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October 2006

Construction
Law UAE
Introduction
This, the first edition of Construction Law UAE, looks at three
issues which have emerged from the white heat of the UAEs
construction market.
First, is the market too hot for traditional lump sum
turnkey procurement? With most mega-schemes
half-completed before the design and specification
are finalised, could the market benefit from a move
towards cost reimbursable guaranteed maximum price
contracting? We look at some of the pros and cons of this
approach in UAE: Time for GMP Contracting?
Second, claims. The FIDIC Fourth Edition remains the contract
form of choice in the UAE. One of its advantages, of course,
is the flexibility it allows for instructing and valuing scope
changes and the consequential re-scheduling. On the other
hand, its antiquated and obscure language can make the
meaning of key provisions hard to pin down. This is particularly
the case where notice procedures are to be complied with
as a precursor to claims for additional time and money. How
should these sometimes imprecise and conflicting provisions
be understood, particularly when read in the light of relevant
articles of the UAE Civil Code? In I thought youd never notice:
The UAE Civil Code and Claims under the Red Book we
suggest some answers.

Our third feature entitled The UAEs Accession to the New


York Convention: worth the wait? highlights the implications
of the recent accession by the UAE to the New York
Convention on the enforcement of foreign arbitral awards.
The UAE construction market, although not yet as litigious as
many, will need to consider whether these new developments
make UAE arbitration more, or less, of a mugs game.
The aim of Construction Law UAE is to stimulate debate. Please
take the time to email your thoughts and comments on what
we have said. We would like to publish the best responses. So,
when emailing, please indicate if you are unwilling for us to do
so. In future editions we hope to feature guest contributions
from our readers. Please let us know if you would like to be
a guest contributor. Please contact Di McCleland on 04 405
4150 or, alternatively, email her at
di.mccleland@dentonwildesapte.com.
Denton Wilde Saptes UAE construction group includes lawyers
with many years experience negotiating and concluding major
works contracts and handling all kinds of dispute resolution,
claims and advisory work in the UAE, across the Middle East
and throughout the developed and developing world. We are,
in Abu Dhabi: Alistair Hirst and Steven Tee; in Dubai: David
Courtney-Hatcher, Michael Kerr, Ravinder Bhullar, Andrew
Chegwidden, Ashley Hill, Nick Kramer and Matthew Blycha.

UAE: time for GMP Contacting?


Clients who ask us to help them draft forms of guaranteed
maximum price (GMP) contracts, have a variety of reasons for
their decision to contract on this basis. Fixed price lump sum
contracting, they point out, assumes that the design will be
more or less complete at the time the contract is signed. The
Contractor will have had time to assess the buildability of
the project, to organise his supply chain and sub-contractors
and generally to have satisfied himself that the job can be
completed at a profit, for the contract price and within the
contract time.
In the UAE, of course, precisely the opposite is usually the case.
First, the price and programme are fixed against an outline
design, then a contract of some kind - often just a letter
agreement - is signed. Only after that is the design developed
to a level of detail which enables the Contractor to see exactly
what he has committed himself to. The result, not surprisingly,
is a book of variations which quickly runs out of control and a
completion date without basis in reality.
There are signs that the UAEs major developers are starting to
realise that they cant have it both ways. Fixed price and fixed
time mean fixed workscope. If, on the other hand, an instant
start on site really is essential, with construction following hard
on the heels of design development, a procurement method
which is more flexible than the rigid fixed price lump sum
approach is needed.
For these reasons, the UAEs construction industry is seeing
increasing numbers of contracts awarded on the basis of a
GMP. The advantage of GMP contracting, if properly used,
is that it facilitates an early start on site without sacrificing
reasonable price certainty. It incentivises the Contractor to
be efficient and the Developer to ensure that his design team
sticks to the design development programme.
So, how does GMP contracting work? Typically, the Contractor
bids against the Developers preliminary or outline design and
specification and the parties agree a guaranteed maximum
price. Interim payment valuations are made on an actual
cost, open-book basis. The categories of reimbursable costs
- labour, materials, plant and sub-contractors are preagreed. There is a fee, either a lump sum or a percentage
of the reimbursable cost, to compensate the Contractor for
overheads, profit and preliminaries. As the design develops,
often with the benefit of the Contractors suggestions on
buildability, the GMP remains fixed, subject only to adjustment
in case of major scope or design concept changes, or the usual
Employers risk events.

The incentives usually arise by agreement of a target cost


sometimes an evolution of the GMP agreed between the
parties when the design has become sufficiently frozen. In
other words, once the design target is no longer moving, the
target cost can be fixed.
The target cost will work in conjunction with a pain/gain share
regime. So, if actual cost is lower than target cost, the cost
saving is shared on a pre-agreed percentage basis. If on the
other hand actual cost exceeds target cost, the cost overrun is
only shared between by the Developer and the Contractor to
the extent of the pre-agreed percentage, with the Contractor
retaining the risk of all cost overruns above the GMP.
The advantages are obvious. In order to earn their shares of
the cost savings or minimise their shares of the cost overruns,
both parties will need competent project management,
efficient design development and drawing issue, tight subcontract procurement and supply chain management and
elimination of waste.
So much for the underlying principles: what about the
practice? Some alarming consequences have resulted from
the unshakeable belief, still widespread in the UAE, that any
construction contract should be drafted using the FIDIC Red
Book (4th Edition) as its basis. A quick glance should satisfy
even FIDICs most loyal users that it cannot easily be adapted
for use as a GMP/cost reimbursable/target cost contract.
A number of suitable standard form contracts have been
published. These include the UKs JCT Prime Cost contract, the
NEC Option C, D and E and the ICHEME Green form but none
of these seems yet to have found favour in the UAE.
You should, therefore, consider using one of these forms as
the basis for your GMP/target cost contract, rather than FIDIC.
Or, if you decide to go bespoke remember you will need a
contract which covers at least the following:
a way of fixing the target cost (if not already fixed in the
contract);
the criteria for adjusting the GMP and/or the target cost
and a procedure for agreeing or fixing those adjustments;
what will constitute changes in the original scope, sufficient
to justify increases in the GMP and/or target cost?
the admissible categories of reimbursable costs;
how is the fee calculated and what does it include and
exclude?
which cost components are fixed at the date of the
contract and which are subject to escalation?

how will the advance payment, if any, be apportioned


between cost and fee?
what compensation is payable upon termination? and so
on.
To conclude: GMP/target cost arrangements may be part of
the answer to the time/cost/scope tensions which are part
and parcel of the UAEs fast-track mentality. These contracts
can be written simply and clearly but FIDIC, particularly the
modified version of the FIDIC Red Book (4th Edition) which is
still widely used in the UAE, is not the place to start.

I Thought Youd Never Notice:


The UAE Civil Code and Claims
under the Red Book
FIDIC in the UAE
For all its innovation and spectacular achievements, the
construction industry in the UAE has been slow to move on from
its close relationship with the FIDIC Red Book (4th Edition) (the
Red Book). This was, of course, superseded long ago and it is
scarcely used anywhere else in the world, outside of this region.
The Red Book provides a number of notoriously tricky
procedures for claim notification and particularisation to be
followed by the Contractor. They are not sharply drafted and
their meaning and intent are not always clear. However, it seems
to be implied in some cases that if these procedures are

not strictly adhered to by the Contractor, the claim will be dead


in the water - in other words, the Engineer may be entitled to
reject the claim outright. Building and civil works contracts in
the UAE are generally governed by UAE law and hence the
UAE Civil Code (the Civil Code) will apply. This article considers
how, when express notification procedures are read in the light
of applicable provisions of the Civil Code, a more moderate
and fair outcome may emerge.

Entitlement to Claim
The Red Book provides that in certain circumstances a
Contractors entitlement to claim may be lost if he fails to give
notice of his intention to claim or fails to provide detailed
claim particulars within the timescales prescribed. There
are two provisions of the Red Book which state that a failure
to comply with the specified notice or particularisation
procedures for making a claim will justify the rejection of the
claim.
First, Clause 44.2, which is concerned with applications for
extensions of time. This clause provides that in case of noncompliance with the time limit to provide notice and/or to
provide detailed claim particulars, the Engineer is not bound
to make any determination of a claim for an extension of
time. The Engineer, therefore, has a discretion not to make
a determination if either the time limit for notice or for
particularisation is not met.
Second, Clause 52.2, which applies to applications for payment
for variations. This clause states that the varied work will not
be valued unless notice of an intention to claim extra payment
is made within 14 days of the date of the instruction. Strictly
construed, this clause allows for a claim to be disallowed if the
14 day time limit is not complied with.


Clauses which expressly provide procedures for claim notification and
particularisation are:


6.3 Notice of delay or disruption in case of delayed information or


instructions;
12.2 Notice of adverse physical obstructions or conditions;
30.3 Notice of damage to any bridge or road due to the transport of
Materials or Plant;
38.1 Notice of when any part of the Works or foundation is ready to be
covered up (compliance required for 38.2 to apply);
40.3 Notice requesting permission to proceed with work after a suspension
lasting more than 84 days (compliance required for 51.1 to apply);
42.1 Notice containing reasonable proposals regarding access and
possession (compliance required - arguably - for 42.2 to apply);
44.2 Notice of an application for an extension of time;
52.2 Notice to claim additional payment for varied work;
53.1 Notice to claim additional payment under any clause of these
Conditions or otherwise;
65.5 Notice of increased costs arising from Special Risks; and
69.4 Notice of suspension by the Contractor due to non-payment by the
Engineer.
These clauses stipulate a range of notice procedures. There are some slight
differences between them. In any case, Clause 44.2 and/or Clause 53.1
apply to all of them.

There is no prescribed form of notice. Clause 1.5 of the Red Book


states that notices must be in writing and that the word notify is to
be construed accordingly. As such, there is no reason why a monthly
report, for example, could not be construed as a notice. However, it
would be prudent for the Contractor to make two things clear. First,
that the written information is intended to be a notice under the
contract. Second, the clause under which it is given - this will include
in every case at least Clause 53.1or Clause 44.2.

The Red Book is silent as to what constitutes detailed particulars.
This will vary case-by-case. It would be good policy, wherever possible,
for the Contractor to invite the Engineer to confirm that he is satisfied
with the detail provided, or if not, to say so.

Please note that Clause 53.1 states that, notwithstanding any other
provision of the Red Book, all claims for additional payment under
the Red Book require 28 days notice from the date of the event giving
rise to the claim. This would appear to extend the shorter requirement
of 14 days under Clause 52.2. We would suggest, however, that the
Contractor should comply with the 14 days notice period.


The Civil Code


If the Engineer feels inclined to reject an otherwise meritorious
claim solely by reason of non-compliance with strict
technicalities of the notification procedures it is important for
him to consider the provisions of the Civil Code, which might
have a bearing on the issue.
For instance, the Civil Code makes clear that neither party
to a contract should act in bad faith. Article 246 states that
contracts must be performed in a manner consistent with
the requirements of good faith. This could apply, for example,
where a Contractor points to information given in agreed
minutes of a meeting or a periodic report as written notice
of an intention to claim, as required by the Red Book. If,
as is sometimes the case, a question arises as to whether
information in a formal minute or a written report is strictly
written notice, consideration of good and bad faith may, as a
matter of UAE law, be relevant. The Contractor may argue, in
such a case, that the Employer and the Engineer have actually
been notified of the existence of the claim, in a written form,
within the stipulated time period and, as such, the purpose of
the notification provision has been fulfilled and that it would be
an act of bad faith not to accept this.
The Civil Code also states that neither party may exercise its
rights under a contract in a manner which is oppressive or
abusive to the other. Article 106 says that the exercise of a
right shall be unlawful if, among other things, the interests
desired are disproportionate to the harm that will be suffered
by the other party. Thus, if an otherwise valid and meritorious
claim is disallowed solely by reason of purely technical breach
of a notice provision, this may well be unlawful, especially if the
likely financial harm to the Contractor is disproportionate to
the interests in upholding the Employers contractual right to
receive timely notice.
Furthermore, Articles 318 and 319 of the Civil Code provide
that unjust enrichment is unlawful. If, for example, the Engineer
rejects a claim for additional payment for varied work purely
on the grounds that the time limit for notice has not been met,
it could, as a matter of UAE law, be the case that the Employer
has been unjustly enriched by benefiting from additional work
while seeking to avoid payment by relying on a procedural
technicality. Consequently, the claim may succeed in the eyes
of UAE law even if the notice procedures were not complied
with.

Comment
This article highlights only a few examples of how the Red
Book, when read in the context of the applicable provisions
of the Civil Code, might not have the meaning, or at least the
effect, suggested by the express words used. There are, of
course, numerous other provisions of the Civil Code which are
likely to be relevant and must be considered when advising

the Contractor, Engineer or Employer. Contractual provisions


which appear to have drastic consequences as written in the
Red Book (or in any other standard form contract which may
be used in the UAE) may, in fact, have a modified or different
effect when read together with applicable provisions of the
Civil Code.

The UAEs Accession to the


New York Convention: worth
the wait?
The UAE has ratified the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, know as the New York
Convention (the Convention). The date of the UAEs accession is
likely to be soon. The UAE will then join the 137 states which have
already acceded.
Until now the UAE has had only limited arrangements for mutual
recognition and enforcement of foreign arbitral awards: various
treaties with states in the Gulf, the Middle East and North Africa
as well as France and India. Those treaties resulted in easier
enforcement in the UAE of awards made in those states (and vice
versa), but enforcement of awards from non-treaty states was
subject to scrutiny by the UAE courts under local laws. This not
only involved burdensome procedural requirements but also an
often lengthy court process. That said, even the enforcement of
purely domestic awards in the UAE is not without its difficulties.
With the UAEs accession to the Convention, enforcing foreign
awards from Convention states is likely to become easier. Subject
to any reservations the UAE makes when it accedes, the UAE
courts will then be required to recognise awards made in other
Convention states as binding and to enforce them under the
conditions outlined in the Convention. The grounds for objection
are limited: mainly, lack of arbitral jurisdiction or procedural
unfairness during the proceedings.
But what practical impact will this have for the UAE construction
industry? Probably not much. It remains the case that only a
very small number of UAE construction disputes reach a formal
dispute resolution process. In such cases the UAE construction
industry still tends to prefer a domestic arbitration process.
Dubai government bodies are in any case bound to do so by the
Law of Contracts of Government Departments in Dubai 1997.
It is a very rare contractor who, when tendering for a project in
the UAE, will even consider negotiating different terms for the
dispute resolution clause (eg. foreign venue, international rules
etc.). The UAE construction industry therefore remains far more
likely to generate domestic UAE awards than foreign ones. The
Convention is, of course, no help in relation to domestic awards: it
applies only to foreign awards.

So, does the UAEs accession to the Convention offer any real
benefits to the UAE construction industry at all? The answer,
perversely, may be yes, but only if the UAE construction
industry is prepared to consider opting for foreign arbitration
venues. These would then generate foreign awards. The
obvious benefit is that the Convention would then apply.
Enforcing a foreign award in the UAE under the Convention
may be considerably easier and quicker than enforcing a
domestic award. Moreover, a party with the benefit of a
UAE award may find it easier to take that award to another
Convention state than to face the hurdles and uncertainties
associated with enforcement in the UAE.
These are peculiar and, presumably, unintended
consequences.

For further information, please contact:


David Courtney Hatcher
T +971 4 3310220
F +971 4 3310220
david.courtney-hatcher@dentonwildesapte.com
Michael Kerr
T +971 4 3310220
F +971 4 3310220
michael.kerr@dentonwildesapte.com
Alastair Hirst
T +971 2 6266180
F +971 2 6266175
alastair.hirst@dentonwildesapte.com

Perhaps the imbalance between these legal regimes will be


corrected in time, leading to a more uniform approach towards
ratification of domestic and foreign awards.
At the time of writing, the full text of the instrument of
accession has yet to be released. This may confirm, among
other things, whether awards made before ratification or
accession will be enforceable under the Convention and
whether the UAE has made any reservations regarding
enforcement of awards. These may include only enforcing
awards which are made in other Convention states and/or
which relate to disputes which are commercial in nature.
The ratifying decree does not contain any reference to
reservations. We hope to be able to address these questions in
our next edition.

2006 Denton Wilde Sapte, unless otherwise indicated. All information correct as at time of printing. Consistent with our policy when giving advice on a nonspecific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of a specific problem we recommend that you seek
professional advice.
With effect from 1 November 2006 any references to Denton Wilde Sapte should be taken as referring to Denton Wilde Sapte LLP.
The term partner is used to refer to a member of Denton Wilde Sapte LLP or an employee or consultant with equivalent standing and qualifications.
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