Explained: UAE Courts Judgment Concerning Construction Works

In the UAE, all commercial activity, including that of construction, is regulated by the UAE Commercial Transactions Law. However, since these activities are based on contracts, in practice, the Federal Law No. 5 of 1985, known as the UAE Civil Code or the UAE Civil Transactions Law also comes into play.

Civil Law system: Since the UAE follows the civil law system, as opposed to the common law system, the focus while deciding cases in courts is given to the laws, and the doctrine of legal precedent is not applicable. This does not mean that the judgements of the UAE courts are not regarded. The lower courts in the hierarchy of the court system usually adhere to the judgments pronounced by the Courts of Cassation, that is the highest Court of Appeal in the UAE. In cases involving construction disputes, the UAE courts have delivered comprehensive judgements with respect to construction laws.

Defining Construction Contracts

Dubai Court of Cassation Judgement 922 of 2020: The Court defined a construction contract keeping in view Articles 872, 877, 878, 885, 886, 887 and 888 of the UAE Civil Code, and viewed that a construction contract is one where one of the parties undertakes to do some work in exchange of a remuneration to be paid by the other party. The work must be completed according to the provisions of the contract between the two parties. If the work is such that it is violative of the contractual provisions, then the contract must be rescinded, and if it can be remedied, a reasonable time must be afforded to the defaulting party to rectify the situation.

Relationship Between Employer and Sub-Contractor

UAE Federal Supreme Court Judgement 851 of 2021: There are very few instances where a sub-contractor can claim payments directly from the employer. In an appeal before the Federal Supreme Court, the employer stated that there was no privity of contract between the employer and the sub-contractor, implying that the sub-contractor could not claim from the employer. The sub-contractor had issued payment invoices to the main contractor, reaffirming this point. Further, as per the construction contract, only the main contractor reserved its right of compensation from the employer. The Court ruled in favor of the employer and relied on Articles 872, 890 and 891 of the UAE Civil Code, which reiterate the employer’s grounds.

The Court concluded that a sub-contractor could claim sums from the employer only on two grounds: either there exists privity of contract between the sub-contractor and the employer, or the main contractor had assigned the sub-contractor his right to claim payments from the employer. None of the conditions were applicable in this case.

Back-To-Back Clauses

A back-to-back clause in a construction contract is one which stipulates that the subcontractor will only receive payment once the main contractor receives an equivalent payment from the employer. Back-to-back clauses are enforceable in the UAE.

Abu Dhabi Court of Cassation Judgement 151 of 2014: When a back-to-back clause regarding payments exists in a construction contract, the sub-contractor will be entitled to payment from the main contractor only when the main contractor has received an equivalent amount from the employer. This equivalent payment receipt is a prerequisite for the sub-contractor to claim his payment. The relationship between a sub-contractor and a main contractor is the same as between a main contractor and the employer.

Force Majeure

Force majeure is a term referred to those circumstances or events under which the fulfillment of a contract becomes impossible. As per Article 273 of the UAE Civil Code, an event will be considered as force majeure if it makes an obligation impossible to perform.

Abu Dhabi Court of Cassation Judgment 835 of 2021: A contractor asserted force majeure for delay of completion of construction works, stating that the building equipment could not be imported from China owing to the Covid-19 pandemic and therefore suspension of trade activity. However, the Court rejected this assertion because the contractor failed to prove that the material was in fact imported from China. Moreover, the contractor had already completed a part of the works in question. The Court held that the pandemic should not only make the agreement onerous but also make the performance impossible.

Abu Dhabi Court of Cassation Judgement 512 of 2021: An application to dissolve a contract, on account of the impact of the Covid-19 pandemic, was filed before the Court. Referring to Article 273 of the UAE Civil Code, it held that if force majeure leads to the performance of an obligation impossible, it will be extinguished, and the contract will be revoked. However, in such cases, force majeure should be the only reason for the damage occurring.

Dubai Court of Cassation Judgment 479 of 2021: Where the project was not delayed due to the Covid-19 pandemic, the Court held that force majeure supervenes to a point where the obligations under the binding provisions of a contract are rendered impossible to be performed.

Lump-Sum and Re-Measurable Contracts

Dubai Court of Cassation Judgement 472 of 2021: The Court clarified the distinction between lump-sum and re-measurable contracts in construction. It held that in a lump-sum contract, the contractor cannot demand an increase in the pricing unless there is a change in the design or variation which has been approved by the employer. On the contrary, in a re-measurable contract, a contractor is required to notify the employer of any increase in the quantities and is thus entitled to claim for additional works.

Liquidated Damages

Dubai Court of Cassation Judgement 472 of 2021: The Court held that in a construction dispute, the employer has the right to claim liquidated damages in case the contractor delays the completion of work.