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Sat 27 Jan 2007 12:00 AM

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Economic pressures pose questions for legal system

Anthony Edwards explores how the UAE Civil Code may deal with time extension and termination issues.

Some authoritative views and informed press comment have recently had me reflecting on the ability of this region's legal processes to deal with the economic stresses that may soon be set to grip the engineering and construction sector.

A leading figure in the industry recently focused my attention on the vast amount of work yet to come on stream in and around Dubai. Yet the business pages tell of economic pressures, a possible slowing of growth, along with contract delays, skilled labour and materials shortages and a general feeling of harder times to come. If all this does occur, how will the legal structures here cope?

From the perspective of those of us who practice the law of the industry, it is perhaps timely to review some main principles and how the UAE law deals with them. Practically, the lawyer's only rule book is the Civil Code, setting out the law that governs engineering and construction contracts. What assurances does it offer in major areas that inevitably become vitally important, particularly during ‘hard(er) times'?

Overrun delays arise from a multitude of causes, mostly either ‘client decisions' or ‘contractor default'. The extension of time provisions play a vital role in well-drawn contracts, protecting clients from being in breach when changing designs or specifications, and entitling contractors to relief from delay (liquidated) damages and from paying excessive penalties when imposed by their clients, and to claims for their overrun costs. In jurisdictions with significantly developed engineering and construction law, there is also the notion of ‘time being at large' in circumstances where the contract provisions do not allow adequate mechanisms for extending the contractor's time for completion, or protecting the client's right to its liquidated damages. The UAE Civil Code is not so industry specific, since it is much broader in its terms and concepts, if no less effective, in its way. The Muqawala contract provisions of the Civil Code deal with engineering and construction contracts within 25 Articles (numbered 872 to 896). Article 877 makes it the duty of the contractor to complete ‘in accordance with the conditions of the contract'. If a contractual period expires without delayed work being completed, the Article allows the client to apply to the court to cancel the contract. Conversely, all the contractor may claim is the right to have the client ‘take delivery' of the works on completion (Article 884) even though the contractor is to be entitled to an increase in the price, but seemingly only where the contract is itemized on unit prices and it becomes ‘necessary.....to exceed the quantities on the list' (Article 886). No details are however provided as to the circumstance that might make it so ‘necessary' and even then the contractor must give immediate notification of the need to increase, failing which the right is lost. The concept of time at large is not covered.

Articles 892 to 896, in a total of just 7 clauses, deal with contract termination. Effectively, Muqawala contracts may only be cancelled by consent or order of a Judge. An interesting question is how this fits with the termination of employment clauses usually found in standard contracts. An answer may be that parties should have regard to other provisions of the Code. Article 272 provides that where one party is in breach, the other may give notice requiring either performance of the contract (by the guilty party) or its cancellation. However, this route also appears to require ratification by the Court, albeit on its face a wholly reasonable provision since it does seem to lead to termination consequent upon default. However, reference may also have to be made to Article 31 of the Code, which stipulates that ‘mandatory' provisions of law take precedence over specific contract stipulations.

The dilemma seems to be that a standard contract provision, well used in traditional forms, becomes questionable legally. Even though Article 895 of the Muqawala provisions allows a party to claim compensation against the other party, the issue arises of whether it is necessary to involve the Court to determine whether there was a right to contractual termination at all. It might be that the application to the Judge is essentially akin to asking the Arbitrator to determine whether the factual background justified the act of termination. However, a more fundamental legal issue could then be involved - namely, whether the termination clause can stand at all, if the Code says a contract may only be cancelled either consensually or by order of the Court. Furthermore, there would appear to be another inherent question - of whether the jurisdiction lies with the Court, or the Arbitrator, in contracts where the parties agree that arbitration will be used to resolve their disputes. If Article 31 does raise conflict between specific agreed provisions and the express terms of the Code, then it is not immediately plain whether only the Court may declare employment at an end.

Article 247 of the Code gives rise to similar considerations of applicability to engineering and construction contracts. Again, on its face a wholly sensible provision, the Article provides that a party may refuse to perform the contract if the other party does not also perform; a principle that seems squarely to justify termination. However, this ‘wholly sensible' provision is nowhere to be found in the Muqawala Articles of the Code; so query - does it apply at all to the engineering and construction industry sector?

What lawyers term the ‘jurisprudence' relating to such important commercial issues as time extensions and termination do, then, pose questions that are not readily answered within the UAE Civil Code law. For such a vibrant Industry as is the Engineering and Construction sector (which just may be on the verge of sterner economic conditions), it seems of considerable importance for all interested parties to urge development of the ideas and principles that will properly be better suited to the real complexities and needs of the Industry, than may be the genuinely laudable, but likely too general, concepts of the Civil Code.

“A leading figure in the industry recently focussed my attention on the vast amount of work yet to come on stream in and around Dubai. Yet the business pages tell of economic pressures, a possible slowing of growth, along with contract delays, skilled labour and materials shortages and a general feeling of harder times to come.”

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