The balance between Fairness and Certainty in UAE Construction Contracts
For common law practitioners new to the UAE, Articles 106, 246 and 390 of the UAE Civil Code are features of UAE law that takes some adjustment and require understanding. These provision state that a person can be liable for the unlawful exercise of an explicit right in the contract (Art. 106); that the contract must be performed in good faith and in accordance with local custom (Art. 246); and that compensation can be fixed in advance but then adjusted by the court if necessary (Art.390). Such provisions, from a common law practitioner’s perspective, will immediately be seen as creating uncertainty in the contract. Therefore, when giving advice, common law lawyers need to adopt a different approach to contract interpretation.
Judges and arbitrators applying the law of the UAE can at times have a wide discretion to reach an outcome that he or she believes to be a “fair outcome”, despite in some respects, the decision contradicting the explicit terms of the contract.
On a practical level, such provisions create some uncertainty, as in most situations, what is fair and reasonable is subjective, with a lot of grey areas. This can create an incentive for a party who took a commercial risk that didn’t pay off, to instigate proceedings in the hope of being bailed out of its mistake by a sympathetic tribunal. The party most often able to benefit here is the contractor.
Article 246 states as follows:
- The contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith.
- The contract shall not be restricted to an obligation upon the contracting party to do that which is [expressly] contained in it, but shall also embrace what is appurtenant to it by virtue of the law, custom, and the nature of the disposition.
Again, despite what has been explicitly agreed in the terms of the contract, considerations around ‘good faith’, ‘what is appurtenant’ (also translated as an “essential requirement”) and ‘customs consistent with the nature of the disposition' all impact on how such terms can and will be applied. The construction industry is one of the most impacted by such law, as few industries have such ingrained customs. Such customs are often adopted, despite the terms of the contract, as the engineer and the parties naturally follow their own favoured procedures and precedent forms.
Article 106(2) also provides another clear example of the court being able to prohibit the enforcement of terms explicitly agreed in the contract. It provides that the exercise of a right will be unlawful in any one of the following circumstances: when (i) the intention is to harm others; (ii) the intended gain is of little importance when compared to the damage caused to the other; (iii) the exercise of the right exceeds what is usually accepted by custom and usage; or (iv) such exercise is contrary to the provisions of Islamic Shari’ah, public policy or morals.
When it can be shown that there is an intention to cause harm, the moral argument for such provision is convincing. However such cases are likely to be rare, as proving such intent is often going to be extremely difficult. Furthermore, Article 106(2) applies to a much wider array of situations, creating real uncertainty as to how the contract will be applied where one party faces significant losses, or even ruin, due to:
- a calculated commercial gamble that it lost; or
- its own negligence, agreeing to terms of a contract that it knew it could never fulfil
Article 106 in this instance essentially provides such party with a very real chance of remedying the situation at the back end of the deal, once the agreement has been implemented and the risk has arisen. As such, contractors can and will take bigger risks in what they sign up to, and employers who adopt unfair and unreasonable contractual terms are left with real uncertainty as to whether or not such terms can be enforced. The resulting situation is that neither party proceeds with confidence in, or ultimately will give reverence to, the contract.
Another prime example of the court having such discretion is article 390(2), which provides that in all cases of the parties having agreed to fix a sum for liquidated damages, the court can, at the request of either party amend such agreement in order to make the amount assessed equal to the loss suffered.
As such, any agreement reached in the contract negotiations can be set aside to represent the actual loss. The contractor’s risk is in effect uncapped, but its price will often not take such risk into account. Negotiations on liquated damages can be hard fought, with give and take applied to the rate of liquidated damages resulting in movement in the contract price, with neither party acknowledging or perhaps realising that the court will have discretion at the conclusion of the works to re-assess the entire sum.
So what is the solution? Ideally, these provisions of the civil code should encourage employers to tender with contracts that are fair and reasonable, and ensure that their engineer’s administer them accordingly. This however is rarely the case, as contracts weighted heavily in favour of the employer are still common practice. Where this is the case, the employer and engineer need to be extremely careful and consistent with their application of the contract, ensuring that they are at all times clear and consistent, ensuring the contractor is aware of the strict obligations agreed. Seeking to enforce stringent or harsh terms only at the point of terminating a contract or seeking to make deductions from the final account creates a real risk of a challenge by the contractor.