Construction in Dubai and the UAE: exciting times

The Dubai construction sector continues to boom, offering significant opportunities for lawyers in the region. But they need to be alert to the ways in which the industry is changing.

By Nick Carnell, partner, Kennedys

A standard plotline for science fiction films is that of the planet created from scratch in a matter of moments. For lawyers, insurers and construction professionals doing business in Dubai, it is an image with a certain resonance. Dubai is one of the fastest growing economies in the world. In less than two generations it has grown from a pair of fishing villages beside a creek, to a city of 1.5 million people with a rate of growth bordering on the frightening.

However, the very speed at which this expansion has happened can lead to issues. For members of the construction industry, this begs the questions what risks should I be looking at and what should I be doing to protect myself? Of course, the answers will vary from project to project but there are certain common features. Examples come both in the way work is procured and in the field of dispute resolution. In relation to both, the indication is that a previous mentality where margins meant little attention was paid to either contractual niceties or the possibility of claims, is now a thing of the past

Until comparatively recently, a view that held sway in much of the Middle East was that contracts were something at best to be concluded quickly, and then placed in a locked drawer, never to be referred to again. That approach, while not much liked by lawyers, had a singular advantage – it worked. However, times move on and there is little doubt that the Middle East construction industry is asking a series of increasingly sophisticated questions about the way in which works are procured.

The first, and perhaps most obvious, question to ask is whether the contract form that is being proposed actually reflects the division of responsibility on the project? Put another way, does liability attach to people who actually control particular risks? Is the contractor being asked to assume liability for design in circumstances where he has no responsibility for design? If he is, has this been reflected in his price, and perhaps more importantly, does his insurance cover this?

This leads to an obvious, but sometimes misunderstood point. Insurance in all fields – and construction is no exception – is provided to deal with things that might happen. The actuarial process is concerned with assessing the likelihood of eventualities – insurers do not cover certainties. It is perfectly proper – and indeed sensible – for insurers to look carefully at the Quality Assurance procedures of the parties in determining whether a particular risk is one they wish to take on.

This in turn throws up a common cause for concern – do the parties actually understand what they have each taken on? Placing the contract in a locked drawer pre-supposes that each party has already read it and understands perfectly the extent of his obligations. History suggests this is seldom so.

From this we move to whether the contract form actually represents the project to be constructed? If, for example, large parts of the design are yet to be finalised, or the scope of the works is still evolving, is there really any point in seeking to commit the parties to a fixed price, knowing that this is not really going to represent the eventual price of the works. Similarly, should we be using a Bill of Quantities that will rapidly become an irrelevance?

For many years the standard form contract of choice for the region has been a version of the 1987 FIDIC form. This was generally varied to add a provision for Bills of Quantities, despite the fact that contracts were commonly let including large proportions of provisional sums. This is obviously of minor concern if little attention is to be paid to the contract once it is signed. However, recent experience suggests a gradual move away from this approach towards more appropriate procurement strategies such as target cost contracts.

A further consideration, the importance of which cannot be underestimated, especially in the UAE, is the danger of using contract forms or legal notions that aren’t applicable to contracts subject to UAE law. The point arises in two ways. Firstly, and as indicated above, that parties attempt to use a contract form that doesn’t really work when applied to the particular project. Secondly, it is that parties try to import legal concepts with little or no application when the UAE Civil Transactions Code is applied.

This brings problems of its own. The Civil Transactions Code is of course published in Arabic. Translations are widely available but these are unofficial and in the event of discrepancies, the Arabic version will prevail. Furthermore, and in common with all civil law jurisdictions, while attempting to cover every eventuality that may arise, instances can and do occur where the code is silent. In circumstances where there is no doctrine of precedent (at least not in the way understood in Common Law jurisdictions) this leads to uncertainty. While it is probable that over time this issue will be addressed and the gaps filled in, this will take time.

Quite simply, understanding the severity of a risk is intimately bound up with understanding how it will be dealt with by the local courts applying the applicable law. Until recently, disputes – or at least those that led to any sort of formal proceedings – were relatively uncommon within the Emirates. The pace of change has meant, sadly but inevitably, that this is changing. A cause for concern is whether the UAE has the means to deal with this.

While technologically advanced, in some quarters the Dubai Court system is perceived as slow and is not widely employed by international users of court services. Similarly, the Dubai International Arbitration Centre and the Abu Dhabi Centre for Arbitration and Conciliation, while superbly appointed, are handicapped because it is only within the past six months that the UAE has actually acceded to the New York Convention on the enforcement of foreign arbitral awards (albeit that at the date of writing this article neither Dubai nor the UAE were shown on the Convention website as members).

However, it is the case that the number of matters being referred to arbitration is increasing and it appears that this trend will only increase. A new Federal law dealing with arbitration is presently in draft, although it remains to be seen whether this will mark an appreciable change from the present position, where the arbitral tribunal is given almost complete discretion to determine its own procedure and jurisdiction.

These problems are partially offset by a recent and exciting development – the opening of the Dubai International Financial Centre (DIFC) and the creation of a new, separate and autonomous legal system for it. Thus, disputes between companies registered in the DIFC, or between a DIFC company and a non-DIFC company relating to a contract made in the DIFC, or even between two non-DIFC companies but entered into within the area of the DIFC (which is something under 3km2) are subject to the jurisdiction of the DIFC Courts rather than the Dubai Federal Courts. In order to implement this, the DIFC has adopted a series of substantive laws closely modelled on their English counterparts.

Just as importantly, it has appointed an English QC to draft the procedural rules, which will be known as the RDC (or ‘Rules of the DIFC Courts’). This document, which is presently in draft, is intended to blend all the best from the English Continental and US procedures, while also borrowing from Middle Eastern legal systems – an example of the latter coming in the area of mediation (‘Justice by Reconciliation’) where Arab and Middle Eastern dispute resolution systems contain provisions for conciliation that pre-date the English or US method – and which is extremely useful.

That said, both the procedural and substantive laws will be instantly recognisable to Western lawyers – and there can be little doubt that one of the drivers behind the establishment of DIFC courts was the wish to create somewhere an institution in the DIFC that would mirror that encountered in Europe or the US. In its relatively short lifespan the first claim form has already been issued in DIFC courts¹. It might be anticipated that future business of the courts will span both disputes arising from the construction of DIFC and those involving transactions by the financial institutions setting up within DIFC.

The UAE provides something of a paradox – on the one hand demand for capable contractors exceeds supply; on the other the UAE’s principal developers wield considerable commercial power such that onerous terms can be and are imposed on contractors in circumstances where the facility to resolve disputes is still developing. The problems highlighted in this article could be avoided by a collaborative approach in which the parties seek to adopt a partnering approach geared towards identifying and diagnosing issues² with a view to maximizing returns for all parties. It has been suggested there is no reason why such an approach should not be adopted within the UAE as well – although it does require something of a move away from so-called ‘traditional’ – that is to say confrontational – contracting.

To paraphrase the old curse, therefore, these are interesting times for all those involved in construction. For lawyers there is a dual challenge. On the one hand, advice to those entering contracts needs to be geared to the changes occurring in the way works are being procured. On the other hand, the possibility of disputes occurring needs to be balanced against the fact that the means to resolve those disputes is evolving and will continue to do so.

References

1. By Kennedys

2. Within the UK such contracts, particularly PPC 2000 and the ‘Be Collaborative’ form produced by the Centre for the Built Environment have attracted a number of adherents