I. The Types of Construction Contracts
Q: What are the standard types of construction contracts in the UAE?
A: Generally, the forms of construction contracts vary in conformance with the size of the project. Contracts for relatively small projects are generally drafted by the engineers/consultants, not lawyers, while contracts for mid-size and large projects usually follow the FIDIC contracts forms.
Construction contracts are classified as follows:
- Design & Build Contracts
- Design Only Contracts
- Management Contracting: which is a form of construction contracts where the employer subcontracts the works to many subcontractors while having a management contractor to supervise the works of the subcontractors.
Q: What are “Collaborative Contracting”? How prevalent are they in UAE?
A: “Collaborative Contract” is a single contract signed by all the delivery partners (e.g. the engineer, architect, original equipment manufacturer, and the contractor) to work closely at the owner’s expenses on a conceptual design, cost estimate and schedule, defining the scope of works, schedule, coordination guidelines, and collaboration obligations for each delivery partner.
Collaborative contracting has emerged in common law jurisdictions, i.e. Australia, USA, and Canada, then transferred to civil law jurisdiction. It’s not common in the UAE.
Q: What industry-standard form of construction contracts are most commonly used in UAE?
A: Construction contracts in the UAE, generally follow the conditions of the FIDIC contracts. The parties may include additions/alterations/substitutions to the standard FIDIC contract based on the size of the project and the requirements of the parties.
Q: What’s the letter of intent in the construction field? Is it common in UAE?
A: Letter of Intent (LOI) is a Formal letter to a contractor or subcontractor, that notifies the recipient of the intent by another party to award a contract or subcontract on a project. Letters of intent are common and widely practiced in the UAE. Letters of Intent may be construed to be binding or non-binding depending on the words of the LOI.
II. Guarantees in Construction Industry
Q: What is meant by Retention's in the construction field?
A: The employer may retain a portion of the contract price in retention to be released when: (a) the completion of works; (b) the expiry of the defects liability period. It’s a common practice in the UAE to withhold retention money. Generally, an amount equal to 10% of the contract price, to be released as follows:
- 5% upon the completion of the works
- 5% upon the expiry of the defects liability period
Q: What are performance bonds?
A: Performance bonds are guarantees provided by a bank for the owner to guarantee the good performance of the works by the contractor. Performance bonds are unconditional and irrevocable, however, the liquidation thereof may be subject to an “interim injunction” by the court, in case it considers the liquidation of the performance bond to be unjust or to cause irreparable harm to one of the parties.
Q: What are the available guarantees for the contractors?
A: It’s possible for contractors to make use of a clause to retain the ownership over the goods and supplies on-site until the full payment is made by the employer.
Q: Are the parties of a construction contract free to agree in advance on liquidated damages?
A: Liquidated damages are enforceable in the UAE. Subject to article 390 (1) of the Civil Transactions Law No. 5 of 1985, the parties may agree upon the amount of compensation in advance for a breach of contract. The court may, on the application of either party, vary such agreement so as to make the compensation equal to the loss, and any agreement to the contrary shall be void and null.
