The Projects andConstruction Review

The Projects and

Construction Review

Law Business Research

Fifth Edition

Editor

Júlio César Bueno

The Projects andConstruction Review

The Projects and Construction ReviewReproduced with permission from Law Business Research Ltd.

This article was first published in The Projects and Construction Review - Edition 5(published in July 2015 – editor Júlio César Bueno)

For further information please emailNick.Barette@lbresearch.com

The Projects and

Construction Review

Fifth Edition

EditorJúlio César Bueno

Law Business Research Ltd

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i

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

39 ESSEX CHAMBERS

ALLEN & OVERY LLP

ANDERSON MŌRI & TOMOTSUNE

ARAQUEREYNA

BANWO & IGHODALO

BASHAM, RINGE Y CORREA, SC

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GALADARI ADVOCATES & LEGAL CONSULTANTS

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K&L GATES

ACKNOWLEDGEMENTS

Acknowledgements

ii

LAW FIRM OF HASSAN MAHASSNI

LINKLATERS LLP

LLS LUNGERICH LENZ SCHUHMACHER RECHTSANWÄLTE

McCULLOUGH ROBERTSON LAWYERS

MAPLES AND CALDER

MIGUEL DE LEMOS

MILBANK, TWEED, HADLEY & McCLOY LLP

MOLINA RIOS ABOGADOS

PECKAR & ABRAMSON, PC

PINHEIRO NETO ADVOGADOS

PLESNER LAW FIRM

SHIN & KIM

STIBBE

WALDER WYSS LTD

ZHONG LUN LAW FIRM

iii

Editor’s Preface ..................................................................................................viiJúlio César Bueno

Chapter 1 INTERNATIONAL PROJECT FINANCE ..............................1Phillip Fletcher and Andrew Pendleton

Chapter 2 DISPUTE RESOLUTION IN CONSTRUCTION PROJECTS ...............................................................................13

Robert S Peckar and Denis Serkin

Chapter 3 RELATIONSHIP CONTRACTING ......................................24Doug Jones

Chapter 4 A GUIDE TO ALTERNATIVE PROJECT DELIVERY SYSTEMS .............................................................36

Maurice Masucci, Frank Giunta, and David Price

Chapter 5 ARGENTINA ...........................................................................54Pedro Nicholson

Chapter 6 AUSTRALIA .............................................................................65Matt Bradbury, Kristen Podagiel, Hayden Bentley, Tim Hanmore, Emma Murray, Peter Williams, Liam Davis, Meg Morgan and James Arklay

Chapter 7 AUSTRIA .................................................................................79Alric A Ofenheimer and Michael Strenitz

Chapter 8 BELGIUM ................................................................................92Rony Vermeersch

CONTENTS

iv

Contents

Chapter 9 BRAZIL ..................................................................................103Júlio César Bueno

Chapter 10 CANADA ...............................................................................125Ian Bendell, Andrew Burton, Bruce Darlington, Lana Finney, David Foulds, Lindsay Krauss, Howard Krupat, Elizabeth Mayer, Mitchell Mostyn and Natasha Rana

Chapter 11 CHILE ....................................................................................140Victor Ríos and Carlos Molina

Chapter 12 CHINA ...................................................................................152Zhu Maoyuan and Zhang Jiong

Chapter 13 COLOMBIA...........................................................................170Carlos Umaña, María Luisa Porto, César Rodríguez and Juan Martín Estrada

Chapter 14 DENMARK ............................................................................185Peter Wengler-Jørgensen, Maygan Mike Lundgaarde and Daniel Hedegaard Nielsen

Chapter 15 EAST TIMOR ........................................................................200Miguel de Lemos

Chapter 16 FRANCE ................................................................................212Paul Lignières, Mark Barges, Darko Adamovic and Marianna Frison-Roche

Chapter 17 GERMANY ............................................................................223Rouven F Bodenheimer and Claus H Lenz

Chapter 18 IRELAND...............................................................................235Conor Owens, Mary Dunne and Michael Kennedy

Chapter 19 ITALY .....................................................................................249Francesco Sanna, Anna Amprimo and Carolina Teresa Arroyo

v

Contents

Chapter 20 JAPAN ....................................................................................267Tetsuya Itoh, Reiji Takahashi, Kenichi Yamamoto and Tetsuro Motoyoshi

Chapter 21 KOREA ...................................................................................279Michael Chang, Sang-Hyun Lee and Seung-Gyu Yang

Chapter 22 MEXICO ................................................................................290Juan Carlos Serra and Manuel Iglesias

Chapter 23 NETHERLANDS ..................................................................310Frédérique Jacobse, Zeeger de Jongh, Werner Runge and Arent van Wassenaer

Chapter 24 NIGERIA ................................................................................323Stella Duru

Chapter 25 QATAR ...................................................................................333Andrew Jones, Zaher Nammour and Sarah Stewart

Chapter 26 SAUDI ARABIA .....................................................................347Rahul Goswami, Zaid Mahayni, Atif Mulla and Emad Zahrani

Chapter 27 SPAIN .....................................................................................362José Guardo and Alejandro León

Chapter 28 SWITZERLAND ...................................................................375Thomas Mueller-Tschumi and Francis Nordmann

Chapter 29 TURKEY ................................................................................386H Ercument Erdem

Chapter 30 UNITED ARAB EMIRATES .................................................398Daniel Brawn

Chapter 31 UNITED KINGDOM ...........................................................411David Brynmor Thomas, Alexandra Bodnar, Rebecca Drake and Samar Abbas

Chapter 32 UNITED STATES .................................................................425Carolina Walther-Meade, Karen Wong, Henry Scott and Miguel Duran

Chapter 33 URUGUAY .............................................................................448Beatriz Spiess

Chapter 34 VENEZUELA.........................................................................461Pedro Ignacio Sosa Mendoza, Pedro Luis Planchart and Rodrigo Moncho Stefani

Appendix 1 ABOUT THE AUTHORS .....................................................475

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS ...505

Appendix 3 GLOSSARY OF TERMS ........................................................511

vii

EDITOR’S PREFACE

La meilleure façon d’être actuel, disait mon frère Daniel Villey, est de résister et de réagir contre les vices de son époque. Michel Villey, Critique de la pensée juridique modern (Dalloz (Paris), 1976).

This book has been structured following years of debates and lectures promoted by the International Construction Law Committee of the International Bar Association (ICP), the Royal Institution of Chartered Surveyors (RICS), the Chartered Institute of Arbitrators (CIArb), the Society of Construction Law (SCL), the Dispute Resolution Board Foundation (DRBF) and the American Bar Association’s Forum on the Construction Industry (ABA). Some important issues recently discussed during the annual meeting of the International Academy of Construction Lawyers (IACL) have also been included for a broader debate. All of these institutions and associations have dedicated themselves to promoting an in-depth analysis of the most important issues related to projects and construction law practice and I thank their leaders and members for their important support in the preparation of this book.

Project financing and construction law are relatively young, highly specialised areas of legal practice. They are intrinsically functional and pragmatic and require the combination of a multitasking group of professionals – owners, contractors, bankers, insurers, brokers, architects, engineers, geologists, surveyors, public authorities and lawyers – each bringing their own knowledge and perspective to the table.

I am glad to say that we have contributions from three new jurisdictions in this year’s edition: East Timor, Nigeria and Saudi Arabia. Although there is an increased perception that project financing and construction law are global issues, the local flavour offered by leading experts in 30 countries has shown us that to understand the world we must first make sense of what happens locally; to further advance our understanding of the law we must resist the modern view (and vice?) that all that matters is global and what is regional is of no importance. Many thanks to all the authors and their law firms who graciously agreed to participate.

Editor’s Preface

viii

Finally, I dedicate this fifth edition of The Projects and Construction Review to a non-lawyer, a non-engineer, but yet a most noble man: Ozias Bueno, my dearest father, whose tenderness, dedication and wisdom has given me nothing less than the desire to also be a model father to my own little son.

Júlio César BuenoPinheiro Neto AdvogadosSão PauloJuly 2015

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Chapter 30

UNITED ARAB EMIRATES

Daniel Brawn1

I INTRODUCTION

The United Arab Emirates (UAE), and particularly Dubai, are forging ahead following the economic difficulties of 2008. Stalled projects have been revived, new ones announced amounting to $315 billion and GDP growth may exceed 5  per  cent for the year. Real estate price rises have steadied, regulatory reforms are transforming the commercial environment and ‘green’ issues have come to the forefront. On the downside, inflation continues to be an issue and the dip in oil prices had a negative effect on the stock market. Problems with Iran remain and Yemen’s rumoured application to join the Gulf Cooperation Council (GCC) could alter the political landscape. The new UAE Commercial Companies Law2 will attract greater investment by easing company flotations and bringing corporate regulation closer to international standards. The long-awaited insolvency law and arbitration law have still not materialised, both of which would help to attract foreign direct investment and create a business environment in which international business people feel comfortable.

II THE YEAR IN REVIEW

The UAE are back in growth mode, with grand schemes and a vision for the future that exudes confidence. Indeed, the new UAE Space Agency has announced the first Arab mission to Mars, to coincide with the 50th anniversary of the foundation of the UAE in 2021.

In Abu Dhabi, Yas Island is becoming a bustling tourist centre and Saadiyat Island is progressing, with the Louvre, Zayed National and Guggenheim museums expected to

1 Daniel Brawn is a senior associate at Galadari Advocates & Legal Consultants.2 Federal Law No. 2 of 2015.

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complete in 2015, 2016 and 2017 respectively. The Abu Dhabi World Financial Market3 has signed the lease for its offices on Al Maryah Island and the Abu Dhabi Master Plan approved 76 new projects in 2014, including a  wildlife park, botanical gardens and a medical college. Following the success of Dubai’s English common law court in the Dubai International Financial Centre (DIFC),4 Abu Dhabi now plans its own such court.

Dubai continues to build on being awarded the right to host Expo 2020 but must manage expectations successfully. Dubai Metro is set to expand by 14.5 kilometres to include the Expo 2020 site and open up new areas for development. Phase 1 of the Jumeirah tram service (the first 11 stations) is operational and plans have been announced for a  ‘Museum of the Future’, which could be completed by 2017. The extension of Dubai Creek is progressing through Safa Park to the sea and the upmarket Meydan city community will develop along its banks. An amended application for the listing of part of Dubai Creek as a UNESCO World Heritage site should be decided this year. The first licences have been let for the Dubai Design District as a hub for fashion and design, with purpose-built facilities over an eventual area of 25 million square feet. Enabling works have been completed for Dubai Wharf and the Mohammed Bin Rashid City will feature its own freshwater lagoon and beach. Interest in The World islands has rekindled in expectation of Expo 2020, Deira Island is expected to be completed by the middle of 2017 with its leisure facilities, mall and a night market, and the contract has been let to build the bridge to Bluewaters Island, which will feature the world’s largest Ferris wheel, the Dubai Eye. Separately, Phase 2 of Dubai Healthcare City has been announced, at a cost of around 5 billion dirhams, confirming Dubai as a major health-care provider.

Development of the Northern Emirates is less frenetic but nonetheless impressive. Sharjah has eased its property ownership regulations, and non-GCC nationals may now purchase 100-year leases at the Al Rayyan development in Al Nahda, expected to complete in mid-2016. A new luxury resort is proposed on the Corniche, as Sharjah positions itself as a  family and cultural destination, and expansion of Sharjah Airport should double tourist visits to 10 million per year by 2021. Development projects in Ras Al Khaimah and Fujairah remain popular, spurred on by economic activity in the ports and free zones.

Industrial expansion continues as the government seeks to diversify the economy. Abu Dhabi’s Al Ruwais industrial zone is now a busy petrochemicals centre,5 while the Madinat Zayed industrial zone6 and the deep-water Khalifa port and industrial zone7 are progressing in phases. Transport infrastructure is also expanding, with emphasis on key traffic corridors, including 246 kilometres and 15 overhead interchanges off the Al Mafraq-Guwaifat Road, to connect Abu Dhabi with neighbouring countries. The

3 See Federal Decree No. 15 of 2013 Establishing the Financial Free Zone.4 A financial free zone established in 2004 with its own ‘offshore’ common law judicial system

operating in English.5 To cover 14km2 and focus on plastic manufacturing, oil and gas, cement, and

logistics industries.6 To cover 2.5km2 and focus on the oil and gas, food manufacturing and logistics industries.7 As a hub for manufacturing, logistics and trade.

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extension of the Sheikh Mohammed Bin Zayed Road is under way and the Dubai Bypass Road will encompass six lanes, 15 interchanges and 12 tunnels. Phase 1 of the Abu Dhabi city metro should be operational by 2017, and phase two of the GCC Etihad Rail network connecting Abu Dhabi to Dubai and the Oman border could be operational by 2020. The aviation sector is equally buoyant, with the expansion of Abu Dhabi International Airport to cover an area of 700,000 square metres and handle 27 million passengers a  year. Further phases of Dubai’s Al Maktoum International Airport are planned, to increase passenger numbers from the current 7 million to 26 million a year by 2018. Dubai International (already the world’s busiest airport in passenger numbers) will open a new Concourse D at Terminal 1, to expand capacity from 70.4 million this year to 100 million by 2020. Dubai has also passed a new law setting up the Dubai Aviation City Corporation to boost the Emirate’s position as a global travel hub.

The UAE government is making a major drive towards sustainable development and government departments are encouraged to become world-class utility providers, with the aim of reducing carbon emissions by 15  per  cent by 2021 and achieving 60 per  cent of energy use through sustainable management systems. The Abu Dhabi Tourism Authority’s new building has been praised as the first green building to adhere to all of the municipality’s green building standards. In Dubai, it is proposed that all new buildings should be built with eco-friendly supplementary cementing materials in place of ordinary Portland cement for an extended life-cycle and to cut CO₂ emissions by 80 per cent.

Shams 1, the world’s largest concentrated solar power plant, is operational and should contribute 100MW to the national grid.8 The engineering, procurement and construction contract for the UAE’s first waste-to-energy power plant, by TAQA in Abu Dhabi, may reach completion in 2017 or 2018, and the stalled Nour solar plant is being revived. Separately, the US$40 billion Braqa nuclear power plant, commissioned by the Emirates Nuclear Energy Corporation, is expected to complete by 2017.

In Dubai, Phase 2 of the Mohammed bin Rashid Al Maktoum Solar Park should be operational by 2017 with a capacity of 200MW and a cost of 1.2 billion dirhams, and tenders will shortly be invited for Phase 3, to add 800MW; there should be a staggering capacity of 1,000MW by 2030. The legal structure has been put in place to allow residential buildings with solar panels to upload excess electricity to the national grid, and Dubai is running trials of its first electric bus.

GCC countries are discussing the introduction of value added tax, at a rate of around 5 per cent. Finally, Dubai is seeking to position itself as a bridge to Iran for new opportunities in the event that international sanctions against Iran are lifted.

III DOCUMENTS AND TRANSACTIONAL STRUCTURES

The International Federation of Consulting Engineers (FIDIC) standard forms of contracts are the most commonly used in the private construction sector and the 1999 edition of the Red Book is widely accepted, although more mature consultants

8 Shams 1 has the ability to power 20,000 homes in the UAE.

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prefer the familiar 1987 edition, which enshrines the traditional powers of the engineer. Use of the FIDIC EPC/Turnkey Silver Book is growing, thanks to its allocation of risk to the contractor. Subcontracts are frequently bespoke in form, albeit based upon FIDIC forms, and are usually back-to-back with the main contract in relation to payments, release of retention, delay damages and securities. It is not uncommon for contractors to be deprived of the final tranche of the retention monies (a risk that is often priced into the contract sum), and any falling-out with the employer often results in the employer calling the performance bond. Such events should be understood within the parameters of Articles 872 to 896 of the Civil Code,9 setting out minimum rights and responsibilities of parties engaged in muqawala contracts for construction works or services.

The public sector continues to use stand-alone bespoke forms of contracts, usually modelled on FIDIC. Abu Dhabi has promulgated a stand-alone contract under licence from FIDIC for construction projects undertaken by public entities in the Emirate.10 Schedules 1 and 2 to Abu Dhabi Executive Decision No. 1 of 2007 set out its mandatory build-operate and design-build forms. In Dubai, public sector contracts are regulated by Dubai Law No. 6 of 1997, which prohibits without prior approval from HH the Ruler of Dubai the adoption of any term imposing a FIDIC condition, whether express or incorporated by reference.

Collateral warranties (also known as duty of care deeds) are still rare but are becoming more common on large-scale projects with English lawyers and consultants. The distinction that exists in some jurisdictions between the assignment of a benefit and the novation of a burden does not exist in UAE law; assignment, therefore, takes effect as a novation by means of a tripartite agreement signed by all three parties.

IV PPP AND OTHER PUBLIC PROCUREMENT METHODS

Federal procurement and the management of public finances are closely regulated activities in the UAE. Article  9 of Federal Decree No.  8 of 2006 on the United Nations Conventions against Corruption sets out a  minimum legal framework for the establishment of appropriate systems of procurement, based on transparency, competition and objective criteria in decision-making. The UAE Federal Government Contracts Regulations relate to contracts executed by the UAE federal government, although individual emirates have their own very similar regulations. Abu Dhabi Law No. 6 of 2006 concerning Purchasers, Tenders, Auctions and Warehouses and Dubai Law No. 18 of 2006 concerning Management and Procurement of Public Funds of the Government of Dubai are in place. Government contracts are advertised in at least two daily newspapers and tenders are assessed on the basis of which is the most economically advantageous. However, the UAE has not signed the World Trade Organization (WTO) plurilateral Agreement on Government Procurement.

9 Federal Law No. 5 of 1985 Promulgating the Civil Transactions Law, as amended.10 Introduced by Law No. 21 of 2006 and brought into force by Executive Decision

No. 1 of 2007.

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Typically, preference is given to local companies licensed in the particular emirate, and foreign participation is limited by the requirement of 51 per cent local ownership for non-GCC nationals; the UAE has still not amended this requirement in line with WTO recommendations. However, a range of procurement methods are used in the UAE. Abu Dhabi paved the way for the ‘informal PPP cell’ in the power sector. The first generation of PPP models included the Abu Dhabi Water & Electricity Authority Independent Water and Power Projects in waste-water projects, while second generation models include Zayed University and the Shams 1 solar power project. More recent university PPP schemes, including the Mubadala Paris-Sorbonne University, have favoured the UK PFI model with no construction guarantees or other explicit supports. The Skynet 5 PFI UK Ministry of Defence form was relied upon heavily for the Mubadala Yahsat satellite project. Long-term build-operate-transfer (BOT) and build-own-operate-transfer structures are also used. BOT is the preferred model for the UAE’s first nuclear power plant in Braqa in Abu Dhabi. The design-build-finance-operate procurement model was chosen for the Mafraq–Ghweifat Highway and Dubai to Abu Dhabi Highway.

In Dubai, the Dubai Electricity and Water Authority (DEWA) favours an engineering-procurement-construction procurement route with a joint venture structure 51  per  cent owned by DEWA. The Roads and Transport Authority (RTA) has been instrumental in developing Dubai’s model for financing infrastructure projects, with policies and procedures modelled on PPP procurement processes. A proposed Dubai PPP law should take the model to its next level of sophistication, informed by English PFI styles of project delivery.

V RISK ALLOCATION AND MANAGEMENT

i Management of risks

Principles of freedom of contract (pacta sunt servanda) are paramount in UAE law and are seldom departed from. Parties are generally free to agree terms and conditions, provided they comply with the requirements of public order and morals,11 the principles of good faith12 and no unjust enrichment.13 When considering the construction of such obligations, words are to be given their true meaning.14 In the absence of express provisions, local industry custom is highly persuasive.15 Western principles regarding unfair contract terms are not adopted in local law, and misrepresentation is only actionable where it was deliberately intended to deceive. Moral damages may be awarded for infringement of liberty, dignity, honour or reputation.

11 Article 207(2) of the Civil Code; Article 2, Federal Law No. 18 of 1993 Concerning Commercial Transactions.

12 Article 246(1) of the Civil Code.13 Article 318 and 319 of the Civil Code.14 Article 258(2) of the Civil Code.15 Article 264 of the Civil Code.

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The general rule is that parties can agree division of risk and caps on liability, although there are exceptions in relation to:a liability for quality of materials (to be borne by the party responsible for their

provision, unless expressly provided otherwise);16

b liability for the balance of materials (to be borne by the contractor if the employer provides the work materials);17

c liability for acts or work (the contractor is liable for loss or damage resulting from his acts or work);18

d decennial liability (imposed on contractors and designers for construction defects that threaten the stability or safety of a building in proportion to their project involvement from the time of delivery of work for a mandatory term of 10 years);19

e liability of employers towards subcontractors (excluded in the absence of an assignment in favour of the subcontractor against the employer);20 and

f any clause seeking to exclude all liability for one’s own wrongful act is void.21

Principles of fitness for purpose, while not expressly addressed in law, are generally implied by having regard to the obligations between the parties and the expressed scope of work. UAE law does not recognise concepts of punitive or exemplary damages. There is no scope to invoke provisions of international law to fill gaps in local law,22 and if there is no express provision, judgment will be passed according to shariah law.23 The exception is the DIFC free zone, with its own commercial laws and courts, which adopt English procedure and may rely upon English common law to fill a lacuna.

ii Limitation of liability

Contracting parties are free to agree liquidated damages in advance, and the amount may constitute a ‘penalty’ rather than a genuine pre-estimate, although the judge may vary the amount in line with the actual damage suffered.24 The courts apply a tripartite test: the invoking party must establish (1) a breach by the party that agreed to pay the fixed amount, (2) evidence of actual damage sustained, and (3) a causative link between the fault and the damage suffered.25

16 Article 875 of the Civil Code.17 Article 875(2) of the Civil Code.18 Article 878 of the Civil Code.19 Article 880 of the Civil Code.20 Article 891 of the Civil Code.21 Article 296 of the Civil Code.22 See Article 1 of the Civil Code: ‘There shall be no innovative reasoning in the case of

provisions of definitive import.’23 Article 2 and 3 of the Civil Code.24 Article 390(1) of the Civil Code.25 Dubai Petition No. 494/2003 (hearing 24 April 2004), Petition 344/19 (hearing

23 January 2009).

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UAE law recognises both direct and consequential harm. Losses inflicted directly on a  party ‘must unconditionally be made good’.26 Conversely, liability will arise for consequential harm where an element of deliberate wrongdoing is established, which requires more than mere negligence.

Loss of profit or of the opportunity to make profit, albeit normally entertained as part of tortious liability, may be awarded where the occurrence of damage is certain in the future, but purely speculative claims will not succeed.

Force majeure is frequently argued as an excuse for failure to honour contractual obligations, particularly in relation to the global credit crunch of 2008, but the courts have held that the credit crunch does not amount to an ‘unexpected’, ‘exceptional’ or ‘extenuating’ circumstance.27

iii Political risks

The UAE did not suffer the effects of the Arab Spring and is generally free from political risks. Political differences with Qatar are handled diplomatically, the situation in Yemen is challenging and relations with Iran are difficult. Demands for the expansion of the GCC into an actual union must be considered carefully.

The UAE is one of 179 existing Multilateral Investment Guarantee Agency (MIGA) member states, which seek to strengthen investment ties by providing guarantees to international investors against political risks. The DIFC has signed a memorandum of understanding with MIGA to promote foreign direct investment into the Middle East and North Africa and facilitate access to cross-border financing, in particular by offering political risk insurance. The UAE is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (The New York Convention), the Washington Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (1965) and some 38 bilateral treaties, mostly with other Arab states, some 28 of which are currently in force.

The UAE’s first Federal Competition Law came into force on 23 February 2013 and deals with issues of merger control and the prohibition of anti-competitive behaviour and abuse of dominant market position.28 The new Commercial Companies Law will make company flotations easier, although relaxation of the 51 per cent local ownership requirements has not materialised.

Foreign ownership of real estate has been opened up in many areas. Dubai is at the forefront of legislative development with its Escrow Law of 2007,29 the regularisation of off-plan sales contracts on the Oqood or interim register,30 the registration of lenders’

26 Article 283(2) of the Civil Code.27 The principle was set out in Dubai Court Case No. 2009/359.28 Federal Law No. 4 of 2012 Concerning Regulation of Competition.29 Dubai Law No. 8 of 2007 Concerning Escrow Accounts of Real Estate Developments in the

Emirate of Dubai.30 Dubai Law No. 14 of 2008 Concerning Mortgages in the Emirate of Dubai.

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mortgage interests on the interim register in 2008,31 the implementation of Strata Law regulations in 2010,32 a framework for the termination of sale contracts for developer’s breach33 and the establishment of the specialised Real Estate Court.

Although there is no sovereign immunity as such in Dubai, no claim may be brought against any government department or institution without first obtaining consent from the Ruler’s Office.34 This provision is intended to promote settlement by compromise, in the Arab way, but note that a judgment may not be enforced by seizing or attaching public property.35

VI SECURITY AND COLLATERAL

The UAE houses two distinct financial regulatory jurisdictions. The DIFC free zone is regulated by its own Dubai Financial Services Authority (DFSA).36 The rest of the UAE is overseen by the Central Bank, the Emirates Securities and Commodities Authority or the Ministry of Economy and Planning,37 depending on the particular financial activity. Credit support and collateral are subject to the regulations of the financial institutions, but there is no unified federal regulatory system for the financial markets or their intermediaries.

In 2012 the UAE decided to move to a ‘twin peaks’ regulation model,38 introducing a prudential regulator and a conduct-of-business regulator to operate as a safety valve for the financial sector. A fuller overhaul is expected to align the UAE’s regulatory model with international best practice.

Onshore security and collateral are governed by both the Commercial Code and the Civil Code. The DIFC Law of Security and Security Regulations applies in the DIFC. The DFSA has undertaken an extensive consultation process to bring its capital markets laws and regulations into closer alignment with the European Union’s

31 Dubai Law No. 13 of 2008 Regulating the Interim Real Estate Register (as amended by Dubai Law No. 9 of 2009).

32 Dubai Law No. 27 of 2007 Concerning the Ownership of Joint Properties (Condominiums) in the Emirate of Dubai; as clarified by Direction for Jointly Owned Property Declarations (2010), Direction for Association Constitution (2010), Direction for Preparation of Survey Plans (2010), and Direction for Surveyors (2010).

33 Executive Council Resolution No. 6 of 2010 Approving the Executive Regulations of Law No. 13 of 2008 Regulating the Interim Real Estate Register in the Emirate of Dubai.

34 The Immunity Orders of 1972 and 1992, the Law on Government Lawsuits of 1996, and Dubai Law No. 3 of 1996 Concerning Government Claims (as amended by Dubai law No. 10 of 2005).

35 Article 3 of Law No. 10 of 2005; also Article 103 of the UAE Civil Code.36 Regulatory Law, DIFC Law No. 1 of 2004.37 Union Law No. 10 of 1980 concerning the Central Bank, the Monetary System and

Organisation of Banking.38 The Australian model that weathered the global crisis.

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Prospectus Directive39 and Market Abuse Directive,40 as well as various capital market standards adopted by the Organisation for Economic Co-operation and Development. This resulted in the enactment of the DIFC Markets Law and associated Market Rules addressing, inter alia, collective investment and Islamic finance.41

Future practices are likely to be dictated by these developments, as well as by the anticipated federal insolvency law dealing with priority funding and financial collateral, and promoting centralised registration for ‘disqualified person and directors’ and ‘bankruptcy restrictions and orders’.

VII BONDS AND INSURANCE

Commonly the contractor is required to provide a performance bond from a recognised bank operating in the UAE equal to 10 per cent of the tender value of the construction contract; indeed, this is a  requirement for government contracts.42 Unconditional or on-demand bonds are standard practice. Other forms of project bonds, including advance payment bonds, retention bonds, employer payment guarantees and even tender bonds are recognised commercial transactions.

Precautionary attachment orders may be applied for in local courts to safeguard the interest in bonds and guarantees in the event of a  legitimate fear that the interest may be lost and on condition that the substantive dispute is filed within eight days from the date of the attachment.43 Both the local courts and the DIFC courts have taken precautionary measures to prevent the premature cashing of bonds, although the practice remains common.

Collateral warranties or direct agreements are occasionally seen in the UAE, as are parent company guarantees, particularly in the case of joint ventures or special project vehicles that are in reality shell companies.

The UAE Society of Engineers requires its members to hold professional indemnity insurance. Decennial insurance is also available, to respond to Article 880 of the UAE Civil Code, by which the contractor and designer are liable for serious structural defects for a period of 10 years from completion.

39 2003/71/EC.40 2003/6/EC.41 Markets Law, DIFC Law No. 1 of 2012, supplemented by Regulatory Law, DIFC Law

No. 1 of 2004 (as amended) and various DFSA Rulebook modules.42 Law No. 8 of 2008 Relating to Contracts with Government Departments in the Emirate of

Abu Dhabi; Law No. 6 of 1997 concerning Contracts of Government Departments in the Emirate of Dubai.

43 Article 252, Federal Law No. 11 of 1992 Promulgating the Law of Civil Procedures (the Civil Procedures Law).

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VIII ENFORCEMENT OF SECURITY AND BANKRUPTCY PROCEEDINGS

Following the economic crisis of 2008, many companies implemented restructuring programmes to facilitate refinancing, but the position has now stabilised. Corporate initiatives and bespoke legislative solutions staved off insolvencies and brought about various legislative vehicles such as the special judicial committees to settle disputes stemming from difficulties faced by mortgage lenders Amlak Finance PJSC and Tamwell PJSC,44 and the Dubai Real Estate Court to resolve property disputes.45 Nakheel and Limitless have been removed from the jurisdiction of the Special Tribunal to decide disputes with Dubai World LLC, but its subsidiaries remain within the jurisdiction of that Tribunal.46

Bankruptcy and corporate rescue regimes are governed by the Commercial Code, which also provides rudimentary creditor protection. Under the current regime, a trader may be declared bankrupt by the competent court if it fails to pay a commercial debt on the due date by reason of financial instability.47 The DIFC has its own insolvency laws, based on the UK insolvency regime.48 The UAE still awaits the proposed Financial Restructuring and Bankruptcy Law,49 intended to support the rescue and rehabilitation of non-government onshore businesses and ease debt restructuring by, for example, the introduction ‘cramdown’ processes.50 The emphasis will be on ‘corporate rescue’ and the adoption of a more debtor-friendly regime.

Bankruptcy provisions do not ordinarily apply to state-owned entities and, as stated above, seizure of assets owned by the state is not permitted. Consequently, the Commercial Transactions Code expressly excludes from its definition of ‘trader’ all state ministries, departments and public authorities, as well as public benefit establishments, associations and clubs.51 The courts may defer or refuse a declaration of bankruptcy or the enforcement of a DIFC court declaration if to do so would be in the best interests of the national economy.

The UAE has not incorporated into federal law the UNCITRAL Model Law on Cross-Border Insolvency and there is no harmonised approach to cross-border insolvencies.

44 Decree No. 61 of 2009 Forming a Special Judicial Committee to Settle the Disputes Related to Amlak Finance, PJSC and Tamweel, PJSC.

45 Dubai Real Estate Property Court Decree No. 28 of 2008.46 Dubai Decree No. 57 of 2009 Establishing a Tribunal to decide the Dispute in relation to

Settling the Financial Position of Dubai World and its Subsidiaries.47 Article 645 of the Commercial Transactions Code.48 Insolvency Law, DIFC Law No. 3 of 2009, supported by the DIFC Insolvency Regulations

enacted pursuant to Article 140 of DIFC Companies Law and Article 93 of the DIFC Insolvency Law, including DIFC Preferential Creditor Regulations.

49 Modelled on existing French bankruptcy laws.50 A process whereby a minority of creditors can be forced to accept a restructuring agreement

by the majority, not dissimilar to administration in the United Kingdom.51 Article 15 of the Commercial Transactions Code.

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IX SOCIO-ENVIRONMENTAL ISSUES

i Licensing and permits

Environmental laws have been in place in the UAE for some time,52 and a host of new laws and regulations have served to align the regulatory framework with the UAE’s social and environmental objectives. Typically, infrastructure and building projects require an environmental impact assessment before construction, modification or extension,53 together with supporting documents in line with local directions, including health and safety management systems.

In the capital, in line with Abu Dhabi Plan 2030, the Estidama Pearl Rating requirements54 are mandatory for all buildings in addition to the Abu Dhabi building codes, although implementation is inconsistent. New development regulations emanate from carefully considered urban planning initiatives, including the Urban Street Design Manual, Public Realm Design Manual, Coastal and Marine Planning, Infrastructure Planning, Safety and Security Planning Manual and the Community Facility Planning Standards.

As part of the implementation of its Strategic Plan 2015, Dubai has promulgated its very own Green Building Regulations and associated practice guides, comprising 67 Dubai municipality mandatory regulations to be applied to all buildings in the Emirate. While Dubai does not favour a particular rating system, LEED standards are widely adopted, subject to municipal regulations and circulars issued from time to time.

ii Equator Principles

The National Bank of Abu Dhabi has taken the lead in committing to the Equator Principles, in line with World Bank guidelines and the practices of international finance corporations. The Equator Principles were originally a credit risk management framework used in project financing, but now incorporate environmental management frameworks and human rights issues. However, there are issues as to how the Equator Principles may be incorporated into the Islamic finance industry.

X FOREIGN INVESTMENT AND CROSS-BORDER ISSUES

The UAE investment regime is relatively open and allows capital, profit and royalty payments to be repatriated freely. There are no federal income tax laws, either corporate or individual, and the new UAE Commercial Companies Law will facilitate company flotation. Customs duty at 5 per cent is levied on goods entering the UAE.

Foreign investors may own up to 49 per cent of a limited liability company in the ‘onshore’ UAE, with a local partner owning 51 per cent. Businesses must be registered

52 Notably Federal Law No. 24 of 1999 for the Protection and Development of the Environment.

53 Federal Law No. 24 of 1999 for the Protection and Development of the Environment.54 A hybrid of the Building Research Establishment Environmental Assessment Methodology

and the Leadership in Energy and Environmental Design (LEED) rating systems.

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and licensed in the particular emirate to conduct business operations in that emirate. Alternatively, a  foreign entity may conduct business by appointing a  locally licensed commercial agent or distributor to facilitate the sale of products and services, or by registering a branch office in the UAE.

One hundred per  cent foreign ownership and the distribution of profits55 to shareholders or a  parent company (irrespective of their location) is permitted in the free zones. Each free zone implements its own regulations regarding the licensing and governance of entities operating within its borders.

To meet the UAE Vision 2021 on economic diversification, there has been a  positive drive towards expanding investment opportunities. The UAE Investment Map is a government initiative to facilitate fact-finding and promote foreign investment. Additional liberalisation has been discussed, including relaxation of the 51  per  cent local ownership requirement for certain categories of companies and relaxation of the requirement for foreign companies to appoint a local agent, but this relaxation has not so far materialised.

XI DISPUTE RESOLUTION

Arbitration has grown in popularity as an alternative to court litigation,56 not only for international parties, but also for domestic disputes where the underlying contract is written in English (in court litigation, all documents must be translated into Arabic). The proposed Federal Arbitration Law (based upon the UNCITRAL Model law) still awaits finalisation.

The majority of construction disputes are referred to arbitration in the Dubai International Arbitration Centre,57 or the Commercial Conciliation and Arbitration Centre58 in Abu Dhabi. The DIFC operates the DIFC-LCIA Arbitration Centre,59 serving as a useful alternative, particularly since the extension of DIFC court jurisdiction to allow businesses to opt in to DIFC jurisdiction.60 The DIFC courts are piloting a scheme to convert court judgments into arbitral awards that can be enforced internationally under the New York Convention. Contracts involving large international companies commonly provide for arbitration under the Rules of the International Chamber of Commerce.

Recourse to formal alternative dispute resolution, including mediation and conciliation, is not common, although informal conciliation has long been part of the local culture. Abu Dhabi has taken great steps in regulating the management of disputes

55 Subject to statutory reserve requirements.56 See, for example, landmark judgment in Hedley International Emirates Contracting LLC

v. Nakheel PJSC, Claim No. DWT/0017/2011, in which the Dubai World Tribunal upheld its policy of respecting arbitration clauses.

57 www.diac.ae.58 www.adcci-uae.com.59 www.difcarbitration.com.60 Law No. 16 of 2011 Amending Certain Provisions of Law No. 12 of 2004 concerning Dubai

International Financial Centre Courts.

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under municipality construction contracts, with the mandatory appointment of a dispute adjudication board once a dispute has arisen. The municipalities and the RTA have their own arbitration rules, as do the Emirates Securities and Commodities Authority and the International Islamic Centre for Reconciliation and Arbitration.

However, the local courts continue to guard their jurisdiction jealously, particularly in relation to issues of public policy and disputes regarding commercial agency and distributorship.61 UAE courts are competent to hear any action filed against a  party in the UAE except suits relating to real property located outside the country.62 Any agreement that is contrary to the Civil Procedures Law is invalid.63 Pursuant to principles of reciprocity codified in the Civil Procedures Law, primarily Article  235, foreign judgments are enforceable in the UAE subject to there being a reciprocal arrangement with the home jurisdiction and the condition precedent that the UAE courts have no jurisdiction over the matter in issue.64

The UAE is signatory to a number of international conventions, including the New York Convention, the Washington Convention, the Riyadh Convention on Judicial Cooperation between States of the Arab League (1983), the GCC Convention for the Execution of Judgments, Delegations and Judicial Notifications (1987).

XII OUTLOOK AND CONCLUSIONS

The UAE is experiencing strong growth and new legislative developments that should take it into the next era of sophistication. Expo 2020 is a major boost for Dubai and the opening of the Iranian market presents exciting possibilities, but the government must manage expectations and must put in place a modern legal structure that meets international standards.

61 Federal Law No. 2 of 2010 amending provisions of Federal Law No. 18 of 1981 has reinstated the Commercial Agency Committee to review disputes related to commercial agencies.

62 Article 20 of the Civil Procedures Law.63 Article 24 of the Civil Procedures Law.64 Article 235(2)(a) of the Civil Procedures Law.

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Appendix 1

ABOUT THE AUTHORS

DANIEL BRAWNGaladari Advocates & Legal ConsultantsDr Daniel Brawn is an English solicitor and non-practising barrister, a chartered arbitrator and a fellow of the Chartered Institute of Arbitrators. Daniel is a senior associate with Galadari Advocates, specialising in international arbitration within the construction industry. Daniel regularly sits as an arbitrator and is a registered advocate at the DIFC English-language court in Dubai.

Daniel has wide experience of the construction industry, both from a contentious and non-contentious perspective. He has put together development projects of all sizes, providing the legal and practical advice needed to manage the risks. Daniel advises owners, developers, contractors and their professional teams and carries out due diligence work for funders. He has extensive experience of drafting and negotiating contracts and all the associated documents, bonds and guarantees common to large developments. On the contentious side, Daniel focuses on arbitration to resolve technical disputes: drafting pleadings and advising on the level of proof required in claims regarding breach of contract, delay, disruption and prolongation, extensions of time, liquidated damages, the valuation of variations and loss and expense.

Daniel teaches construction and arbitration law to postgraduate students at the CIArb, the American University in Dubai and the University of Salford in England, and regularly publishes learned articles on construction and dispute resolution.

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GALADARI ADVOCATES & LEGAL CONSULTANTSPO Box 7992DubaiUnited Arab EmiratesTel: +971 4 393 7700Fax: +971 4 393 7755daniel@galadarilaw.cominfo@galadarilaw.comwww.galadarilaw.com