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Key Regulations of the UAE Construction Law

Key Regulations of the UAE Construction Law

Published 8 Feb 2024
In the construction law in UAE jurisdiction, construction contracts are regulated by the Civil and Commercial Code. These provisions include default clauses that must be explicitly stated in contracts and non-negotiable standards that apply even if parties choose foreign law or dispute resolution mechanisms. Opting for foreign law or a different dispute resolution venue does not exempt parties from complying with UAE construction laws and regulations.

Every year in the UAE, the government adjusts existing construction laws. This article defines the UAE regulatory framework's intricacies, the construction law in the UAE, the participants, and the risks.
Contents

The UAE Construction Legal Framework

The legal system in the UAE has three main sources of law:
Federal Laws and Decrees. These apply across all Emirates.
Local Laws. Each Emirate enacts its own laws but must align with federal laws.
Shari'ah. A legal system based on Islamic principles.
Each Emirate passes its laws, and you can monitor them on the Municipalities' websites:
For example, The Abu Dhabi Municipality mandates using Abu Dhabi Government Conditions of Contract for construction project procurement, introduced in 2007 and based on the 1999 FIDIC Red and Yellow books.

As for the Dubai Municipality, it has Administrative Decision No 125 of 2001, which offers an in-depth technical discussion on building regulations and standards.

There are two main financial free zones — the Dubai International Financial Centre (DIFC) in Dubai and the Abu Dhabi Global Market (ADGM) in Abu Dhabi. They have their own legal system based on common law, with their own English language courts.
DIFC. Its laws are developed by the DIFC Authority, based on international standards and common law principles tailored to the region's needs. The DIFC Courts operate within a common law framework and have a specialized Technology and Construction Division.
ADGM. It has its own set of commercial regulations and rules, a financial services regulator, and its own Courts. ADGM's legal system is based on English common law, English statutes, and ADGM enactments. These are primarily drafted from English statutory precedents and partly from other respected common law jurisdictions.
Furthermore, the free zones in the UAE have distinct rules ensuring compliance with building standards, environmental considerations, health and safety guidelines, and other technical requirements.

Laws concerning employment matters, such as labor laws, are also crucial in the construction law in the UAE. Federal public tenders conducted by the UAE government adhere to the Federal Public Tenders Law outlined in Financial Order No. 16 of 1975.

Civil Code

The main law governing construction projects in the UAE is the Civil Transactions Law, commonly known as the Civil Code.[?] This law is foundational for civil transactions and incorporates general principles derived from Islamic ideals. It covers various aspects of contracts, including their formation, interpretation, and execution. The Civil Code also outlines remedies for breaches and circumstances like force majeure and addresses harm and tort liability issues.
A crucial provision in construction contracts often cited is Article 246[?] of the Civil Code. This article emphasizes that parties must perform contracts in good faith and adhere not only to express contract terms but also to other requirements in line with the transaction's law, customs, and nature. Additionally, the Civil Code includes specific provisions for Muqawala contracts, encompassing construction contracts. These provisions serve as defaults when parties have yet to agree on specific terms.
An example of a mandatory provision in the Civil Code is Article 880[?], which addresses decennial liability. This provision holds contractors and architects liable for any destruction or defect in buildings they have constructed.
Another relevant law is the Commercial Transactions Law[?], also known as the Commercial Code. This UAE’s law applies to construction and engineering projects, emphasizing that commercial parties are bound by the agreements they enter unless those agreements contradict a mandatory provision of law.

In summary, these laws shape the legal framework for construction projects in the UAE, providing guidelines for contract formation, performance, and legal remedies.

Standard Contracts

The International Federation of Consulting Engineers (FIDIC) provides a suite of construction contracts[?] common in the industry. Each type of contract consists of special conditions and has its own specific (for example, duration of work). The suite includes:
Green Book (1999). The Short Form of Contract is for small projects under $500,000. An authorized person from the employer handles Engineer duties. It's good for simple projects without needing specialist subcontracts and includes Rules for Adjudication, which is unique for international contracts.
Red Book (1999). The Red Book is for construction projects where the employer does the design. It's not limited to civil engineering and focuses on procurement type. Suitable for projects with Employer design but allows some Contractor design. An Engineer employed by the employer does administration and supervision. Example forms for Tender, Contract Agreement, and Dispute Adjudication Agreement are provided.
Yellow Book (1999). The Yellow Book governs construction contracts where the contractor handles design. The Yellow Book includes example Tender, Contract Agreement, and Dispute Adjudication Agreement forms. It focuses on procurement type rather than the nature of specific work.
Orange Book (1995). Initially focused on project type, current FIDIC contracts emphasize various procurement strategies. The Orange Book assigns total design liability to the contractor, offering single-point responsibility for the employer. It is suitable for turnkey projects where the contractor provides a fully-equipped facility.
Silver Book (1999). The Silver Book is for experienced Contractors in process, power, and private infrastructure projects, where they take full responsibility for design and execution. It ensures cost certainty by transferring risks, like ground conditions, to the contractor. The employer retains some risks. Limited control is given, and there's no Engineer reference, emphasizing reduced Employer influence.
Public-Private Partnerships (PPPs). PPPs are a mutually beneficial cooperation between government agencies and entrepreneurs in sectors traditionally under the state's responsibility on the balanced distribution of risks, benefits and costs, rights and obligations defined in the relevant contracts.
Design-build. It's a method of delivering construction projects in which the designer and builder work together under a single contract from the beginning of the project to ensure unity and cooperation throughout the process.
FIDIC forms heavily influence the UAE construction law practices, often as a foundation for adjusting individual contractual provisions. There is a shift towards increased design responsibility for contractors, particularly in planning and building projects, and a growing preference for bespoke contracts, including PPPs.

Taxation

For legal construction entities, the following types of taxation apply in the UAE construction law:
VAT. The standard rate is 5% and is charged when the company's profit exceeds AED 375,000 or $100,000 annually. The amount must be repaid 28 days after the end of the reporting period for the quarter. Before doing so, you must register the business as a taxpayer on the FTA website.[?] The 0% VAT rate in Dubai applies to businesses specializing in certain types of activities, and construction is not on that list.
Income tax. From June 1st, 2023, for other businesses (including construction), it is 9% — this applies to companies whose yearly profits come out to more than 375,000 AED.
Corporate tax. Corporate tax (CT) is a direct tax imposed on the net income or profits of corporations and other entities arising from their business activities. The UAE has the GCC region's lowest corporate income tax rate, set at a standard rate of 9%.
First Bit provides services taking into account the regulatory framework in the UAE both in terms of taxes and other legal regulations.
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The Parties

Traditionally, the employer, the contractor, and the financier negotiate a contract. UAE construction law also allows for subcontractors, architects of record and others. The participants will vary depending on the arrangements prescribed in the contract.
The Employer Identity
Firstly, the type of employer in construction projects depends on the construction project. Here, established developers are typical employers for large construction projects — developers, often selected for their extensive experience, typically secure construction contracts for commercial properties.

For smaller projects, it's likely to be a private landowner.

If the project's type is public utility or transportation, the employer is usually a government or semi-governmental organization.

The general task for employers is to secure planning permits and building permits timely, along with ensuring the well-being and safety of their employees, especially in the case of work-related injuries.

The employer has a basic right to:
  • Issue taking-over certificates
  • Comply for payment obligations
  • Get approval for additional work
  • Fairly remunerate the contractor
  • Terminate the construction contract
The Contractor Identity
The choice of contractor always depends on the nature of the construction project.
The typical contractors in the UAE are local companies. The companies usually deal with domestic, small to medium-sized projects.

There are some relaxations[?] in the construction law in the UAE, which were adopted in 2021 and required a local sponsor to implement construction activities and attract foreign business.

The contractor has a basic right to:
  • Subcontract all or part of the works
  • Answer for the subcontractor
  • International construction projects are often conducted by joint ventures (JVs) or special purpose vehicles (SPVs).

A Joint Venture is a business arrangement in which two or more parties come together to undertake a specific project or task. Construction companies may form joint ventures to combine their resources, expertise, and capabilities to pursue and execute large-scale projects. Joint ventures are often established to share risks, leverage complementary skills, and enhance competitiveness in the bidding and execution of contracts.

An SPV is a legal entity created for a specific and often temporary purpose, usually to isolate financial risk or manage a particular set of assets or projects. In the context of contracting and construction, SPVs are sometimes used for large infrastructure projects.
The Subcontractor
For employers, choosing a subcontractor also depends on the type of construction project. It is usually locally incorporated organizations.

According to UAE construction law, subcontractors aren't participants in contracts with employers, so they are not directly responsible to employers. However, the employer may require subcontractors to provide an accompanying warranty, which the employer may rely on to obtain the subcontractor's direct liability for defective work.
The Financier
The size of a construction project reveals its financing. Local and international banks in the UAE often act as financial parties to large construction projects. As a specific characteristic, the construction market uses Islamic finance structures, which offer an alternative to traditional financing.

As for small and medium-scale projects, lenders are typically the financiers on a corporate or full recourse basis.

The financing agreement might grant them the authority to supervise and approve future contracts related to the project. For instance, the contractor may need approval from the funders for subcontractors, allowing financiers to assess the subcontractor and their funds. This practice involves bonding and discounting of the payment certificate.
The Architect of the Record
The Architect of Record is the architect or architecture firm listed on a building permit for a particular project where they provided their services. Building permits are granted by a government agency authorized to oversee construction and enforce building codes in a specific jurisdiction.

Specifically, the construction law in Abu Dhabi requires an architect or engineer of record. As well as the contractor, the architect is pointed in the building permit. Engineers of record are employed by consulting firms, which, according to UAE laws, must be authorized to carry out these activities.

According to Abu Dhabi's building law, the architect of record may be held responsible for design and construction defects, even if they didn't create the designs. They are expected to supervise the construction, and liability extends to defects in both design and construction.

Construction Execution

Construction Execution consists of a range of procedures.
Scope of work. The employer or contractor will explain what needs to be done in a project — the scope of work. If the employer plans the project, they'll give details like specifications, drawings, schedule, and more.
They can share those ideas if the contractor suggests changes to save money or improve things. If the employer doesn't plan the project, they'll tell the contractors what they need, and the contractors will share their plans.
Procedure of Variations. The contract typically governs the process and includes a price for variations. Either the employer or the contractor can request variations, leading to potential entitlements for additional time and compensation if accepted. If variations are necessary due to a party's failure, delay, or default, that party is not entitled to extra time or compensation under the contract.
Generally, works are completed by the contract's specified date, subject to potential amendments. Variations causing time extensions may trigger claims for prolongation costs, an extension of time, and additional work.
Design. Employers typically hire design consultants, and contractors focus on executing the employer's provided plan. However, there's a recent trend toward design and build contracts, where contractors take responsibility for projecting specified works. Contractors engaging usually obtain professional indemnity insurance.
If the contractor doesn't handle the design, the UAE's mandatory decennial liability holds both the contractor and designer jointly liable for building collapse. This liability persists even if a third party performed the design. Additionally, contractors are always accountable for planning temporary works like scaffolding.
Construction. The contract establishes the responsibilities of each party in construction projects. Typically, the employer is responsible for site access and payments to fund the project costs.
The engineer/consultant supervises project execution and may contribute to the design. The contractor carries out the construction works according to contract specifications.
Site Access. The employer is tasked with providing the contractor timely site access and information on its status, including pollution and ground conditions. Once the contractor assumes site custody, responsibilities include site maintenance, health, and safety measures, and managing on-site noise and pollution.
In case of archaeological discoveries, the responsible party must report to authorities, leading to work suspension until an investigation occurs.
Permits. UAE construction projects necessitate a building permit from the relevant municipality. The engineer obtains initial design approval, and subsequent permits for execution, such as "No Objection Certificates" (NOC), are the contractor's responsibility, involving agencies like environmental or utility bodies.
Maintenance. During the defect liability period, corrective works are conducted based on the division of responsibilities outlined in the main contract and subcontract. Once this period concludes, employers commonly engage specialized companies through contracts for ongoing maintenance services, especially for systems like elevators and air-conditioning.
Tests. In construction projects, the specified tests on completion are typically conducted by either the main contractor or specialized third parties, depending on the nature of the work. Under the Red Book, these tests, overseen by the engineer/consultant, must occur within 14 days of notification. The contractor is obligated to address any defects before the issuance of the taking-over certificate by the engineer/consultant.
Completion, Takeover, Delivery. Upon satisfactory completion of tests and issuance of the taking over certificate by the engineer/consultant, the contractor invites the employer to take over the work. Without a certificate, if the employer uses any part of the work, it is considered taken over, transferring related liabilities to the employer.
Post-takeover, the contractor typically receives a portion of retention money and a reduction in the value of performance bonds, as stipulated in the contract.
Defects and Defects Liability. Once the work is handed over, the liability period for defects begins, typically lasting one to two years (extendable for specific aspects). The contractor must promptly address defects or outstanding works identified during this period. Failure to meet obligations may trigger the calling of performance bonds.
Additionally, the UAE construction law’s mandatory decennial liability provision holds both the contractor and designer jointly liable for building collapse during this period.

Payment

There are several types of payment. In the UAE construction law the party selects each type depending on the arrangements.
Negotiated Price. Contracts typically involve fixed lump sum payments or remeasurements, where the work value is determined by a pre-set price schedule or BOQ (bill of quantities). The usual payment method is based on the contract administrator's certification of completed work, occurring either periodically (like monthly) or at agreed-upon milestones or stages.
Advance payments and interim payments. These types of payments are widely used in construction contract law in UAE. For example, in government contracts, as per Circular No. 1 of 2019 from the Executive Council of the Emirate of Abu Dhabi, payments should be settled within 30 days from the invoice date. The circular also mandates that undisputed amounts must be paid within 30 days in case of a dispute.
Invoices. Contractors usually give paper invoices to the employer, although some contracts use programs for easier document exchange, including invoices. For such needs, you can try the FirstBit ERP system, which helps our clients track contracts and documents more comfortably.
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Timeframe

The construction contract law in the UAE directs contractors in planning and updating projects efficiently. Focused on the UAE context, we provide the info about how delays, remedies, extensions of time, force majeure, and unforeseen circumstances are handled within the contractual framework. Navigating these nuances is crucial for successful construction projects in the UAE.

Planning

The contract outlines how the contractor should plan the project. It specifies the method for developing strategies and regularly updating the project plan. Often, contracts require the use of project management tools like FirstBit Contracting ERP. The tool makes the process smoother by allowing the contractor to input updates of construction contract law in the UAE and generate an updated plan shared with the employer.

When something happens that might cause delays, the contractor usually has to tell the employer about it. The notice includes details about how much the delay might cost and how long it might take.