Practical Law

Practical measures for recovering payment unique to the local environment.

One of the biggest risks that a contractor faces on any construction project is non-payment. Default on payment is as much a fact of business life in the UAE construction industry as in the UK and any other part of the world. While many of the remedies available in the UK also apply in the UAE, others are unique to the region and may not be known to those unfamiliar with contracting here.

Statutory framework in the UAE

UK contractors will be well-acquainted with the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996). One of the key aims of the Construction Act 1996 is to improve the payment process within the construction supply chain by facilitating cashflow. This is achieved by implying certain payment provisions into any construction contract not containing the necessary payment terms.

If an employer defaults on its payment obligations, the contractor has an automatic right to proceed to statutory adjudication (rather than pursuing the employer through the courts or in arbitration). The Construction Act 1996 also permits a contractor to suspend work, in whole or part, for non-payment.

There is no equivalent legislation currently enacted in the UAE. As a result, a number of the contracting restrictions in the UK that reduce contractors’ risk in relation to payment, do not apply in the UAE. For example, ‘pay-when-paid’ clauses, which are prohibited by the Construction Act 1996, are a relatively common feature of sub-contractors’ payment terms in the UAE.

Right to suspend

Suspending a contract will not automatically result in a payment being made. However, where the employer is keen for a project to be completed or a building to be handed over, the contractor may be able to exert considerable leverage to resolve payment disputes through the threat of “downing tools”.

Some construction contracts include a clause sanctioning suspension for non-payment. For example, clause 16.1 the FIDIC Red Book entitles a contractor to suspend work (or reduce the rate of work) if the employer fails to certify an interim payment certificate or fails to make payment in accordance with the contract.

But what if the contract contains no specific provisions for suspension? In the absence of a contractual right to suspend for non-payment a contractor may have recourse to the UAE Civil Code.

Article 247 provides that:

“In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do.”

The UAE courts have interpreted this provision as permitting a party to suspend performance of its contractual obligations where the other party is in serious breach of its own obligations.

It is important to be aware that the courts will interpret Article 247 of the UAE Civil Code in the context of both parties’ mutual obligations of good faith. These obligations of good faith are themselves implied into contracts entered into in the UAE by operation of Article 246(1) of the UAE Civil Code. Accordingly, suspension of work must be a reciprocal and proportionate response to the default in question. A party considering suspending work should ask:

• Does the employer have any legitimate reasons for withholding payment?
• But for the breach, has the employer otherwise substantially discharged its payment obligations?

The consequences of an unlawful suspension can be severe and therefore caution is required.

Termination

A party’s default may be considered so flagrant and damaging that the other party’s preferred option is to terminate the contract for default. If the threat of termination is carried out, the chance of securing early resolution of payment disputes is likely to be severely limited as positions will almost certainly become entrenched. Accordingly, termination is generally exercised very sparingly, particularly in the UAE.

The majority of standard form building contracts, including the FIDIC Red Book at clause 16.2, contain express provisions regulating the rights of either or both parties to terminate the contract in defined circumstances. In the UK, a party may rely on the common law concepts of repudiation and frustration to conclude a contract in limited circumstances.

The UAE Civil Code provides for the possibility of bringing a contract to an end where its terms are silent on the right to terminate. Should a party wish to terminate a contract for breach (in the absence of express contractual terms as to termination), ordinarily, that party must file an application with the local courts for an order granting that entitlement. Provided the order is granted, a contractor may also be entitled to damages for the employer’s breach.

Other remedies available in the UAE

In addition to exercising rights to suspend or terminate the works, the following remedies may be relied upon by a contractor to seek to extract payment from a client:

• A party may apply to the courts for a Precautionary Attachment Order against specific assets where, for example, interim certificates remain unpaid. An Order is only likely to be granted where there is a suspicion that those assets may be dissipated such that any future judgment in respect of those certificates might not be capable of being satisfied. Whilst arbitration or litigation proceedings will need to be commenced within eight days of obtaining a Precautionary Attachment Order, it has proved to be a very powerful tool in encouraging resolution of payment disputes in the UAE.
• Seeking an Order for Payment from the courts. This is similar to the summary judgment procedure in the UK Courts. It enables a party to circumvent the usual court processes, which can be time consuming and costly, where the debt being pursued is undisputed. In our experience, an Order for Payment will only be issued in exceptional circumstances and only where the debt in question is unequivocally admitted, fully documented and substantiated by a commercial instrument such as a dishonoured cheque.

Minimising risk

It is often said in construction contracting that “prevention is better than cure”, meaning that a contractor’s best defence against a defaulting employer is to minimise its risk in relation to payment at the outset. While this is undoubtedly correct, most contractors in the UAE are not in strong bargaining positions and, as a result, are reliant on measures aimed at recovering debts.

While the remedies described in this blog are valuable tools available to the contractor to recover payment, each also has the potential to aggravate a precarious cashflow situation. We would always advise exercising caution and seeking legal advice before adopting any of the possible measures available.