Sub-Clause 19.6 [Optional Termination, Payment and Release], and

c.)   Pay to the Contractor the amount of any loss of profit or other loss or damage sustained by the Contractor as the result of this termination.”

The processes for termination of the construction contract are quite different under UAE law and the FIDIC Contract (Red book 1999).  Therefore, it is important to draft the construction contract in terms of UAE law and to modify the FIDIC provisions accordingly to fit within the scope of the UAE law.

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance