Top five tips for participants in the Middle East construction industry

The global construction industry has been hugely impacted as a result of the COVID-19 pandemic (COVID-19). It has had a widespread effect on the supply chain (particularly in the case of long lead equipment and raw materials), cash flow and the workforce. Hundreds of projects in the Middle East are affected despite attempts by regional governments to introduce extensive stimulus packages. Numerous leading developers in the region have stalled flagship projects and are looking to reprice others whilst contractors and subcontractors scurry to seek protection by issuing force majeure notices (in many cases prematurely) having been squeezed severely by liquidity shortfalls and limitations on the labour force. The highly publicised Expo 2020 which was due to kick off in October this year has been rescheduled to 2021.

The approach of the United Arab Emirates differs from that of other jurisdictions, such as Scotland,¹ which has directed that construction sites should stop all non-essential construction projects. For now, the construction industry in the United Arab Emirates falls within the category of “essential services”, and whilst the government has required that certain safety measures  be implemented (such as limiting the number of labourers allowed within the same bus) by and large work on ongoing projects continues, albeit at a slower rate. Given the impact on project financing and the workforce (with international flight restrictions and limitations on the movement of labour between Emirates), together with the fall in oil prices, it is unclear for how long this will be sustainable.

Set out below are our top five tips for construction participants in the Middle East.

• Understand your contract – Project managers, engineers and employer representatives need to work with their respective legal teams to identify and map out potentially applicable contractual provisions such as those relating to force majeure, employer’s risk, change in law, change in costs, extension of time, termination, suspension and insurance. It may be that COVID-19 may trigger potential relief under several provisions of a contract, not just the force majeure provisions.
• Understand applicable local law provisions – Irrespective of the contractual provisions, certain mandatory provisions of local law may be applicable. Depending on which side of the fence you sit, you may be able to successfully rely on these provisions. Whilst we set out potentially relevant provisions of the UAE Civil Code below, parties will need to consider whether these are applicable – for instance, should a project be located in the Dubai International Financial Centre (DIFC), it may be that DIFC law is the applicable law (as is the case with the Abu Dhabi Global Market):
  • Article 273 of 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 obligee to cancel the contract provided that the obligor is made aware.” As such, where a force majeure event makes performance impossible, the contract will be automatically terminated. Further, in cases where only part of the contract is impossible to perform, the impossible part of the contract is extinguished. However, Article 273(2) also provides that the contractor is permitted to terminate the entirety of the contract provided the employer is made aware.
  • Article 249 of the Civil Code provides that – “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, 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.” This provision prohibits a party from exercising its rights in a manner that is oppressive or abusive – a judge or arbitrator, after weighing up the interests of each party, is entitled to reduce an "onerous" contractual obligation to a "reasonable level", if there are "exceptional circumstances".
  • Article 893 of the Civil Code – “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”. Parties may look to rely on this provision (which is largely self-explanatory) together with Articles 273 or 249 above.
  • Article 894 of the Civil Code – “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.” It appears that this would be construed as a mandatory provision of law. This is similar to the Quantum Meruit principle whereby a contractor shall be entitled to the value of the work it has completed and to the expenses it has incurred in the performance of the contract, up to the amount of the benefit the employer has derived.
  • Article 247 of the Civil Code provides that, “In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refrain from performance of his obligation if the other contracting party does not perform that which he is obliged to do.”
  • Article 246 of the Civil Code provides that, “(1) The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith. (2) The contract shall not be restricted to an obligation upon the contracting party to do that which is [expressly] contained in it, but shall also embrace that which is appurtenant to it by virtue of the law, custom, and the nature of the disposition.”
• Adhere to contractual notice requirements – Generally, failure in many Middle East countries such as the United Arab Emirates, Kingdom of Saudi Arabia and Qatar, to abide by contractual notification requirements does not automatically result in a waiver or loss of an entitlement to pursue a claim. The position is very different from that of common law jurisdictions such as England and Wales. Nonetheless, it is advisable that parties err on the side of caution and ensure that notice requirements are carefully complied with to avoid inadvertently losing rights.
• Cooperate and mitigate – The preferred standard form contracts used regionally (FIDIC) includes an obligation on parties to cooperate, and, in the case of delay, for contractors to mitigate. Under UAE law there is also a mandatory requirement for parties to act in good faith (see above). It is therefore important that the parties look to work together and collaborate in order to ensure that potential delays and losses caused by COVID-19 are mitigated.
• Regularly monitor directives from government authorities – As is the case globally, the situation remains fluid. In many instances there are hourly and even daily changes in policies, directives and requirements. Teams should ensure that, where possible, a dialogue is developed with the relevant authorities to guarantee that all options and, where applicable, potential exemptions to blanket rules are utilised.

The bottom line is that parties to a construction contract need to understand the terms of the contract, adhere to notification requirements, where applicable cooperate in good faith and mitigate delays/effects. Ultimately, many projects may be delayed and/or cancelled and as a consequence, disputes may arise. Parties should ensure therefore that during this period they do not take steps that are likely to prejudice their respective positions in due course.