<p>This is the second and final part of the article written for China Construction  Law Review which provides a brief comparison on some aspects of UAE construction  law with PRC law, common law principles and provisions of the FIDIC Red Book  conditions.&nbsp; In this part of the article, legal provisions relating to  suspension of works, taking over of works, defects liability and subcontracting  are dealt with.<br /><br /><strong>The Right to Suspend Work </strong><br />It goes  without saying that cash flow is vital for any business venture, construction  projects in particular.&nbsp; It is an industry practice that, save for any advance  payment of between 10% and 20% (depending on the nature of the project),  contractors would have to use their own finances, or at the very least,  financially expose themselves to subcontractors and suppliers by producing or  delivering material and execute works in advance for their employers for a fixed  period of time (usually monthly) or until a certain stage of completion is  reached before they get paid, and even then contractors don&rsquo;t get paid in  full&sup1;.<br /><br />Therefore, in the effort to reduce the contractors&rsquo; risk in  relation to payment, construction contracts usually provide a number of  potential remedies in the event employers fail to make payment in accordance  with the agreed time or schedule.&nbsp;The remedies include the right to recover late  payment interest or financing charges &sup2;, suspend work&sup3; or reduce the rate of  work&nbsp; and exercise termination for default provision<sup>4</sup> Of the three  foregoing remedies, the right to suspend work is perhaps the more commonly used  remedy given that the right to receive interest does not, in any significant  way, compel employers to pay on time, and contractors are wary about terminating  contracts for fear of losing the opportunity to complete the works and realise  the profit that they had initially bargained for.&nbsp;<br /><br />In the UAE, in the  absence of a contractual right to suspend work for non-payment, a contractor may  rely on Article 247<sup>5</sup> , and to some extent, Article 414<sup>6</sup>&nbsp;  of the UAE Civil Code.&nbsp; The right to suspend work under these provisions however  are more general in scope and are not specifically intended to address  situations of non-payment.&nbsp; What they do provide though is that 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.&nbsp; Translating this to a construction setting, it  would mean that a contractor would be entitled to suspend work if it has not  been paid by the employer for any claims that have been certified or accepted  despite the contractor&rsquo;s continued performance beyond the due date for  payment.<br /><br />However, before exercising the right to suspend work a  contractor should take into consideration and address any issues that the  employer may have raised as justifications for non-payment. This is so that the  contractor is not taken to have acted in bad faith. It is to be noted that the  Dubai Court of Cassation decided in a case that the requirements of good faith  under Article 246 is applicable to the right to suspend performance.&nbsp; In this  case, the Court held that a party cannot invoke the right to suspend work if the  other party has substantially discharged its part of the obligations leaving  only a minor part of it unperformed; in other words, the de minimis approach  applies.&nbsp;<br /><br />Unlike the standard FIDIC provisions, the UAE Civil Code does  not expressly provide that a contractor is entitled to receive an extension of  time and payment in respect of additional costs caused by the suspension or  reduction in the rate of work<sup>7</sup>.&nbsp;&nbsp; To address this, it is arguable  that, on the basis of the requirements of good faith, the employer would not be  able to recover any liquidated delay damages from the contractor for delays  attributable to the contractor&rsquo;s suspension (or reduction in the rate of work)  due to non-payment; and that the contractor would be able recover the additional  costs incurred or losses suffered as a result of the suspension (or reduction in  the rate of work) by way of damages<sup>8</sup>.&nbsp;<br /><br />It is interesting to  note that under the standard provisions of the 1999 FIDIC Red Book conditions,  the additional costs that a contractor is entitled to recover in the event of  suspension or reduction in the rate of work for non-payment include an allowance  for reasonable profit which appears to be more favourable than the provisions of  the UAE Civil Code given that there is no clear and express provision under the  Code to enable a contractor to recover reasonable profit in such  circumstances.<br /><br />Under the PRC Contract Law<sup>9</sup>, a contractor may  prolong the construction period and claim compensation for work stoppages,  idling costs, re-mobilisation costs, material storage costs and other resulting  costs and expenses if the employer fails to supply or deliver items that it has  agreed to provide in accordance with the requirements of the contract (which  include funds or payments).&nbsp; Although the relevant provisions do not expressly  provide that a contractor may suspend or reduce the rate of work on the basis of  an employer&rsquo;s failure to make payment, the fact that a contractor is entitled to  prolong the construction period and recover costs and expenses for work  stoppages would mean that it is entitled to suspend or slow down work  progress.&nbsp;<br /><br /><strong>Taking Over Completed Works <br /><br /></strong>Under the  UAE Civil Code<sup>10</sup>,&nbsp; an employer is obliged to take delivery of  completed contract works and pay the contractor the agreed price accordingly.&nbsp;  This requirement is normally supplemented or amended according to the contract  of the parties where elaborate procedures and conditions for handing over and  taking delivery of completed works are often specified in the  contract<sup>11</sup>.&nbsp;<br /><br />The UAE Civil Code further provides that if there  is no valid reason for an employer not to take delivery of the completed works,  the risk or care of the completed works shall be deemed transferred to the  employer.&nbsp; In the local construction scene, it is not unusual to find an  employer refusing to take delivery of completed works or preventing its  technical consultant from issuing a taking over or completion certificate due to  financial difficulties. Otherwise to do so the employer will have to incur the  cost of maintaining the works or project and, if FIDIC Red Book conditions  apply, pay the contractor half of its retention money<sup>12</sup>.&nbsp;&nbsp;&nbsp;  Therefore, in specific circumstances, the relevant provisions of the Civil Code  may be relied upon by a contractor as a ground for transferring the risk and  care of the completed works to an employer despite the latter&rsquo;s refusal to take  over the works or the absence of a taking over or completion  certificate<sup>13</sup>.<br /><br />Similar to the FIDIC taking over of works  regime, the PRC Contract Law require a process of inspection to be carried out,  however, it goes a step further by imposing the need for the works to be in  compliance with the &ldquo;inspection rules&rdquo; and &ldquo;quality standard&rdquo; issued by the  government. Whilst one may say that it is given that completed works must, as a  matter of right, be in conformance with the applicable building or construction  code before it can be accepted as completed<sup>14</sup>,&nbsp;problem may still  arise in a situation where a contractor argues that certain requirements of the  local authorities or government agencies are additional or a variation to its  original scope of works<sup>15</sup>.&nbsp;<br /><br /><strong>Defects Liability  <br /></strong><br />In the event a contractor is carrying out works defectively the  UAE Civil Code<sup>16</sup>&nbsp; allows an employer to cancel the contract  immediately if it is impossible to remedy the defective works; otherwise, the  employer should give the contractor a reasonable period of time to remedy the  defective work<sup>17</sup>.&nbsp;&nbsp;&nbsp; If a contractor fails to remedy the defect  within the said period an employer may request the court to cancel the contract  and allow it to engage a third party to remedy the defect at the contractor&rsquo;s  expense.&nbsp; However, Dubai Court of Cassation has held that in case of urgency an  employer may proceed to engage a third party to remedy the defect without the  need to obtain prior permission from the court.<br /><br />Turning to the PRC  Contract Law, an employer also has the right<sup>18</sup>&nbsp;to require a  contractor to remedy defective works within a reasonable period of time.&nbsp; If the  contractor fails to do so after it has been urged, the employer may terminate or  rescind the contract<sup>19</sup>.&nbsp;Similarly, under Sub-Clause 15.2(c)(ii) of  the 1999 FIDIC Red Book conditions, an employer may terminate the contract if a  contractor fails to comply within 28 days from receiving a notice under  Sub-Clauses 7.5 or 7.6 to remove, re-execute or remedy defective works or  execute any urgent work<sup>20</sup>.<br /><br />One important distinction between  the two laws in respect of defect liability is that under the UAE Civil Code the  contractor, design architect/engineer and supervising architect/engineer are  jointly liable to the employer for the structural integrity of the building or  installation for a period of 10 years from the date of handing over, unless,  such building or installation are intended to remain for less than 10  years<sup>21</sup>.&nbsp;The liability imposed under this mandatory law on the liable  parties is popularly known as the Decennial Liability.&nbsp; It is a strict liability  that does not require the employer to show negligence or default on the part of  any of the liable parties<sup>22</sup>.&nbsp;<br /><br />Under Decennial Liability, an  employer has 3 years from the total or partial collapse of the building or  installation, or the discovery of the structural defects in the building or  installation, to seek compensation against the liable parties.&nbsp;&nbsp;This would mean  that the liable parties will have 13 years of liability over buildings or  installations that have been handed over.&nbsp;Any agreement to exempt or limit such  liability is unenforceable at law<sup>23</sup>.&nbsp;It should also be noted that  defects in the land upon which the building or installation is located, or the  fact that, the employer has consented to the construction of the building or  installation does not excuse the liable parties from the  liability<sup>24</sup>.&nbsp;<br /><br /><strong>Subcontracting </strong><br />It is of  course common practice for a contractor to subcontract parts of its works.&nbsp;There  are several reasons for a contractor to sub-let its works, it may be the case  that certain parts of the works require specialist knowledge or skills of  certain subcontractors, or it may also be the case that the contractor wishes to  spread its risk by dividing the works into smaller portions to several  subcontractors.&nbsp;<br /><br />The UAE Civil Code allows a contractor to sub-let either  the whole or part of the works unless prohibited by the terms of the contract or  the nature of the works is such that the contractor must personally perform  it<sup>25</sup>.&nbsp;Under the Code, a subcontractor has no right against an  employer<sup>26</sup> , all rights and liabilities in relation to the sub-let  portion of the works will be a matter between the contractor and its  subcontractor.&nbsp; In the UAE, it is common for an employer to request specialist  subcontractors to provide a collateral or direct warranty to the employer with  regard to the quality and/or fitness of the subcontract work<sup>27</sup>.&nbsp;This,  however, does not in itself gives any right to a subcontractor to have direct  recourse against an employer<sup>28</sup>.&nbsp;&nbsp;<br /><br />Based on the standard FIDIC  Red Book Conditions<sup>29</sup>,&nbsp;a contractor must obtain the Engineer&rsquo;s  consent before it is allowed to sub-let any part of the Works&nbsp;&nbsp; and it will  remain liable for the acts and defaults of all subcontractors including  nominated subcontractors (指定分包商), however, a contractor is prohibited from  sub-letting the whole of the Works<sup>30</sup>.&nbsp;There is serious implication if  a contractor fails to comply with the restrictions in relation to subcontracting  because it may give the employer the right to terminate the  contract<sup>31</sup>. <br /><br />Unlike UAE law, a contractor under the PRC  Contract Law has lesser freedom to sub-let works.&nbsp;Although a contractor may,  with the consent of the employer, sub-let part of the works to a third party it  may not sub-let the whole of the works or divide the works in order for several  subcontractors to complete the whole of the works<sup>32</sup>.This begs the  question whether does this restriction means that the PRC Contract Law does not  allow Construction Management or Management Contracting type of contracts to be  implemented in the PRC? Generally, these types of contract entail a main  contractor<sup>33</sup>&nbsp;sub-letting the whole of the works (either as agent of  the employer or in its own capacity) to several trade or specialist contractors  for the execution of the whole of the works. Perhaps, in the writer&rsquo;s view, this  type of contract is not deemed by the PRC Contract Law to be a construction  contract for the purposes of Chapter 16, but more so of a contract providing  consultancy services<sup>34</sup>.&nbsp;<br /><br />Further restriction is imposed under  the PRC Contract Law whereby a subcontractor is not allowed to further sub-let  its works. There is no such prohibition either under UAE law or within FIDIC  standard conditions.&nbsp;Another notable difference between the UAE and PRC laws is  that under the latter regime, a contractor and all its subcontractors are  jointly and severally liable to the employer.&nbsp;In other words, an employer may  pursue or claim against a subcontractor jointly with the main contractor for any  of the subcontractor&rsquo;s defaults; whereas in the UAE, unless a subcontractor has  provided a collateral or direct warranty to the employer, or there exist some  special circumstances that create a legal relationship between them, an employer  will not have the right to pursue claims directly against a  subcontractor.<br /><br /><strong>Conclusion</strong><br />The UAE is a melting pot of  different cultures.&nbsp;This also applies to the local construction industry with  its players (developers, consultants, contractors, suppliers, etc) having  originated from different parts of the world.&nbsp;In this regard, Chinese  contractors are certainly not newcomers to the UAE.&nbsp; They have, along with other  foreign contractors, made significant contribution to the development of UAE&rsquo;s  real estate and infrastructure, and they continue to do so despite the current  lull in the market.<br /><br />However, a rich mix of cultures is also a recipe for  construction disputes when the industry players do not give sufficient regard to  local law and issues.&nbsp; Ideally, the provisions of construction contracts should  apportion and allocate all conceivable commercial or legal risks between the  contracting parties.&nbsp;But they are often fraught with ambiguities and pitfalls  partly due to the fact that the contracting parties fail to address local law  and issues.&nbsp;<br /><br />In light of the sluggish construction market that the UAE is  currently experiencing (especially within the real estate sector<sup>35</sup>),  the shortcomings in many of the local construction contracts are now the subject  of legal disputes. As a result, the awareness and the need to take cognisance of  local law amongst the construction industry players have increased during these  difficult times.&nbsp;This is a positive development as further appreciation of local  law will contribute to the maturity of the construction industry as a  whole.<br /><br /><strong>Footnotes </strong></p>
<ol>
<li>Progress payments are usually subject to retention sum and evaluation by a  third party consultant, namely &ldquo;the Engineer&rdquo; if it is under FIDIC Red Book  conditions.&nbsp;</li>
<li>See Sub-Clauses 60.10 and 14.8 of the 1987 and 1999 FIDIC Red Book  conditions respectively.</li>
<li>See Sub-Clauses 69.4 and 16.1 of the 1987 and 1999 FIDIC Red Book conditions  respectively.</li>
<li>See Sub-Clauses 69.1(a) and 16.2(c) of the 1987 and 1999 FIDIC Red Book  conditions respectively.</li>
<li>Article 247, in translation, reads &ldquo;In 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&rdquo;.&nbsp;</li>
<li>Article 414, in translation, reads &ldquo;Any person who is obliged to perform a  thing may refrain from so doing so long as the obligor has not discharged an  obligation of his arising by reason of an obligation of the obligee and  connected with it&rdquo;.&nbsp;&nbsp;&nbsp;</li>
<li>See Sub-Clauses 69.4 (a) &amp; (b) and 16.1 (a) &amp; (b) of the 1987 and  1999 FIDIC conditions respectively</li>
<li>A contractor may rely on Articles 338 and 389 of the UAE Civil Code to  recover compensation as a result of the employer&rsquo;s failure to make payment in  accordance with the contract.</li>
<li>Articles 283 and 284 of the PRC Contract Law.</li>
<li>Articles 884 and 885 of the UAE Civil Code.</li>
<li>For example Clauses 48 and 10 of the 1987 and 1999 FIDIC Red Book conditions  respectively.</li>
<li>Under the FIDIC Red Book regime, a Taking-Over Certificate will trigger the  contractor&rsquo;s entitlement for the release of the first half of its retention  money; it also marks the end of the construction period and the contractor&rsquo;s  responsibility for the care of the works followed by the commencement of the  Defect Liability Period.&nbsp;&nbsp;</li>
<li>However, the contractor would need to be mindful of issues relating to  insurance coverage for the completed works and the project site.&nbsp;</li>
<li>Sub-Clauses 26.1 and 1.13 of the 1987 and 1999 FIDIC conditions respectively  require a contractor to comply with all laws including any applicable  regulations or by-laws of the relevant local authorities.</li>
<li>This may occur in situation where there are conflicting or competing  building codes imposed by different local authorities with no clear distinction  as to which one takes priority.&nbsp;</li>
<li>Article 877 of the UAE Civil Code.</li>
<li>What amounts to a reasonable period of time is a question of fact.&nbsp; The  writer submits that the extent and seriousness of the defects and its impact on  the safety of the works and people at the project site would be relevant factors  to be considered.</li>
<li>Articles 262 and 281 of the PRC Contract Law.</li>
<li>Article 94(3) of the PRC Contract Law.</li>
<li>Sub-clause 63.1(c) of the 1987 FIDIC Red Book conditions provides similar  remedy to an employer.&nbsp;&nbsp;</li>
<li>Articles 880 and 881 of the UAE Civil Code.</li>
<li>Article 883 of the UAE Civil Code.</li>
<li>Article 882 of the UAE Civil Code.</li>
<li>Article 880(2) of the UAE Civil Code.</li>
<li>Article 890 of the UAE Civil Code.</li>
<li>Article 891 of the UAE Civil Code.</li>
<li>This practice takes place more often in the case of a nominated  subcontractor.</li>
<li>Unless there are special circumstances where a legal relationship can be  established between the employer and the subcontractor.</li>
<li>Sub-Clauses 4.1 and 4.4 of the 1987 and 1999 FIDIC Red Book conditions  respectively.</li>
<li>Save for certain conditions specified in the relevant sub-clauses.</li>
<li>See Sub-Clauses 63.1(e) and 15.2(d) of the 1987 and 1999 FIDIC Red Book  conditions respectively.</li>
<li>Article 272 of the PRC Contract Law.&nbsp;</li>
<li>Sometimes known as the Construction Manager or Management Contractor.</li>
<li>However, even if this view is correct there appears to be another issue to  overcome because the same law also prohibits an employer from dividing up the  works in a construction projects so to be undertaken by several contractors.&nbsp;  Presumably, the way to overcome this prohibition is to only employ one  contractor to carry out the whole of the structural works of the project as  required under Article 272 of the PRC Contract Law.<br />The real estate sector in  Dubai in particular has gone through significant legislative changes which has  in some ways influenced the local construction market.&nbsp; See Lisa Dale, &ldquo;Eight  Years in Review - Legislating for Dubai&rsquo;s First &lsquo;Boom and Bust&rsquo; Cycle,&rdquo; Al  Tamimi Law Update (<a href="http://altamimi.newsweaver.ie/Newsletter/kalr5lz78an">http://altamimi.newsweaver.ie/Newsletter/kalr5lz78an</a>).</li>
</ol>