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Getting Paid: Mitigating Non-Payment Risks and Deploying “Self-Help” Remedies under UAE Law

By Joseph Chedrawe and Mina Morova*

One of the biggest risks on any construction project is non-payment. This article sets out contractual measures to mitigate non-payment risks and describes “self-help” remedies to obtain payment under United Arab Emirates (“UAE”) law.

Contractual Measures

To mitigate against the risk of a payment dispute, there are a number of measures which the parties may wish to incorporate in their contract.

First, the parties may incorporate various payment structures into their contracts, including, for example:

  • a down payment upfront at the start of the project (e., before any work has been done), which may help meet significant start-up or procurement costs;
  • a payment schedule for milestones or progress payments throughout the project;
  • interest on late payments; or
  • an owner’s obligation to purchase materials upfront from the suppliers.

Second, the parties may include stoppage of works/supply options, including right of suspension or termination clauses, which clearly define the parties’ rights and responsibilities in the event of non-payment. For example:

  • The party due an outstanding payment may suspend or terminate work if the mutually agreed upon time period for suspension or termination has passed since giving any required notice. It is typically a contractual requirement in suspension or termination clauses that the owner be given notice and an opportunity to make the payment before the suspension or termination is effective. Failure to abide by the express requirements of such clauses could result in a party being liable for breach of contract for the stoppage. Accordingly, it is important that a party comply with all contractual prerequisites before any stoppage;
  • A party may also wish to take advantage of a partial suspension (rather than a full suspension), which allows minimal activity on site;
  • A party may also be entitled to the costs associated with the stoppage, including demobilization and remobilization costs; and
  • The end result of a suspension clause may be much the same as a termination clause in that either party will have the right to terminate the contract at the end of the agreed suspension period.

Third, a tiered dispute resolution clause may allow for payment disputes to be dealt with more expeditiously, without resort to formal legal proceedings. For example:

  • A dispute adjudication board (DAB) can be established at the outset of a construction project to provide a dispute avoidance role in the event of non-payment;
  • The senior managers or executives may be required to meet within – and for – a certain number of days to discuss the non-payment; or
  • The parties may also choose to submit their payment dispute to mediation with the aim of reaching a mutually beneficial settlement in the event prior discussions or negotiations do not yield a positive result.

“Self-Help” Remedies Under UAE Law

In the absence of contractual measures, there are at least three “self-help” remedies under UAE law to get paid for contracted services.

If the relevant contract does not contain a right to suspend performance, Article 247 of the UAE Civil Code may provide an avenue to do so.1 Pursuant to Article 247, a contracting party may withhold or suspend the performance of its obligation if the other party fails to discharge a mutual or corresponding obligation that has since become due for performance. The UAE Federal Supreme Court commented that good faith applies to the right to suspend performance and, as such, any suspension of work must be a reciprocal and proportionate response to the default in question.2 Before exercising a suspension right, a party may be well served to ensure its own performance of the contract is compliant.

Another “self-help” measure is contained in Article 879 of the UAE Civil Code, which closely resembles, if not replicates, the concept of a common law lien.3 This provision applies where a party produces a beneficial effect on the property of the employer. The term “beneficial effect” is not defined in the legislation but may mean an effect which increases the value of, or improves, the property. Accordingly, if a party is not paid due consideration for completed works that produced a beneficial effect on the property in question, that party may be entitled to exercise a possessory lien by, for example, taking over the property and withholding keys or access codes required by an employer to gain access to works for which payment is overdue.4 The key consideration in the application of this provision lies in whether the works undertaken produced a beneficial effect on the property. In other words, if no beneficial effect is created, the party may not retain possession of the property and to do so in those circumstances would be unlawful.5

Finally, a party may also seek to take advantage of priority rights liens. In accordance with Article 1527 of the UAE Civil Code, an amount due to a contractor or building engineer has the same status as a priority right.6 A priority right is a statutory right entitling a beneficiary to a priority claim against proceeds ultimately realized from a sale of the concerned property.7 While Article 1527 does not provide any guidance on the procedure to be followed for the sale of the property, it is a requirement under the provision that the priority right be perfected by registration with the relevant Land Registry in order to be effective.8 Accordingly, by registering a priority right, a party may be able to satisfy its entitlement to a payment out of the sale proceeds of the property, in the event the sale is instigated by the employer or another entity, such as a creditor.9

Concluding Remarks

When it comes to getting paid, a party’s best defense against a defaulting employer may be to minimize its risk from the outset in the contract. That said, while prevention is often better than the cure, asserting a number of remedies under UAE law may also help parties get paid.

*Mina Morova is a Trainee Associate in our Dubai office.

1 Article 247 of the Federal Law No. (5) of 1985 On the Civil Transactions Law of the United Arab Emirates (the “UAE Civil Code”) provides that “[i]n contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do”.

2 UAE Federal Supreme Court No. 556/2009 dated 7 June 2010.

3 Article 879(1) and (2) of the UAE Civil Code provide that:
“(1) If the work of the contractor produces (a beneficial) effect on the property in question, he may retain it until the consideration due is paid. And if it is lost in his hands prior to the payment of the consideration, he shall not be liable to the loss, nor shall he be entitled to the consideration.
(2) If his work produces no (beneficial) effect on the property, he shall not have the right to retain it pending payment of the consideration, and if he does so and the property is lost, he shall be liable in the same manner as if he had misappropriated it.”

4 Michael Grose, Construction Law in the United Arab Emirates and the Gulf, Chapter 18: Self-help Remedies, 1st ed. John Wiley & Sons Ltd (2016), 195.

5 Another similar provision which may give rise to a possessory lien under the UAE Civil Code is Article 416, which provides that: “[a]ny person who has incurred necessary or beneficial expense on property of another in his possession may refuse to return such property until he recovers what is due to him at law, in the absence of an agreement or provision of law to the contrary”.

6 Article 1527 of the UAE Civil Code (Section III: Special Privileges Over Immovable Property) provides that: “(1) Sums due to contractors and building engineers who have been entrusted with the erection, reconstruction, repair or maintenance of buildings or other works, have a privilege over such works but only in respect of the increase in value resulting from such works at the time of the alienation of the immovable. (2) Such privilege must be registered, and its rank is fixed by the date of its registration.”

7 See Grose, supra  note 4, at 196; Dubai Cassation No. 339/97 dated 23 November 1997.

8 The mode of registration is not specified; however, Law No. (7) of 2006 concerning Real Property Registration in the Emirate of Dubai requires, at Article 9, that all transactions that “create, transfer, change or cancel rights” over land are recorded in the Land Register in order to have effect.

9 It should be noted that, in accordance with Article 1527 of the UAE Civil Code, the value of the priority right is limited to “the increase in value” resulting from the works of the contractor at the time of the sale of the property.

 

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.