- December 17, 2019
- Construction and Infrastructure Lawyer
It is no secret that the construction and infrastructure industry is a cornerstone of Dubai’s economy. According to the Dubai Statistics Centre, construction and infrastructure projects added 14.5% more to the emirate’s economy in 2018, compared to 2017, for an additional AED 25 billion in GDP. Government spending on infrastructure projects also increased significantly with a 32% surge in spending during 2018.
Though the sector has always been robust, increased foreign investment, the government’s continued commitment to advancing innovative and cutting-edge infrastructure projects, and the upcoming EXPO 2020 have ushered in exceptional growth and development across the sector. With over 4,792 construction projects currently active across the emirate, many companies are now seeking legal guidance from construction and infrastructure lawyers in Dubai to navigate the issues and concerns that arise from delayed payments and bonds during complex projects worth several million dirhams.
For a wide variety of reasons, payments between main contractors, sub-contractors, and other parties may be delayed, sometimes excessively so, during the construction process. Delays can lead to cash shortfalls, which, in turn, can significantly hinder project timelines and subject parties to the risk of substantial financial loss. That’s one reason why, in the UAE, bonds are required for almost all significant construction projects.
More specifically, bonds called ‘demand guarantees’ are increasingly popular across the construction and infrastructure sector as delayed payments continue to stymie cash flow. Found within most FIDIC contracts, demand guarantees require the guarantor to deliver an immediate cash payment to the beneficiary upon demand. This cash payment is usually limited to a maximum of 10% of the contract’s value and can provide much needed cash when a party is faced with delayed payments.
Under Articles 411 and 414 of the Federal Law of 1993, the guarantor, which is almost always a bank or other financial institution, is obliged to pay a demand guarantee to the beneficiary “unconditionally and without restriction.” The bank, as guarantor, ensures its own liability is covered by securing a counter-indemnity from another bank or, more likely, from the customer for whom it provided the demand guarantee. It is then a simple matter of recouping the demand guarantee using cash from the customer’s account or line of credit. The customer has an extremely short amount of time to seek legal counsel from construction and infrastructure lawyers in Dubai to try to prevent the seizure of its assets by its own bank.
With relatively simple fulfilment criteria, more parties, including main contractors and sub-contractors, are relying on demand guarantees to provide much needed cash flow when payments are delayed. However, such a tactic may compound the problem by causing liquidity issues for another project stakeholder as well as potentially negatively affecting the parties’ working relationship.
With such an active construction and infrastructure sector, delayed payments and bond calls cause significant difficulties for all of a project’s stakeholders and require professional legal support. Construction and infrastructure lawyers in Dubai can assist clients by offering practical legal guidance grounded in real world expertise.
For more information about how experienced construction and infrastructure lawyers in Dubai can assist you, contact Abdulla Al Awadi Advocates & Legal Consultants at +971 4 335 2200 or firstname.lastname@example.org.