Construction Disputes in the United Arab Emirates

The United Arab Emirates (UAE) has become a hub for foreign investors in recent years and the domestic construction industry has adopted and followed international best practices for construction contracts to bring more familiarity and efficiency for foreign investors. 

Construction contracts in the UAE are now largely based on the International Federation of Constructing Engineer (Federation Internationale Des Ingenieurs-Counseils or FIDIC) forms of contract. Celine Abi Habib Kanakri and Andrew Massey, Baker Mckenzie Habib Al Mulla, Legal issues relating to construction contracts in the United Arab Emirates, Westlaw, Practical Law UK, 2017, 2. Except for applicable rules of public order, parties can specifically opt out in writing of the domestic laws of UAE and apply foreign law in their construction contracts.

In this article we will explore the legal framework for construction contracts in the UAE, the dispute resolution mechanism used in them, the relevant rules of international arbitration, and the process for enforcement of foreign arbitration awards.

The Legal Framework for Construction Contracts in UAE

The legal system of the UAE has three independent but interconnected judicial systems: the Civil Law System, Sharia Law, and the Dubai International Financial Centre (DIFC).

The UAE is a civil law jurisdiction, and commercial contracts fall under Articles 872-896 of the Civil Transactions Law No. 5 of 1985 (the Civil Code) and the Commercial Transactions Law No. 13 of 1993 (the Commercial Code).

Under Article 19(1) of the Civil Code, parties to a construction contract can choose a foreign governing law except for:

1. contracts pertaining to right in rem, i.e. involving property located in the UAE; and
2. contracts signed with governmental or quasi-governmental entities in the UAE.

However, foreign parties entering into construction contracts with construction companies in the UAE and opting for a foreign governing law must be prepared to prove in court the existence of contractually agreed foreign law and determine its effects as a matter of law. Absent this, UAE courts will apply UAE law regardless of the choice of the parties.

To avoid this possible outcome, parties can resort to international arbitration because the enforcement of any award under this is based on the Enforcement and Recognition of Foreign Arbitral Awards Convention, 1958 (New York Convention) which has very limited grounds for refusing the enforcement. Id. at 3.

The Legal Framework for Construction Disputes in the UAE

From commercial point of view, the legal system can also be divided into three parts. First, the domestic UAE’s three-part legal system described above. Second, the DIFC, which has its own civil and commercial laws and courts. The DIFC is a free zone in the Emirate of Dubai and follows the English common law approach. The DIFC Arbitration Law is based on the 1985 UNCITRAL Model Law on International Commercial Arbitration (the UNCITRAL Model Law).

Third is the Abu Dhabi Global Market (ADGM) legal system which is similar to the DIFC and was established in 2013. The ADGM has also announced a new arbitration hearing centre in collaboration with the International Chamber of Commerce (the ICC). Dr. Habib Al Mulla, Celine Abi Habib Kanakri, Sally Kotb and Andrew Massey, Baker Mckenzie Habib Al Mulla, Comparison of UAE and DIFC-seated arbitrations, Westlaw, Practical Law UK, 2017, 2.

Broadly, parties can choose to resolve their disputes before domestic UAE courts, foreign courts, or through international arbitration. Arbitration, as a dispute resolution mechanism, has certain inherent benefits in the UAE, including more efficient enforceability. Regardless of the parties’ choice of arbitration, DIFC and UAE courts have jurisdiction on cases having a legal nexus or inherent jurisdiction in UAE.

The Rules of International Arbitration under UAE Law

Before adding an arbitration clause in their construction contracts, parties are well advised to learn about the rules of arbitration in the UAE. In many ways, the rules can make or break the dispute resolution journey.

There is no national arbitration law in the UAE, unlike in the DIFC and ADGM. Rather, arbitration is squarely regulated by the Civil Procedure Code (the CPC) and is most commonly used for domestic arbitrations. For international arbitrations, there are several arbitral institutions available in each Emirate in the UAE. Therefore, until a national arbitration law is implemented in the UAE, parties should take note of the following:

1. There must be an unequivocal and clear intent by parties to arbitrate through an arbitration clause in main agreement or separate arbitration agreement or by an exchange of correspondence.
2. The arbitration agreement must be in writing (Article 203(2) of the CPC).
3. The subject matter of the dispute must be covered under the arbitration agreement.
4. The dispute must be arbitrable. Id. at 4-7

For institutional rules, parties frequently turn to the rules of Dubai International Arbitration Centre (DIAC). These rules point to the DIFC as the default centre of arbitration, facilitate appointment of emergency arbitration, allow consolidation of multi-party disputes and joinder of non-signatory parties, and imposes sanctions to punish poor conduct. These rules underscore the UAE’s emergence as an arbitration hub and its willingness to become an arbitration friendly jurisdiction. Id. at 3

The Enforcement of Foreign Awards

One of the main reasons for the popularity of international arbitration is that by virtue of New York Convention, foreign arbitral awards are more readily enforceable in signatory states. Article V of the New York Convention states the very limited grounds for refusing enforcement of any arbitral award.

In the UAE, enforcement of the foreign awards is governed by the Article 235 of the Civil Procedure Code, which the domestic courts follow in connection with the execution and implementation of judgments and awards of foreign countries. They will recognize a foreign judgment after confirming that:

1. the domestic courts of the UAE have no jurisdiction over the dispute;
2. the judgment or order was passed by the competent court of the foreign country where it was passed and has obtained the status of absolute decree; and
3. the parties were duly summoned and represented.

The UAE is also a party to the New York Convention, which largely makes domestic laws inapplicable in connection with the enforcement of foreign arbitral awards in the UAE subject to public order rules. Foreign arbitral awards also may be enforced in the DIFC. Supra, note 1, at 8.

Conclusion

The absence of a national arbitration law in the UAE may bring some difficulties and uncertainty to foreign investors due to the scattered statutes and laws applicable to international commercial arbitration in the UAE.

However, foreign investors can opt for international arbitration and can also choose to opt for foreign governing law in their arbitration agreements. Foreign investors can refer to the DIFC rules, which is largely based on international standards of practice. Further, they must adhere to Article 235 of the CPC to implement and execute on their foreign arbitration awards.

Ultimately, though, the fact that the UAE is a signatory to the New York Convention means that parties will have a relatively efficient and seamless path to enforce foreign arbitral awards.