<p><strong>Highlights of the Laws of the United Arab Emirates, the People&rsquo;s  Republic of China and the Common Law applicable to construction </strong><br />This article is written for China Construction Law Review.&nbsp;It seeks  to provide readers with an insight into some aspects of UAE law relevant to the  construction industry by way of comparison with the law of the People&rsquo;s Republic  of China.&nbsp;Given the prevalent use of FIDIC&sup2; standard forms of construction  contract in the UAE and the strong presence of common law lawyers in the  country, this article also compares the laws of the two subject countries with  well known common law principles and relevant provisions of the FIDIC&sup3;Red Book  conditions.&nbsp;&nbsp;In this first part of the article, an introduction to the relevant  laws and issues relating to the principle of good faith and liquidated delay  damages are discussed.<br /><br /><strong>Introduction </strong><br />In the UAE, all  commercial activities (including building or construction activities) are  regulated by Federal Law No. 18 of 1993, also known as the UAE Commercial  Transaction Law or the UAE Commercial Code.&nbsp;However, in practice, Federal Law  No. 5 of 1985 also known as the Federal Civil Transaction Law or the UAE Civil  Code is more regularly applied or referred to because it contains general and  mandatory laws that govern contractual relationships in the UAE<sup>4</sup>.The  UAE Civil Code has a specific chapter<sup>5</sup> under the heading called  &ldquo;Muqawala<sup>6</sup>&rdquo; which contains provisions that govern the relationships  between employers, contractors, subcontractors and engineers/architects. In the  context of the People&rsquo;s Republic of China<sup>7</sup>, the relevant law is the  Contract Law of the People&rsquo;s Republic of China<sup>8</sup>&nbsp;&nbsp;(中华人民共和国合同法) (&ldquo;the  PRC Contract Law&rdquo;).&nbsp; Similar to the UAE Civil Code, the PRC Contract Law  contains general and mandatory laws that regulate contractual relationships in  the People&rsquo;s Republic of China, and it has two specific chapters containing  provisions that are applicable to contracts of work and contracts for  construction projects<sup>9</sup>.<br /><br />Although the political structures of  the two subject countries differ, their respective legal systems are similar to  the extent that they both belong to the civil law family<sup>10</sup>. In the  civil law system, unlike common law system, the principle of stare  decisis<sup>11</sup>&nbsp;or case law precedent does not apply.&nbsp; For this reason,  amongst others, judicial interpretations and decisions from civil law countries  tend to be less prescriptive in that the civil law courts do not usually  restrict themselves to the black letters of the law; instead, the meaning and  intent of the law takes a central role. Notwithstanding that, in the UAE, as a  matter of practice, lowers courts do respect and tend to follow the principles  and approaches laid down by the Court of Cassation the highest appellate court  in the UAE<sup>12</sup>.&nbsp;To this end, the legal practice in the People&rsquo;s  Republic of China is similar to the UAE because the writer is advised that  judicial interpretations of the Supreme People&rsquo;s Court, which is the highest  court in the People&rsquo;s Republic, are very helpful and persuasive.&nbsp;&nbsp;<br /><br />In the  context of construction law practice in the UAE, the writer finds that common  law or English law principles are often referred to and sometimes erroneously  relied upon.&nbsp; Indeed, in this regard, Essam Al Tamimi, a prominent UAE legal  practitioner, said in his book<sup>13</sup><br />&ldquo;In addition, because of the  nature of Dubai in particular as a commercial center and because of the presence  of international law firms with &ldquo;common law&rdquo; roots, many contracts which have  been drafted in the UAE appear to have been influenced by common law principles.  <br />This has created difficulties in the application of the law to these  contracts by the courts of the UAE since judicial authority does not recognise  some of the principles or the practices of the common law  system&hellip;&rdquo;<br /><br />Therefore, whilst foreign legal principles, including common law  principles, may provide some guidance, they have no force in law in the UAE  unless they are so widely used and recognised in the industry that they can be  accepted as forming part of the local custom or  practice<sup>14</sup>.<br /><br /><strong>Relevant construction issues </strong><br /><strong>The Principle of Good Faith - 诚实信用原则</strong><br />The nature  of a construction contract is such that it binds contracting parties to a long  term legal relationship. Given the multitude of obligations that each party owes  to the other under a typical contract, it is very important that parties act  according to their promises to ensure that the objectives of the contract are  achieved.&nbsp;<br /><br />However, during the course of a construction project, which  may run for several years, market conditions may change to the detriment of the  parties; for example, prices for construction materials may rise or fall or the  demand for the project may disappear. These changes may adversely affect the  parties&rsquo; relationship or may motivate one, or both the parties, to act in a  manner that is not consistent with the objectives or promises made under the  contract.&nbsp; In this regard, in the absence of an express term that requires  contracting parties to exercise their duties and rights with good faith, or a  term that creates a partnering or a pain-gain sharing type of relationship  between the parties; does the law impose a duty of good faith on the  parties?<br /><br />There is a substantial volume of treatise and case law from  common law jurisdictions that discusses the principle of good faith in the  context of contractual relationships. The writer understands that at present  there is no clear and overriding common law duty that requires parties to a  construction contract to observe the requirements of good  faith<sup>15.</sup>Arguably, this is attributable to the fact that the common  law courts have not been able to prescribe a clear meaning or definition for the  term &ldquo;good faith<sup>16</sup>&rdquo;. <br />In the UAE, the UAE Civil Code imposes an  obligation on contracting parties to abide by the terms of their  agreement<sup>17</sup>&nbsp;and that they must discharge their respective obligations  in a manner that is consistent with the requirements of good  faith<sup>18</sup>.&nbsp;The principle of &ldquo;good faith&rdquo; is a common feature of the  civil law system and is consistent with the principles of Islamic Shari&rsquo;ah which  underlies all laws in the UAE.&nbsp; However, there is no prescription on the  requirements of good faith; it is a matter of judgment for the court to decide  based on relevant facts and circumstances.It is perhaps easier to determine  whether a party has acted in bad faith rather than whether it has acted  consistent with the requirements of good faith. The writer submits that in  deciding the issue of bad faith the court should be invited to look into the  requirements of Article 106 of the UAE Civil Code. Pursuant to this article, a  party is prohibited from exercising its rights if:</p>
<p>&bull;&nbsp;it is intended to infringe the rights of another party;</p>
<p>&bull;&nbsp;the outcome is contrary to the rules of the Islamic Shari'ah, the law,  public order, or morals;</p>
<p>&bull;&nbsp;the desired gain is disproportionate to the harm that will be suffered by  the other party; or</p>
<p>&bull;&nbsp;it exceeds the bounds of custom and practice.</p>
<p>The principle of good faith is also encoded in the PRC Contract Law.&nbsp; An  English translation of Article 6 of the law states that &ldquo;The parties must act in  accordance with the principle of good faith, no matter in exercising rights or  in performing obligations&rdquo;.&nbsp; Even though there is no single or specific  provision in the PRC Contract Law that can be said to encapsulate similar  provisions as those set out under Article 106 of the UAE Civil Code, the writer  considers that one of the objectives of Article 106, which is to prevent a party  from abusing its rights, can be found in a number discrete provisions in the PRC  Contract Law.&nbsp; By way of example, Article 5 of the PRC Contract Law requires  contracting parties to uphold the principle of fairness<sup>19</sup>,&nbsp; Article  60 requires the parties to perform their obligations based on the character and  purpose of the contract or the transaction practices and Article 3 provides that  contracting parties shall have equal legal status and neither of them may assert  its will on the other<sup>20</sup>.&nbsp;&nbsp;<br /><br />The PRC Contract Law also imposes a  public duty on contracting parties which requires them to observe public laws  and social ethics and prohibits them from disrupting socio-economic order or  damaging public interests.&nbsp; It is interesting to consider what does the term  &ldquo;social ethics&rdquo; (社会公德) encompass and whether the People&rsquo;s Court would accept  that the abuse of one&rsquo;s contractual rights in disregard to the seriousness of  the harm that the other party may suffer could be looked upon as a violation of  social ethics.<br /><br /><strong>Liquidated Delay Damages -  约定的误期损害赔偿费</strong><br />In the context of construction contracts, the agreed  completion date or period is inevitably a fundamental term of the contract.&nbsp; To  ensure that the agreed date or period is adhered to, contracting parties often  agree in advance to a compensation mechanism or formula that will calculate the  amount of compensation that a contractor must pay to its employer in the event  of delay for which the contractor is culpable or responsible for (the liquidated  delay damages)<sup>22</sup>.&nbsp;In practice, the compensation mechanism or formula  is often fixed at a daily or weekly rate, for example, one hundred days of delay  at a pre-agreed rate of $1,000.00 per day will produce a liquidated delay  damages of $100,000.00.<br /><br />Both the UAE Civil Code&nbsp; and PRC Contract Law&nbsp;  allow contracting parties to fix a pre-agreed compensation mechanism or amount  in their contract.&nbsp; However, unlike common law jurisdictions<sup>25</sup> ,both  laws allow their respective courts, upon the request of either party, to vary  the pre-agreed amount of compensation or damages.&nbsp;In the context of the UAE  Civil Code, the court may vary the amount so to make it equal to the actual loss  or harm<sup>26</sup>. Official notes issued by the UAE&rsquo;s Ministry of Justice  explained that in exercising the power to vary the pre-agreed amount of  compensation the courts may either reduce or increase the amount; whereas under  the PRC Contract Law<sup>27</sup>,&nbsp; it is expressly provided that the court may  either reduce or increase the liquidated amount.<br /><br />In English law it is an  implied term that an employer to a construction contract must not prevent or  hinder the contractor from completing the contracted work<sup>28</sup>.&nbsp;This is  generally known in construction law study as the prevention  principle<sup>29</sup> (預碍原則).&nbsp;The effect of this principle is such that if the  employer&rsquo;s action, or inaction, prevented or hindered the contractor from  completing the works on time, and if there is no provisions in the contract that  would allow the contractor an extension of time due to the employer&rsquo;s action, or  inaction, then the agreed time for completion would be set at large, i.e. time  at large. This in turns renders the contractual provisions for liquidated  damages to be unenforceable.&nbsp;The follow on effect is that the employer can no  longer resort to the liquidated damages mechanism to recover delay damages from  its contractor; instead, it would have to bear the burden of proving and  apportioning the actual damages that it has suffered as a result of the  contractor&rsquo;s delays in order to recover its delay damages.&nbsp;<br /><br />Contractors  in the UAE would sometimes try to apply the prevention principle or the concept  of time at large in their attempt to defeat liquidated delay damages imposed by  their employers. Notwithstanding that it may be difficult to show that such  principle and concept are customarily used or recognised in the local  industry<sup>30</sup> , the writer considers that such argument is to a large  extent irrelevant because, as explained above, UAE law allows the courts to  review or vary the amount of liquidated damages to equal the actual loss in any  event regardless of whether there was any act of prevention on the part of the  employer.&nbsp; However, there may be a perceived advantage in arguing the  applications of the said principle and concept because if the argument is  successful the burden is then shifted to the employer for it to prove its actual  losses arising from any delays caused by the contractor as opposed to the  contractor having to show that the liquidated delay damages do not reflect the  employer&rsquo;s actual loss or that it is excessively high &ndash; however, this remains to  be seen.<br /><br />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.</p>
<p><strong>Footnotes </strong><br />1- The writer does not claim expertise in the  laws of the Republic<br />of China. The analyses and comparisons set out in this  article are<br />based on his interpretation of the English translation of the  relevant<br />Chinese law which have been reviewed by Mr Sun Wei,  General<br />Editor of the China Construction Law Review (<a href="http://www.cclr.org.cn/">www.cclr.org.cn</a>) and<br />Partner at  Zhong Lun Law Firm, Beijing, China (<a href="http://www.zhonglun.com/">www.zhonglun.com</a>).<br />The writer is  grateful to Mr Sun Wei and Mr Dean O&rsquo;Leary, Senior<br />Lawyer at Al Tamimi &amp;  Company (<a href="http://www.tamimi.com/">www.tamimi.com</a>) for their  inputs<br />and comments on this article.<br />2- FIDIC is the acronym for the  French version of the &ldquo;International<br />Federation of Consulting Engineers&rdquo; (<a href="http://www.fidic.org/">www.fidic.org</a>). The standard<br />forms  of contract published by this organisation are the most widely<br />used standard  forms of contract in the Middle East region.<br />3- The FIDIC Red Book form of  contract is used for building and<br />engineering works designed and supervised  by engineers/architects<br />employed by the employer.<br />4- With regard to  government contracts, there are specific<br />procurement laws that govern  them.<br />5- Articles 872 to 896 of the UAE Civil Code.<br />6- Article 872, in  translation, states that &ldquo;Muqawala&rdquo; is &ldquo;a contract<br />whereby one of the parties  thereto undertakes to make a thing or to<br />perform work in consideration which  the other party undertakes to<br />provide.&rdquo;<br />7- Excluding the Special  Administrative Regions of the People&rsquo;s<br />Republic, namely, Hong Kong and  Macao.<br />8- Promulgated through Order [1999] No.15 of the President of  the<br />People&rsquo;s Republic of China<br />9- Chapters 15 and 16 of the PRC Contract  Law.<br />10- The UAE Civil Code is largely based on the Jordanian and  Egyptian<br />Civil Codes, which in turn, are heavily influenced by the French  Civil<br />Code; whereas laws in the PRC have Russian&rsquo;s and German&rsquo;s civil<br />law  influences.<br />11- Generally, this principle provides that the decision (ratio  decidendi)<br />of a court is binding precedent until and unless it is overturned  or<br />reversed by a higher court. Therefore, the decisions of the common<br />law  courts are an important source of law in the common law system;<br />whereas, in  the civil law system, previous decisions are persuasive<br />and  explanatory.<br />12- The courts in the emirate of Dubai are independent from the  UAE<br />federal court system, however, similar practice is also largely  being<br />followed in the Dubai courts.<br />13- At page 5, Practical Guide to  Litigation and Arbitration in the<br />United Arab Emirates, 1st Edition, Kluwer  Law International.<br />14- Article 2(2) of the UAE Commercial Code and Articles  46, 50 and<br />246(2) of the UAE Civil Code recognise and uphold the binding  effect<br />of custom practice.<br />15- It is interesting to note that the  Australian courts have, in limited<br />circumstances, taken a more liberal  approach on the question of<br />good faith between contracting parties. However,  this is by no<br />means conclusive that there is a clear and overriding duty of  faith in<br />all cases in Australia.<br />16- Whilst there may not be an overriding  duty of good faith<br />imposed on contracting parties in most common law  jurisdictions<br />(if not all), there is an implied term under common law  applicable to<br />construction contracts that an employer must not prevent or  hinder<br />a contractor from completing its work. This implied term is  further<br />discussed in the following section.<br />17- Article 243(2) of the UAE  Civil Code.<br />18- Article 246(1) of the UAE Civil Code.<br />19- An English  translation of Article 5 reads &ldquo;The parties shall abide<br />by the principle of  fairness in defining the rights and obligations of<br />each party&rdquo;.<br />20- The  writer is of the view that it is possible to extend the reading<br />of this  provision to mean that no party shall be allowed to unfairly<br />assert its  contractual rights against the other.<br />21- Article 7 of the PRC Contract  Law.<br />22- See relevant contractual provisions at Clause 47 and  Sub-Clause<br />8.7 of the 1987 and 1999 FIDIC Red Book Conditions  respectively.<br />23- Article 390(1) of the UAE Civil Code<br />24- Article 114 of  the PRC Cpntract Law<br />25- In common law jurisdictions, the courts will uphold  pre-agreed<br />liquidated damages unless it is deemed to be a penalty or, in  some<br />jurisdictions, deemed not to be a genuine estimate of the  employer&rsquo;s<br />losses.<br />25- Article 390(2) of the UAE Civil Code.<br />27-  Article 114 of the PRC Contract Law.<br />28- Some relevant English cases are:  Holme v Guppy (1838) M &amp; W<br />387, Dodd v Churton [1897] 1 QB 566, Peak  Construction (Liverpool)<br />Limited v McKinney Foundations Limited [1970] 1 BLR  111<br />29- This general principle has been adopted by many common  law<br />countries, e.g. Malaysia, Singapore, Australia, Hong Kong,  New<br />Zealand, India and Canada.<br />30- Sub-Clauses 44.1(d) and 8.4(e) of the  1987 and 1999 FIDIC<br />Red Book Conditions respectively allows a contractor to  claim an<br />extension of time for any delay, impediment or prevention  caused<br />by an employer. Therefore, it would be difficult for a contractor  to<br />succeed in arguing the application of time at large concept if  the<br />foregoing FIDIC conditions are present in the contract.</p>