United Arab Emirates: Construction force majeure and alternative relief

What is the most commonly used standard form construction contract used in the country?

In UAE, the most common standard form construction contracts are the International Federation of Consulting Engineers (“FIDIC”) forms of contract. The predominant forms are the first editions (published in 1999) of the:

• Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (also known as the Construction Contract or the “Red Book”);
• Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor (also known as the Plant and Design-Build Contract or the “Yellow Book”); and
• Conditions of Contract for EPC/Turnkey Projects (also known as the EPC/Turnkey Contract or the “Silver Book”).

The FIDIC Red, Yellow and Silver Books are collectively referred to as the “Rainbow Suite”.  Clause references and capitalised terms in this section refer to those used in the Rainbow Suite (1999 editions), unless specifically stated otherwise.

Does the contract include provisions on force majeure? 

The FIDIC Red, Yellow and Silver Books all include provisions on Force Majeure at Clause 19. 

Sub-Clause 19.1 defines “Force Majeure” as “an exceptional event or circumstance:

(a) which is beyond a Party's control;

(b) which such Party could not reasonably have provided against before entering into the Contract;

(c) which, having arisen, such Party could not reasonably have avoided or overcome, and

(d) which is not substantially attributable to the other Party.”

The definition of Force Majeure does not require that the event or circumstance be unforeseeable.  Accordingly, contracts entered into post the Covid-19 pandemic would not be precluded from citing Covid-19 as being an event of Force Majeure, even though it was existing and known to the parties at the time of entering into the contract.

Sub-Clause 19.1 includes a non-exhaustive list of events (including, among others: (i) war; (ii) rebellion; (iii) riot; (iv) munitions of war; and (v) natural catastrophes) that may constitute Force Majeure, subject to conditions (a)-(d) above being satisfied.  Epidemic, pandemic and/or plague are not included in the non-exhaustive list of Force Majeure events in Sub-Clause 19.1. Notwithstanding, the Covid-19 outbreak could arguably be construed as a “natural catastrophe” and would likely satisfy conditions (a)-(d).

Sub-Clause 19.2 states that if “a Party is or will be prevented from performing any of its obligations” by Force Majeure then it shall give notice “within 14 days after the Party became aware, or should have become aware, of the…Force Majeure”.  The Party shall then be excused performance of such obligation, although payment obligations shall not be excused.  A party seeking to rely on Force Majeure relief must be able to show that it is actually “prevented” from performing its obligations under the Contract – it is not sufficient for such obligations simply to be disrupted or made more expensive to perform. In the context of the Covid-19 outbreak, prevention could arguably include government measures imposed to limit the spread of Covid-19, including lockdown and quarantine measures and the suspension of issuing certain permits and visas.

Under Sub-Clause 19.3 both Parties have a duty to “use all reasonable endeavours to minimise any delay”.  In the context of the Covid-19 outbreak, mitigation could include adjustments to the programme and resource management to minimise delay to the works.  Also, the sourcing of alternative suppliers for goods, equipment and materials to mitigate against disruption to the supply chain.

Sub-Clause 19.4 provides that, if Sub-Clauses 19.1-19.3 (above) are satisfied and subject to the Contractor’s claims procedure and notice requirements set out in Sub-Clause 20.1, a Contractor will be entitled to an extension of time and, in certain circumstances, Cost. Cost would only be available in case of events “of the kind” described in sub-paragraphs (i) to (iv) above, where events (ii) to (iv) must occur in the country where the Works are being executed.  Natural catastrophe is thus excluded as an event of Force Majeure that entitles a claim for Cost.  As mentioned above, even though epidemic, pandemic and/or plague are not included in the non-exhaustive list of Force Majeure events in Sub-Clause 19.1, Covid-19 could arguably be construed as a “natural catastrophe”.  In such case, a contractor would be entitled to claim for time but not Cost.

Sub-Clause 19.6 provides that either Party may terminate the Contract if “the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of Force Majeure… or for multiple periods which total more than 140 days due to the same notified Force Majeure”.  This entitlement to terminate only arises if the Contractor is prevented from executing substantially all of the Works in progress, which is a high threshold to satisfy.

Does the contract include provisions for alternative relief that may be relevant to projects impacted by COVID-19?

Sub-Clauses 8.4 provides the Contractor is entitled to claim an extension of time, subject to the claims procedure at Clause 20, if completion of the Works is or will be delayed by, among other things, “Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions”. In the context of the Covid-19 outbreak, Contractors, whose supply chains are impacted by the pandemic, could seek to claim time relief under this clause. However, such relief may not be applicable for contracts entered into post-the Covid-19 outbreak, as the shortages must be “Unforeseeable” (i.e. “not reasonably foreseeable by an experienced contractor by the date of submission of the Tender”).

Sub-Clause 8.5 provides that, if the Contractor has “diligently followed” procedures laid down by public authorities and such public authorities cause “Unforeseeable” delay or disruption, the Contractor may claim an extension of time under Sub-Clause 8.4. In the context of the Covid-19 outbreak, the lockdown and quarantine measures and the suspension of issuing certain permits and visas could arguably constitute delay or disruption caused by public authorities. Again, relief is only available if such delay or disruption is “Unforeseeable” (see above).

Sub-Clause 13.7 provides the Contractor is entitled to claim an extension of time and Cost, subject to the claims procedure at Clause 20, in relation to any “change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws)…made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.” “Laws” means “all national (or state) legislation, statutes, ordinances and other laws, and regulations and by-laws of any legally constituted public authority”. Given the relatively wide definition of Laws, the introduction of quarantine and lockdown measures relating to Covid-19 could arguably entitle the Contractor to claim time and Cost. Such change in Laws must occur after the “Base Date”, being “28 days prior to the latest date for submission of the Tender”.

Sub-Clause 17.4 provides the Contractor is entitled to claim an extension of time and Cost, subject to the claims procedure at Clause 20, in relation to Employer’s risks set out in Sub-Clause 17.3. Such risks include, at sub-paragraph (h), “any operation of the forces of nature which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions”. If the Covid-19 pandemic is deemed a force of nature, then relief may be available to a contractor that suffers related loss or damage that is “Unforeseeable” (see above) or that could not reasonably have been prevented against. This second limb could allow contractors to claim for foreseeable loss related to Covid-19 (i.e. under contracts entered into after the pandemic outbreak).

Do the laws of the country provide for force majeure relief?

Article 273 of UAE Federal Law No. 5 of 1985 (the Civil Code) provides that – “(1) In contracts binding on both parties, if force majeure supervenes which makes the performance of the contract impossible, the corresponding obligation shall cease, and the contract shall be automatically cancelled. (2) In the case of partial impossibility, that part of the contract which is impossible shall be extinguished, and the same shall apply to temporary impossibility in continuing contracts, and in those two cases it shall be permissible for the obligor to cancel the contract provided that the obligee is made aware”. 

Article 273 provides that if a contract is deemed impossible to perform then it will be automatically terminated. In case of partial or temporary impossibility only the impossible part of the contract will be extinguished – but the party claiming force majeure can still terminate the contract simply by giving notice of such to the other party. The Abu Dhabi Court of Cassation (No.13/2010), when considering Article 273, stated that force majeure must be an external event that makes performance of obligations absolutely impossible by all parties, not simply more burdensome.

Do the laws of the country provide for alternative relief that may be relevant to projects impacted by COVID-19?

Article 249 of the Civil Code states “If exceptional events of a public nature which could not have been foreseen occur as a result of which the performance of the contractual obligation, even if not impossible, becomes onerous for the obligor so as to threaten him with grave loss, it shall be permissible for the judge [or arbitral tribunal], in accordance with the circumstances and after weighing up the interests of each party, to reduce the onerous obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void.” An unforeseen emergency differs from force majeure under Article 273 (see above), in that it must render performance onerous, not impossible and it does not result in the contract being terminated, rather the court or arbitral tribunal can adjust and reduce the contractual obligations. In the context of Covid-19, a contractor could claim, for instance, that resulting price escalations entitle it, under Article 249 to renegotiate the contract price.

Article 287 of the Civil Code states “If a person proves that the harm arose out of an extraneous cause in which he played no part such as a natural disaster, sudden incident, force majeure, act of a third party, or act of the person suffering harm, he shall not be bound to make it good in the absence of a provision of the law or an agreement to the contrary.” This Article provides that if a party can prove an extraneous event caused a loss, such a party is not bound to make good the loss, providing it was not involved in causing the event.

Article 893 of the Civil Code states “If any cause arises preventing the performance of the contract or the completion of the performance thereof, either of the contracting parties may require that the contract be cancelled or terminated as the case may be”. Article 893 and 894 (below) relate specifically to muqawala contracts, which are contracts to make a thing or to perform a task, including construction contracts. Article 893 provides either party with a right to terminate, if “any cause” prevents performance or completion. Unlike Articles 273, 249 and 287 above, the cause does not need to be extraneous or unforeseeable and does not need to render performance impossible.

Article 894 of the Civil Code states “If the contractor commences performance and then becomes incapable of completing it for a cause in which he played no part, he shall be entitled to the value of the work he has completed and to the expenses he has incurred in the performance up to the amount of the benefit the employer has derived therefrom.” This Article provides a right of compensation – but not termination – to a contractor who becomes incapable of completing works for a reason it played no part in.