To be paid: Remedies for non-payment in the UAE construction industry

One of the biggest risks a contractor faces on any construction project is failure to pay. Late payments are just as common in the UAE construction industry as they are in the UK and any other part of the world. While many of the legal 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 the procurement process here.

Legal framework in the UAE

UK contractors are familiar with the Housing Grants, Construction and Regeneration Act 1996. One of the main goals of the Construction Act of 1996 is to improve the payment process within the construction supply chain by facilitating the flow of money. This is achieved by including certain payment terms in any construction contract that does not contain the necessary payment terms.

If an employer fails to meet his payment obligations, the contractor automatically has the right to make a judicial decision (instead of taking the employer to court or arbitration). The Building Act of 1996 also allows a contractor to suspend work in whole or in part for non-payment.

There is currently no such legislation in the UAE. As a result, the UAE does not have a number of the UK contract restrictions that reduce contractors' risk of being paid. For example, "pay-when-paid" clauses, which are prohibited by the Building Act 1996, are a relatively common feature of subcontractor payment terms in the UAE.

Right to suspension

The suspension of a contract does not automatically result in payment. However, if the employer is interested in the completion of a project or the handover of a building, the contractor can under certain circumstances exert considerable influence on the resolution of payment disputes by threatening "downing tools".

Some construction contracts contain a clause sanctioning a suspension of payments in the event of non-payment. For example, Clause 16.1 of the FIDIC Red Book authorizes a contractor to suspend work (or reduce workload) if the employer fails to certify an interim payment slip or fails to make the payment in accordance with the contract.

But what if there are no specific suspension provisions in the contract? In the absence of a contractual right to suspension for non-payment, a contractor can rely on the UAE Civil Code.

The UAE courts have interpreted this provision to mean that one party may suspend performance of its contractual obligations if the other party seriously breaches its own obligations.

It is important to be aware that the courts will interpret Article 247 of the UAE Civil Code in connection with the mutual obligations of both parties in good faith. These fiduciary duties are themselves implicitly contained in contracts entered into in the UAE under Article 246 (1) of the UAE Civil Code. Accordingly, the suspension of work must be a reciprocal and proportionate response to the non-performance in question. A party considering ceasing to work should request:

- Does the employer have legitimate reasons for withholding payment?

- But has the employer otherwise essentially met his payment obligations because of the breach of contract?

The consequences of an unlawful suspension can be severe, so caution is advised.

Termination

The failure of either party can be viewed as so blatant and harmful that the other party's preferred option is to terminate the contract for non-performance. If termination is threatened, the chances of an early settlement of payment disputes are likely to be severely limited as the positions will almost certainly solidify. Accordingly, termination is generally handled very sparingly, especially in the United Arab Emirates.

The majority of standard form contracts, including the FIDIC Red Book in Clause 16.2, contain express provisions governing the right of one or both parties to terminate the contract in defined circumstances. In the UK, a party can use common law concepts of disapproval and frustration to enter into a contract in certain circumstances.

The UAE Civil Code provides the ability to terminate a contract if its provisions do not provide for the right to terminate. Should a party wish to terminate a contract for breach of contract (in the absence of express contractual termination terms), that party must normally apply to the local courts for an order granting that right. Provided that the order is issued, a contractor can also be entitled to compensation for breach of contract by the employer.

Other remedies available in the UAE

In addition to exercising rights to suspend or terminate the work, a contractor can use the following legal remedies to obtain payment from a client:

- A party can apply to the court for a precautionary attachment order against certain assets if e.g. Intermediate bills remain unpaid. An order is likely to be issued only if there is a suspicion that these assets may be dispersed in such a way that a future judgment on these Certificates may not be met. Although arbitration or legal proceedings must be initiated within eight days of receiving a precautionary attachment order, it has proven to be a very effective tool in promoting payment dispute settlement in the UAE.

- Seek an order for payment from the courts. It enables a party to bypass standard legal processes, which can be time consuming and costly when the debt pursued is undisputed. In our experience, an order for payment is only issued in exceptional cases and only if the debt in question is clearly recognized, fully documented and evidenced by a trading instrument such as an unpaid check.

Minimizing the risk

When it comes to construction contracts, it is often said that "prevention is better than cure," meaning that a contractor's best defense against a defaulting employer is to minimize their pay risk from the start. While this is undoubtedly true, most UAE construction companies are not in a strong bargaining position and therefore rely on debt recovery measures.

While the remedial actions outlined in this blog are valuable tools available to the contractor to collect payment, each of these actions also has the potential to exacerbate a precarious cash flow situation. We always advise you to exercise caution and seek legal advice before taking any action.