Abstract
The United Arab Emirates (UAE) Federal Law has made a very interesting distinction for construction contracts within its Civil Code, such that construction contracts (which are also known as “Muqawala Contracts”) are governed under separate sections of the Code. To be precise, there are a total of 25 sections that govern the entirety of construction contracts in UAE, which also include the process of termination of the contract and providing damages for the same. The termination and damages concept of construction contracts has grown to be inclusive of various ways through which they can be achieved, and the COVID-19 pandemic has further provided new insights into the discussion. This article aims to understand the existing laws in relation to termination and damages of construction contracts in the UAE, along with discussing some practical steps that must be kept in mind while following the law.
Introduction
The Construction practices in UAE have adopted an internationally accepted law form coupled with the local Federal Law. Majority of the construction contracts in UAE are modelled after the International Federation of Consulting Engineer (Fédération Internationale Des Ingénieurs-Conseils) (FIDIC) form of contracts. However, UAE courts place strong reliance on their local Federal Law to interpret and enforce construction contracts.
In UAE, there is no separate piece of legislation governing construction contracts, instead, all contractual rules for governance are codified in the Civil Transaction Law No. 5 of 1985 (UAE Civil Code). More specifically, the construction contracts are regulated under Articles 872 to 896 of the UAE Civil Code, which are also known as “muqawala contracts” (contracts to build). Some of the provisions mentioned in these Codes are absolute, which means being default provisions, the parties are required to contract out of them explicitly. [1] Hence, it is necessary for an engineering or construction contract, governed under the UAE Laws, to comply with Articles 872 to 896 of the Civil Code, notwithstanding what the parties mutually agree in their respective contracts. [2]
A majority of construction-related disputes in UAE arise over terms of termination (whether express or implied) and parties seeking compensation for the alleged termination. We attempt to dissect the law and discuss the modes of termination and related compensations that a party is entitled to under UAE Law.
Termination under Construction Contracts
Article 267 of the UAE Civil Code provides that a contract cannot be terminated in any way other than by mutual consent, order of the court, or by law. It states that “If the Contract is valid and binding, it shall not be permissible for either of contracting parties to resile from it, nor to vary or rescind it, save by mutual consent or an order of court, or under a provision of law”. [3]
However, considering construction contracts have separate provisions, Article 892 of the UAE Civil Code specifically deals with the termination of such contracts. It states that “The contract for work shall come to an end by completing or by rescission of the contract by mutual agreement or by order of the court”. [4]
A party may primarily rely on Article 892 of the UAE Civil Code while dealing with termination, however, it can also refer to and rely upon Article 267 of the UAE Civil Code depending on the facts and circumstances around the termination.
Under the UAE Civil Code, the construction contracts can be terminated through different methods:
Termination of Contract by Completion of Works Agreed
This is when the obligations of the parties under the contract come to a natural end, as the duties and obligations have been entirely performed by the parties. Therefore, the completion of the work brings about statutory termination of the contract without any requirement for a court order to confirm such termination.
Termination of Contract by Mutual Consent
Termination of the contract by the mutual agreement can occur either before or after entering into a contract. UAE Civil Code, under Article 268 provides for termination of the contract by mutual agreement after it has been concluded by the parties. The article states, “The contracting parties may mutually revoke the contract by their mutual consent after it has been concluded”. [5] Article 268 affirms the principle of party autonomy to agree on termination of the contract even after execution. In the absence of any express provision of termination, the parties can still come together to mutually contract out.
Equivalent to this article, the specific provision dealing with the termination of the contract by mutual agreement for construction contracts is Article 892 of the UAE Civil Code.
Termination of Contract by Court Order
If an event where the construction contract sets out the rights and obligations of the parties and either of the parties breaches the said obligation, the contract in such a situation can be terminated through court orders. This would allow the other party to approach the court/ arbitral tribunal seeking an order of termination of the contract. Therefore, even though the parties may agree on the termination provision, the final termination is confirmed only through a court order/ arbitral award. The parties can approach the court/ arbitral tribunal even in the absence of any express termination provision, in an event where there has been a breach of the mandatory provision of the UAE Law.
However, while the parties seek the termination of the contract through a court order, the contract and its obligations continue to remain in force till the time the court gives orders on the said termination. [6] It must be noted that UAE Courts allow termination of a construction contract only in event of a material breach of obligations. In other cases, the court is more likely to award compensation for the said breach.
Termination due to Force Majeure
Force Majeure refers to a situation where the execution of the duties and obligations under the contract becomes impossible to fulfil. This is when the contract shall be terminated with immediate effect and both the parties return to their pre-contractual positions. If it is not possible for the parties to return to their pre-contractual positions, then the courts award the relevant damages as suffered by the aggrieved party to the contract.
There are two kinds of impossibilities of performance of the contract due to the force majeure event that have been recognised in the UAE legal system under Article 273 of the UAE Civil Code. These include the wholly impossible and partially impossible performance of the contract. [7] The law further differentiates between circumstances wherein the performance of the contract is impossible or impractical and where the performance of the contract is complex due to any force majeure events.
If Article 273 cannot be applied on a particular contract, Article 249 of the UAE Civil Code is referred to, which deals with the concept of “Doctrine of Exceptional Circumstances”. This doctrine applies to situations where the performance of the obligations of the contract becomes onerous due to unforeseen events during the term of the contract. [8]
The equivalent article to Article 273 for construction contracts is Article 873. This Article states, “When an excuse arises, that prevents the execution of the contract, or the completion of its execution, any of the contracting parties may ask for its rescission or termination, as the case may be”. [9] Hence, in a general contract, the contract is automatically terminated when the performance becomes onerous, however, in Muqawala contracts, the parties of the contract can also terminate the contract in onerous circumstances.
Another Article of the UAE Civil Code that explicitly secures the party’s interests concerning funds for his performed works is Article 894 of the Code which states, “If the contractor has started the execution of the work and then became unable to accomplish it, for a reason beyond his control, he shall be entitled to value of the completed work, in addition to the expenses disbursed for its execution to the extent of the benefit that the masters derives from such work”. [10] According to this article, the contractor is entitled to receive monetary compensation for the work completed along with any other expenses incurred during the term of the contract. This article allows the contractor to not be negatively impacted through termination and allows the contractor to receive adequate compensation for the work already completed.
- COVID-19 as a Force Majeure Event
The COVID-19 pandemic has often been debated on whether it can be qualified as a force majeure event or not. However, irrespective of its qualifications, the pandemic is unavoidably an issue of actuality and is dependent on a case-to-case basis. [11] The UAE courts, generally, have been hesitant to include the pandemic within the definition of force majeure in the UAE Civil Code because it considers the event as something that frequently occurs, which has been foreseeable, or an event which is applicable within the context of private contracting relationship rather than been considered to be a public concern. [12]
The general requirements for an event to be considered as a force majeure event are included within sub-clause 19.1 of the FIDIC Red Book 1999 (most used FIDIC forms of contract in the Middle East). Rather than limiting the parties to an exhaustive list of events, the sub-clause includes a non-exhaustive list of situations, which when satisfying a set of requirements are considered to be within the ambit of force majeure. Sub-clause 19.1 provides that an event must be: [13]
i. An exceptional event or circumstance.
ii. Beyond the control of the parties to the contract.
iii. Unforeseeable, such that the parties could not reasonably predict its occurrence before entering into the contract.
iv. Cannot be reasonably avoided or overcome by the parties.
v. Substantially attributable to either of the parties to the contract.
Whether COVID-19 satisfies these requirements or not is debatable and the pandemic might or might not be considered to be a force majeure event. However, along with the drafting of the force majeure provision within the contract, the timing when the parties entered into the construction contracts may be the deciding factor for satisfying requirement (iii) under sub-clause 19.1. If the parties to the contract were already aware of the COVID-19 situation and its impact and if they had taken reasonable steps to limit the impact of the pandemic before their contractual agreement, the parties’ right to invoke the force majeure clause may be restricted in such a case. [14]
The force majeure reliefs are generally not extended to the employer’s payment obligations and the obligation must continue to be fulfilled irrespective of the existence of the force majeure event. Therefore, the employers must note that notwithstanding the existence of the force majeure event, the contractor’s failure to pay when required results in a risk of the suspension of the right of the contractor to suspend or terminate the contract. The relief sought for force majeure can take the form as has been agreed between the parties while entering into the contract. When the contractor is the affected party under the contract, sub-clause 19.4 of the FIDIC Red Book includes an extension of time for the delay in the completion of work, however, the contractor is not entitled to costs. A contract can also become capable of being terminated, under some circumstances, if there is a prolonged period of force majeure, as included under sub-clause 19.6 of the FIDIC Red Book. This sub-clause states that where the entire or a substantial part of work, either prevented for a continuous period of 84 days or multiple periods which total to 140 days, it can result in the termination of the contract altogether.
If any construction contract does not consist of a force majeure clause, help is taken from Article 273 of the UAE Civil Code. According to this Article, if the performance of the entire or any part of the contract becomes impossible, it is possible for either the entire contract or for the relevant impossible obligation to be rescinded. Here, the parties can either be restored to the position that they were in before they entered into the contract with each other, or they can be paid the relevant damages for the same. On the other hand, the courts can also demand to grant an extension of time or demand the specific performance (mostly the preferred option) of the obligation under the contract. This relief is provided under sub-clause 19.7 of the FIDIC Red Book, which also includes a prescriptive set of requirements that the parties must adhere to. [15]
Within the context of muqawala contracts, Articles 893 and 894 of the UAE Civil Code can be applied in the context of COVID-19. These Articles state that if the obligations under a contract cannot be executed due to any situation, then either of the party can request the contract to be rescinded or terminated or be compensated (as the case may be). Article 287 of the UAE Civil Code is used to absolve any party from liability to an extent, given that the party can prove that they have incurred losses to that extent, due to an unforeseen or a force majeure event.
The provisions of the UAE Civil Code have mostly been inspired from the force majeure rules as provided in the FIDIC Red Book, and even though no procedural requirements are provided under the UAE Civil Code while invoking these provisions, it is practical for the parties to rely either on Article 273 or Articles 893 and 894. This helps them in ensuring that the counterparty has received timely notice, and to ensure that they don’t fall short of their overarching duty of good faith, as has been provided under Article 246(1) of the UAE Civil Code. [16]
Termination under FIDIC Conditions of Contract
As discussed above, the UAE Law recognises the parties’ prerogative to agree on the circumstances under which termination can be sought. It is recommended that parties agree on the termination clause as reliance on the statutory termination can lead to parties being in an uncertain position. To assist the parties, they can refer to Article 15 and 16 of the Red and Yellow Books of the FIDIC Contract for termination of contracts, that deal with termination by employer, and suspension and termination by contractor rules and regulations respectively.
Termination of a contract, especially in the construction industry, is known to be a very severe step, and it is, therefore, recommended to resort to other remedies before termination. Some remedies that can be taken to avoid termination include:
i. Parties ensuring that the other party in the contract is financially established and stable and has the necessary resources for completing the project in time.
ii. Parties notifying each other if there is any delay in the execution of work, payment, or if they anticipate any breach.
iii. If the contractor does not perform the obligations mentioned, even after receiving the necessary notifications, the parties can agree on the imposition of liquidated damages as this would act as a deterrence from any breach.
iv. As provided under Articles 256 and 247 of the UAE Civil Code, the parties must follow the principle of good faith. The articles state, “The contracts must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith” and “The contract shall not be restricted to an obligation upon the contracting party to do that which is (expressly) contained in it but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the transaction” respectively. [17] This provision helps the parties in looking beyond the contractual terms of the contract, and incorporating the nature of the matter as well.
Damages under Construction Contracts
Under UAE Law, damages are awarded only in the circumstance where a party has suffered a loss or there has experienced a material breach of contract. Parties can agree on imposition of liquidated damages and the courts are likely to uphold the liquidated damages even in the absence of any suffered loss (provided the liquidated damages is reasonable).
Even though there is no express duty to mitigate a loss, courts do expect the aggrieved party to have taken reasonable measures to reduce their losses due to the breach of the contract. If the aggrieved party has not taken any reasonable measures, this can result in the downward revision of damages awarded to them. [18] This also affirms the principle of good faith discussed above.
The concepts of “Indirect” and “consequential” losses have not been legally defined under the UAE construction law. It is recommended for the contracting parties to expressly refer and specify the categories of loss that they seek to recover, or wish to exclude the liability for, instead of simply referring to them as indirect or consequential losses to avoid any future disputes. [19]
As has been explained by the Dubai Court of Cassation, “There is contractual liability in the presence of three factors; a fault which occurs when one of the contracting parties does not carry out the obligations stipulated in the contract or if there is delay in performing the same; a proven damage; and the presence of causation between the fault and the damages”. [20] Therefore, there must be a breach or fault committed by a contracting party resulting in a direct loss or grievance to the other contracting party, which they must be capable of proving. It has been further stated by the court that, “The creditor should establish the debtor’s fault in not performing his contractual obligations and the damages”. [21] This statement comes in line with Article 113 of the UAE Civil Code according to which, “The onus of proof lies on the creditor, in establishing his right and on the debtor, in refuting it”. [22] Therefore, the burden of proof lies on the party bringing the suit against the other party, and there must be a proper establishment of the right to damage in front of the court.
I. Types of Damages
Some of the principles for awarding damages recognised under the UAE Law are direct damages, loss of opportunity, loss of profits, consequential damages, interests, and moral damages. The Law and UAE courts also recognise the parties’ ability to agree on liquidated damages. As has been provided in the explanatory note of the UAE Civil Code, compensation is provided for direct damages as experienced by the parties during the term of the contract. [23] Therefore, in contracts where compensation has not expressly been deliberated and agreed upon, the court must appropriate the actual damage, as sustained by the aggrieved party to the contract.
UAE law recognise the principle of consequential damages, even if they have not been legally defined within the code. However, the concept is confined to tortious liability and is excluded from the contractual liability application. [24]
The loss of profits during the contractual liability has been recognised by the Dubai Court of Cassation. The concept of loss of profits is included under Article 292 of the UAE Civil Code (however, the article is limited to tortious liability) and also provided in the explanatory note of Article 389 of the UAE Civil Code. Nevertheless, to expect the court to award loss of profits as damages, the occurrence of damage must be specific, as courts shall not be awarding any compensation to the parties for any probable or hypothetical damages in the contract. [25]
II. Liquidated Damages Clauses
Liquidated damages clauses are valid and enforceable under Article 390(1) of the UAE Civil Code. However, the courts hold the power to reconsider such clauses if a party to the contract makes an application in the court, irrespective of any agreement to the contrary between the parties. This power of the court has been provided under Article 390(2) of the UAE Civil Code, and the burden of proof lies on the party that is requesting such a reassessment from the court. As a matter of public order, any limitation clause or any agreement which limits or excludes the right of the party to request for such reconsideration of the liquidated damages is deemed null by the court. Hence, a judge or arbitration can be requested by the parties to reassess and reconsider the contractually agreed damages, no matter what has been agreed by the parties to the contrary. It has been expressly provided in the explanatory note of Article 390 of the UAE Civil Code that the judge holds the discretion to either increase, decrease, or make the compensation equal to the contractually agreed compensation against the appropriate damages incurred. The UAE Civil Code recognises compensation for actual damages, which can be removed by the courts if the damages are: [26]
1. The direct result of the acts of some other party, not a part of the contract between the parties.
2. Foreseeable and specific at the time when the parties are entering into the contract.
It is also possible to recover compensation for any future damages if the above criteria are met, along with satisfying the additional criteria of certainty to occur in the future. However, as provided under Articles 292 and 293 of the UAE Civil Code, it is very unlikely to receive compensation for any indirect or hypothetical damages incurred by the parties. [27]
Contractual Damages
The concept of contractual liability does not accept incidental or consequential damages. If there has been a breach of contract, the aggrieved party can claim contractual damages only if the party has directly incurred such damages from the breach of the contract. It is important for the parties to have foreseen such damages, at the time of entering into the contract. This condition has been derived from the principle of “pacta sunt servanda”, which is Latin for “agreements must be kept”.
Here, the aspect of foreseeability must have occurred while the parties were contracting and must be assessed in abstract and objectively (i.e., in comparison to the notion of ‘ordinary person’). Therefore, the damages incurred must be the ones that an ordinary person could predict, had they been in the same circumstances as the parties. Here, we also take into account the claims from other categories of contractual damages, including loss of profits, moral damages, and loss of opportunity. [28]
Practical Measures
Some important measures must be undertaken by the parties before entering into construction contract. Firstly, parties must seek proper legal advice before entering into such contracts, and it is always recommended to seek advice from the local counsel on UAE imperative laws, along with the laws of public order, which are applied in the UAE construction contracts (even if the contract itself is governed by some other foreign law). Parties are also recommended to:
i. Properly investigate the place and the means for the successful enforcement of the construction contract, especially when they agree on the applicable governing laws and dispute resolution clauses.
ii. Properly conduct technical and commercial due diligence, before agreeing on the pricing and delivery date within the contract.
iii. Accurately record the facts of the contract which can have an impact on their contractual and legal rights in the future.
iv. Correctly comply with the time limits and other contractual provisions.
This helps them in properly analysing the necessary laws even before entering into the contract, which makes the legal procedure easier for them if a situation arises in the future where they need to terminate their construction contract or seek damages under it.
Conclusion
To conclude, construction contracts under the UAE laws are inclusive of rules and regulations that must be accurately followed. Considering that seeking termination and damages for construction contracts can be a difficult process under UAE Laws, it is always recommended for the parties to conduct accurate due diligence before entering into the contract itself by securing proper legal advice.
About the Authors
Hari Wadhwana is an Associate at OGH Legal, UAE.
Muskaan Aggarwal is a 3rd Year Law Student at Jindal Global University and an Associate Editor at IJPIEL.
Editorial Team
Managing Editor: Naman Anand
Editors-in-Chief: Akanksha Goel & Aakaansha Arya
Senior Editor: Jhalak Shrivastav
Associate Editor: Muskaan Aggarwal
Junior Editor: Adarsh Kumar
Preferred Method of Citation
Hari Wadhwana and Muskaan Aggarwal, “Termination and Damages for Construction Contracts in UAE” (IJPIEL, 23 August 2021)
<https://ijpiel.com/index.php/2021/08/22/termination-and-damages-for-construction-contracts-in-uae/>
Endnotes
[1] Celine Abi Habib Kanakri & Andrew Massey, Legal issues relating to construction contracts in the United Arab Emirates, Lexology, (Aug 16, 2021, 9:29 PM), https://www.lexology.com/library/detail.aspx?g=dab36f6f-130e-4432-84d4-5e0bee1dc641.
[2] Charles Lilley, Contracts of muqawala and decennial liability: a middle eastern perspective, Practical Law Construction Blog, (August 16, 2021, 1:27 PM), http://constructionblog.practicallaw.com/contracts-of-muqawala-and-decennial-liability-a-middle-eastern-perspective/.
[3] UAE Civil Code, 1985, art. 267, FED Law No. 5.
[4] UAE Civil Code, 1985, art. 892, FED Law No. 5.
[5] UAE Civil Code, 1985, art. 268, FED Law No. 5.
[6] Id. at 1.
[7] UAE Civil Code, 1985, art. 273, FED Law No. 5.
[8] Diva Rai, All you need to know about force majeure contracts in UAE, IPleaders, (Aug 16, 2021, 2:56 PM), https://blog.ipleaders.in/all-you-need-to-know-about-force-majeure-contracts-in-uae/.
[9] UAE Civil Code, 1985, art. 893, FED Law No. 5 OF 1985, Article 893.
[10] UAE Civil Code, 1985, art. 894, FED Law No. 5.
[11] Chambers and Partners, https://chambers.com/articles/covid-19-impact-on-construction-contracts-in-uae, (last visited Aug. 16, 2021).
[12] Euan Lloyd & Laith Al-Ali, COVID-19 and Construction Contracts: The Risks and Challenges Ahead, Al Tamimi & Co., (Aug 16, 2021, 7:35 PM), https://www.tamimi.com/law-update-articles/covid-19-and-construction-contracts-the-risks-and-challenges-ahead/.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] UAE Civil Code, 1985, art. 246 & 247, FED Law No. 5.
[18] Scott Lambert, UAE law and construction contracts, China Business Law Journal, (Aug 16, 2021, 7:42 PM), https://law.asia/uae-construction-law/.
[19] Id.
[20] Dubai Court of Cassation, petition no 41/2007, 15/04/2007; Dubai Court of Cassation, petition no 37/2004, 18/09/2004.
[21] Id.
[22] It has been further stated by the Dubai Court of Cassation that “causation is presumed to exist unless the debtor proves that damages resulted from force majeure, the creditor’s acts or the acts of a third party”. (Dubai Court of Cassation, petition no 41/2007, 15/04/2007; Dubai Court of Cassation, petition no 37/2004, 18/03/2004).
[23] The explanatory note is issued by the UAE Ministry of Justice and acts as an official commentary to the UAE Civil Code which is used to further explain the provisions of the UAE Civil Code. The Dubai Court of Cassation has referred to this explanatory note in several of its rulings (Dubai Court of Cassation, petition no 130/2006, 10/09/2006; Dubai Court of Cassation, petition no 562/2003, 20/03/2004).
[24] In House Lawyers, https://www.inhouselawyer.co.uk/legal-briefing/damages-and-contracts-in-the-uae/#four, (last visited Aug. 16, 2021).
[25] Dubai Court of Cassation petition no 51/2007, 29/04/200; Dubai Court of Cassation, petition no 46/2006, 08/05/2006.
[26] Id. at 1.
[27] Id.
[28] Id. at 26.
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