Real Estate, Construction and Hotels & Leisure Focus
Andrew Symms Partner, Head of Construction & Infrastructure
Steven Graham Senior Associate, Construction & Infrastructure
Laureen Fredah Intern, Arbitration
The UAE construction market typically uses FIDIC standard forms of contract; or other forms with similar provisions, particularly in relation to dispute resolution.
These dispute resolution provisions usually anticipate arbitration, but to get there adopt a multi-tier approach requiring the dispute be escalated. The idea is that before a dispute gets to arbitration, the parties would have tried to by other forms of alternative dispute resolution (ADR) i.e. negotiation, amicable settlement, conciliation or mediation.
These procedures can often take quite a time to comply with. This article considers the often-encountered problem where a contractor obtaining an injunction in the UAE courts is then required to commence an arbitration within 8 days, potentially without complying with the escalation process.
Most sizeable construction contracts in the region will require the contractor to provide an on-demand performance bond. Sub-Clause 4.2 of the FIDIC form provides that the contractor must provide a performance bond usually for 10% of the contract price. The short point is that it is always tempting for a dissatisfied employer to call on on-demand performance bonds. As the famous English judge Lord Denning once said, this type of security was effectively cash in the hands of the beneficiary. Unlike conditional performance bonds which require the employer to provide some level of evidence of default before calling, an on demand performance bond is an unconditional obligation to pay when a demand has been made. There are only very limited options available to the contractor whether this is to prevent the employer making a demand on the bondsman who provided the performance bond; or to prevent the bondman paying out.
That said, if the Contractor finds out that a call on a performance bond has been or is to be made, then by acting quickly it may be able to get an injunction against one or both of the employer or bondsman. Even though there may be an arbitration provision in the dispute resolution process, it is usually feasible to approach the UAE courts for this purpose.
This article considers the often encountered problem where a contractor obtaining an injunction in the UAE courts is then required to commence an arbitration within 8 days, potentially without complying with the escalation process.
The contractor will usually apply for a provisional attachment order (freezing order injunction) which is provided for under Article 252 of Federal Law No.11 of 1992. Unlike in the English courts where such a request will almost always be denied, in the UAE it is much more common for the order to be granted at the first hearing. Article 252 states:
“Without prejudice to the provisions of any other law, an obligee may apply to the court hearing the action or to the judge for expedited matters, as the case may be, for the imposition of a preservatory attachment over the real estate and movable property of his opponent in the following circumstances: 1. Any circumstance in which it is feared that it may be lost as security for his right, such as the following circumstances: a. if the obligor has no permanent residence in the State; b. if the obligee fears that his obligor may abscond, or remove or conceal his property; c. if the securities for the debt are threatened with loss. … 4. In any event, the court may, before granting the application for attachment, request any details or evidence or statements, under oath, if it so deems necessary.”
However, Article 255 (2) UAE Civil Procedures Law requires the following:
“(2) - The attachor must, within eight days at the most from the date of the imposition of the attachment, bring a claim before the competent court for the confirmation of his right and the validity of the attachment, in cases in which the attachment was by order of the judge for expedited matters, failing which the attachment shall be void ab initio.”
Therefore, once the attachment has been granted, the contractor would be required to commence arbitration proceedings in respect of the subtantive dispute within 8 days of the attachment. Failure to do this is likely to mean that the attachment will be dismissed. This was the court’s ruling in a Dubai Court of Cassation Judgment 322/94.
The issue which then arises is how the contractor can properly commence an arbitration in 8 days if there is a typical escalation process.
The FIDIC contracts identify the procedure which the contractor must follow. Sub-Clause 20.1 imposes an obligation on the Contractor to give notice of its entitlement to a claim “as soon as practicable, and not later than 28 days after he became aware, or should have become aware, of the event or circumstance” giving rise to the claim. Typically also there is a requirement that a party is required to refer the dispute first to the Dispute Adjudication Board and then attempt amicable settlement within 56 days.
Generally, these types of escalation procedures have been held to be contractually binding. The Dubai Court of First Instance in a ruling (Commercial Case 757 dated 15 August 2016) confirmed the principle that recourse to an engineer for a decision was a pre-condition to the commencement of an arbitration. Similarly, in the Court of Appeal Case 795/2018, the court rejected an attempt to appoint an arbitrator before the parties had exhausted the contractual ADR process.
Not surprisingly then, there is then a conflict between the court’s requirement pursuant to Article 255 (2) that formal proceedings “before the competent court” be commenced within 8 days; and a contractual process which potentially requires several months of ADR, before an arbitration can be commenced.
Strictly speaking then, if the contractor commences the arbitration prematurely, the employer could return to the court and claim that although an arbitration has been commenced within the 8 day timescale, it is not an arbitration which has been started in accordance with the contractual escalation process. This will always be a vulnerability for a contractor in this position and there will always be the potential for such a challenge.
However, perhaps a more accurate position is that the contractor will have complied with the court’s requirements. The court is interested in making sure that its attachment to prevent the call will result in the underlying dispute being settled at some point in the future. The onus is on the contractor not only to start the arbitration, but also to see it through. Part of this would then be to agree with the employer that they do go through the necessary escalation procedure or to dispense with it. Of course, it would not be open to the contractor to take this decision unilaterally. Similarly, the employer is unlikely to be well-received by the court if it is obstructing the contractor from trying to comply with the escalation procedure, subsequent to commencing the arbitration.
Ultimately, it may just be a case of the contractor having to start the arbitration twice: once to satisfy the court; and then to stay or restart once the escalation procedure has been complied with.
Escalation procedures are included in contracts for good reason and are generally an enforceable pre-condition to arbitration. Equally, the requirement pursuant to Article 255 (2) that a contractor must commence proceedings within 8 days is founded on good commercial grounds: the attachment has not been provided without a requirement that the contractor take formal steps to show it has a basis for not paying.
There is a potential for a challenge. However, when it comes to preventing calls on bonds, if the contractor wants the injunction, it has no choice but to commence within the 8 days, whether it can comply with the escalation procedure or not. There may be costs involved, but these are likely to be neglible compared to those of allowing the bond to be called.
For further information, please contact Steven Graham.
Published in July 2022
When it comes to preventing calls on bonds, if the contractor wants the injunction, it has no choice but to commence within the 8 days, whether it can comply with the escalation procedure or not. There may be costs involved, but these are likely to be negligible compared to those of allowing the bond to be called.
