Construction disputes are a common occurrence in the United Arab Emirates (UAE) and can involve various parties such as owners, designers, and contractors. The main methods used to resolve these disputes in the UAE include negotiation, mediation, arbitration, and litigation.
Some of the main causes and consequences of construction disputes include:
Common Causes:
- Poor contractual arrangements and inadequately drafted contract terms
- Employer-initiated scope changes
- Unforeseen site conditions or changes
- Poor contract understanding and administration
- Issues with contractor’s quality of work
- Inability of the contractor to meet time targets
- Non-payment or delayed payments
- Poor quality of design
- Errors in claim submissions
- Conflicts over construction delays
Consequences:
- Financial costs – The average cost of construction disputes in the US was $42.8 million in 2022
- Project delays and disruptions
- Damaged relationships between parties
- Potential for legal action, including litigation or arbitration
- Negative impacts on stakeholders’ expectations
- Time and resources diverted to dispute resolution
- Possible suspension of work in extreme cases
To resolve disputes, many parties turn to arbitration as an alternative to litigation. Arbitration is seen as potentially faster and more economical, while also offering benefits like flexibility, privacy, and the ability to select arbitrators with specialized construction knowledge.
How do UAE courts typically handle disputes over penalty clauses in construction contracts
UAE courts typically handle disputes over penalty clauses in construction contracts as follows:
- Validity and enforceability: UAE law acknowledges the validity of penalty clauses in agreements, and courts are generally empowered to enforce them.
- Presumption of harm: When a penalty clause is included in a contract, UAE courts typically presume that harm has occurred automatically upon breach, without requiring the claimant to prove actual damages. This shifts the burden of proof to the defendant to disprove the correlation between the breach and the harm.
- Judicial discretion to adjust penalties: While penalty clauses are generally enforceable, UAE law grants judges the discretionary power to adjust the amount specified in a penalty clause or cancel it altogether if they determine it is too abusive or unfair to one party.
- Liquidated damages for delay: Courts have confirmed that pre-agreed liquidated damages can only be applied in cases of late completion, not for partial or non-performance of works. In such cases, the employer is entitled to claim damages under other contractual or statutory provisions.
- No distinction between penalties and liquidated damages: UAE courts do not typically draw a distinction between pure penalty clauses and liquidated damages provisions. Both are generally treated similarly under UAE law.
- Burden of proof for liquidated damages: Since liquidated damages are consensual, the employer is not required to prove actual damages before levying them under the contract. However, the level of damages claimed must be commensurate with the loss suffered by the employer, in accordance with Article 390 of the UAE Civil Code.
- Lump sum vs. remeasured contracts: The Dubai Court of Cassation has reaffirmed the distinction between lump sum and remeasured contracts in estimating the price of variations, which can affect how penalty clauses are applied.
- Expert evidence: While courts often rely on expert evidence in construction disputes, they retain discretion to adopt or reject expert findings related to penalty clauses and damages.
UAE courts generally enforce penalty clauses in construction contracts, but they have the discretion to adjust or cancel them if deemed excessive. The burden of proof typically shifts to the defendant to disprove harm once a penalty clause is invoked, and courts treat liquidated damages similarly to other penalty provisions.
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