EPC Contracts: The main risks for international companies in the UAE

EPC contracts: The main risks for international companies

Practical guide for contractors and customers

Mainstream

An EPC contract is not just a document about the volume and timing. It is a system of risk-sharing, financing and responsibility for the years ahead.

The main question for an international company entering the project in the UAE is not “what price and completion date”. The main question is what risks are already included in the contract and how they will manifest themselves when circumstances change.

Effective EPC project management begins with three checks:

• Where the contract hides the unilateral rights of the customer.
• What mechanisms of contractor protection really work under the law of the UAE?
• What will happen to guarantees, withholdings and liability when deadlines fail?

If these three issues are not analyzed before signing, a company could win the tender and lose its margin, reputation, or entire business in the region in the first major dispute.

When EPC Contract Risks Become Critical

Risks enter a critical phase if:

• the scope of work is formulated blurred or through reference to the requirements of the customer;
• The schedule is tied to unrealistic KPIs with tough sanctions.
• The mechanism of changing the price and terms for additional work actually does not work;
• the customer requires unconditional guarantees of execution and retention without reference to progress;
• The contractor’s liability is not limited or limited only nominally.
• The applicable law and arbitration clause do not take into account the specifics of the UAE’s offshore jurisdictions.
• Force majeure and changes in legislation are described in a template, without reference to the region;
• Subcontractors are selected without the approval of the back-to-back contractual arrangements.
• The contract is subject to English law, but the construction site is onshore UAE, where the Civil Code operates.
• The ten-year liability under Article 880 of the UAE Civil Code is not taken into account.

The mistake most EPC project participants make

Most international contractors focus on the commercial proposal and project plan. The due diligence of the contract is considered a formality.

It's not right.

The right approach: Legal analysis of the contract determines not only disputes, but also the operational and financial results of the project. Sometimes the best contract is not one where the price is lower, but one where price and timing mechanisms work predictably.

EPC projects do not require a project response to problems, but a contractual strategy laid down before the start.

Step 1. Analyze the contract model and structure

EPC is not a single type of contract. In practice, there are:

• Classic EPC with a fixed price (lump sum turnkey)
• EPC divided with the allocation of design, procurement and construction in different packages;
• EPCm (EPC management) without direct construction
• Hybrid models with open book on a part of volumes;
• Contracts with target cost and gain/pain share mechanism.

Each model distributes the risk of cost, delay and quality differently. An error in the choice of a model at the start leads to a systemic conflict of interest throughout the project.

Key provisions to be analysed before signing:

• Definition of the scope of work;
• the order of priority of the contract documents;
• Design standards and applicable technical standards;
• conditions of transfer of the site and obtaining permits;
• the stage acceptance mechanism, including mechanical readiness and final delivery;
• the rights of the customer to intervention and instruction;
• Change management procedures.

Step 2. Check the distribution of risks between the customer and the contractor

In the UAE, the practice of shifting most risks to an EPC contractor is common. This is not always obvious from one point, but it becomes clear when you read the contract in the complex.

Particular attention should be paid to the risks:

• hidden conditions of the site (ground risk);
• Delays in obtaining permits and visas;
• changes in UAE legislation and technical regulations;
• non-compliance of design solutions with local normal;
• disruptions in logistics and supply chain;
• Increase in the cost of materials;
• errors and omissions in the tender documentation of the customer.

If the contract imposes these risks solely on the contractor without a time and money compensation mechanism, the project is structurally unprofitable when any of the above events occur.

Step 3. Variations: Managing Change, Not Fighting It

Changes to the EPC project are inevitable. It is critical that the contract contains a working mechanism of variations.

A strong mechanism for change should include:

• clear procedure for initiation (only in writing, authorized representatives);
• the obligation of the customer to assess the impact on the price and the period before the start of the modified works;
• the right of the contractor to suspend the modified work in the absence of approval;
• formula for calculating additional costs, including disruption and prolongation;
• Rejection of the presumption that minor changes are compensated for within the contract price;
• The right to increase the price of the contract and extend the terms not only with direct instructions, but also with inaction or delay of the customer.

Without such a mechanism, the changes are converted into free additional works with the customer’s only argument: “It was in your lump sum.”

Step 4. Liquidated damages and liability for delay

Liquidated damages (LD) is a standard EPC contract tool. The risk for an international contractor is not in the availability of LDs, but in their size, basis of calculation and the absence of restrictions.

Particularly hazardous structures:

• daily rate, not tied to the price of the contract, but to the hypothetical damage of the customer;
• No common ceiling (cap) for LD
• simultaneous use of LD for late completion and performance of warranty KPI;
• a mechanism whereby LDs are deducted directly from payments without a court order or arbitration;
• LD after termination without taking into account the fair proportion.

By law of the UAE, the accrual of pre-estimated losses (Article. 390 Civil Code) is permitted, but the court may reduce them to the amount of real damage if they are excessive or the underlying obligation is partially fulfilled. But relying on judicial adjustment alone is a strategically weak position. Protection must be in the contract itself.

Step 5. Guarantees of performance and retention

Performance guarantees and retention are financial instruments that can create a critical cash gap.

Risks that require analysis:

• the amount of the guarantee (unconditional, on the first demand, conditional);
• The warranty return period (not the date of mechanical readiness, but the final acceptance or even the warranty period);
• the right of the customer to partially disclose the warranty without good reason;
• Retention – up to 10% of each payment is found in the UAE market;
• Retention release time – often divided into two parts: after taking-over and after the expiration of the warranty period;
• absence of interest on the withheld amounts;
• Replacement of the bank guarantee.

Weak regulation of these conditions turns the earned but not paid profit into interest-free lending to the customer for years.

Step 6. Select applicable law and jurisdiction, taking into account the specifics of the UAE

International EPC contracts in the UAE are often subject to English law with arbitration in DIFC, DIAC or ICC. But when the construction site is onshore UAE, it is impossible to completely exclude the application of the mandatory norms of the Civil Code of the UAE.

Direct impact on risks:

• Ten-year liability (Decennial Liability) 880 UAE Civil Code – The contractor and the designer are jointly and severally liable for collapse or total defects of the building for 10 years. This is a mandatory rule that cannot be excluded by contract.
• Good faith can be used to correct English standards of interpretation.
• Public order of the UAE – affects the possibility of execution of a foreign arbitration award in terms of punitive damages, interest and certain types of guarantees.

The choice between onshore courts, offshore courts (DIFC/ADGM) and arbitration is not a technical but a strategic issue, on which the execution of the decision, the timing and the procedure depends.

Step 7. Subcontracting and supply chain risks

The EPC contractor remains responsible to the customer for the subcontractors. It is not enough to simply appoint a subcontractor – you need to ensure a back-to-back matching of obligations and risks.

Critical points:

• identical terms and LD in the subcontracting contract;
• synchronized guarantee periods;
• the right of direct claim of the customer to the subcontractor (collateral warranty);
• mechanism for subcontractor replacement in case of non-performance;
• payment terms to the subcontractor – it is desirable to link them to the receipt of funds from the customer (pay-when-paid) taking into account the restrictions of local law;
• The risk of bankruptcy of a key subcontractor or supplier.

The liability gap between the general contract and subcontracting packages is a direct route to losses that cannot be outsourced.

Step 8. Force majeure and change of circumstances

The template force majeure clause, copied from international practice without adaptation to the UAE, is a source of major risks.

For the region, critical:

• extreme heat and weather conditions;
• delays in government permits and visas;
• Changes in customs regulations;
• Restrictions related to pandemics and quarantine;
• sanctions and compliance restrictions;
• delays caused by the actions of the UAE government.

In addition to the list of events, the contract shall determine the consequences of: automatic extension of terms, the right to suspension, the right to reimbursement of additional costs for a long downtime, the right to withdraw from the contract with prolonged force majeure.

The UAE also has a doctrine of extraordinary circumstances (art. 273 Civil Code – al-hawadith al-tari’ah, which allows the court to intervene in the balance of obligations, but relying on judicial discretion in the EPC project is unacceptable – the mechanism must be prescribed by contract.

Step 9. Settlement of disputes: arbitral tribunal

In EPC contracts with an international element, arbitration is preferred, but the choice of institution and place of arbitration should be made conscious.

Options in the UAE:

• DIAC (Dubai International Arbitration Centre) is the main onshore institution, with new rules starting in 2022.
• ADCCAC (Abu Dhabi) – for projects in the capital.
• DIFC-LCIA (historically), now replaced by Dubai International Arbitration Centre with the ability to administer cases under English law.
• ICC, LCIA, SIAC are neutral international centers with the possibility of holding hearings in the UAE.
• DIFC Courts and ADGM Courts are offshore courts of general jurisdiction operating in English law that can act as supporting jurisdiction for arbitration.

Errors in the arbitration clause – the plurality of forums, the ambiguity of the place of arbitration, the incompatibility of language and law – give the opposing party the opportunity to delay the resolution of the dispute for months before the start of the consideration of the merits.

Step 10. Withdrawal strategy and termination

Every EPC contract should be analyzed not only in terms of execution, but also in terms of output.

The risks are concentrated in the following provisions:

• the right of the customer to terminate the contract for convenience (termination for convenience);
• formula of compensation to the contractor in case of such termination (cost reimbursement, loss of profit, payment for the work performed, cost of demobilization);
• grounds for termination by the contractor – delay in payments, systematic intervention, non-provision of the site, prolonged force majeure;
• consequences of termination through the fault of the contractor - the transfer of guarantees, documentation, equipment to the customer without compensation or at residual cost;
• Destiny of retention and warranties after termination.

The terms of exit are not a hypothetical section. This is the real value that the company will gain or lose when the project is terminated.

Comparison: onshore UAE, offshore courts and arbitration in EPC disputes

The choice of the instrument depends on the location of the object, the right, the assets of the debtor and the objectives for the execution of the future decision.

How to strengthen your position before signing an EPC contract in the UAE

Better risk management begins at the tender stage.

An EPC contract must include:

• detailed scope of work and references to standards with an indication of the editorial board;
• an exclusive list of the documents forming the contract and the order of their priority;
• the mechanism of mandatory approval of variations before the start of work;
• the contractor’s liability ceiling (cap on liability), which excludes indirect losses;
• Limit the liquidated damages percentage of the contract price;
• a clause on the contractor's right to extend the deadlines and compensation in case of delays caused by the customer;
• the right to replace retention with bank guarantee;
• Force majeure clause adapted for the UAE, with the right to reimbursement of expenses for prolonged downtime;
• clear regulation of termination for convenience with compensation for lost profits;
• back-to-back guarantees with subcontractors and direct agreement;
• the right to direct contact with the engineer/consultant of the customer and the terms of consideration of requests;
• Sanctions, anti-corruption and compliance clause.

A contract should not be written for a happy scenario, but for conflict management.

Typical mistakes of international companies in EPC contracts in the UAE

1. Winning a tender due to an aggressive price without taking into account the risks of variations and LD turns into losses.
2. Ignoring Ten Years of Liability Even in Choosing English Law 880 Civil Code will be applied.
3. The European draft clause does not take into account that in onshore UAE the enforcement of an arbitration award requires compliance with local public order.
4. Underestimating the time and cost of dispute resolution: EPC dispute arbitration is not fast. Cash flow should take into account the retention freeze during the dispute.
5. Hope for verbal agreements and “special relationship” with the customer After the dispute arises, only documents are valid.
6. The risk of a subcontractor default falls entirely on the general contractor.
7. By law, the UAE deadlines may differ from the usual standards, especially in construction disputes.
8. Inattention to the transition of intellectual property Project documentation often goes to the customer irrevocably.
9. Emiratisation, Local Content (ICV) and Licensing requirements affect cost and timing.
10. The mechanism of suspension of work and the right to withdraw from the contract should be prescribed.

Contractor checklist: 15 Questions Before Signing an EPC Contract

1. Is the scope fully defined and are hidden conditions excluded from the price?
2. What documents are in conflict with the law?
3. What is the liability ceiling and does it apply to LD?
4. Is there a working mechanism for variations with time and money estimates before work starts?
5. Where is the cap for liquidated damages set and are they excluded from the general liability limitation?
6. What is the retention rate and the conditions for its return, can you replace the guarantee?
7. Is there compensation for prolongation and disruption if the customer does not act?
8. How is the force majeure regulated, taking into account regional risks and the right to withdraw?
9. Which arbitration institution and place of arbitration are selected, are they compatible with the place of execution?
10. Does the contract provide the right to suspend work in case of non-payment?
11. What are the consequences of termination for convenience, does compensation cover loss of profits?
12. Under what conditions does intellectual property transfer to project documentation?
13. Are back-to-back terms agreed with key subcontractors?
14. Are the UAE’s mandatory rules, including decennial liability, taken into account?
15. Which team will manage contract risks on the site and has the authority to record instructions?

What a Strong EPC Risk Management Strategy Looks Like

A strong strategy includes five levels:

1. Not just a review, but a structural analysis of the distribution of risks: scope, price, time, guarantees, responsibility.

2. Financial modeling of cash flow, taking into account retention, payment delays, advances of subcontractors and the cost of bank guarantees.

3. Operational rules for fixing instructions, notices, daily reports and correspondence that create an evidentiary basis for future claims.

4. Legal Choice of Law, Forum and Dispute Resolution Strategy, Ensuring Enforcement of Decisions at All Levels – Onshore, Offshore and Cross-border.

5. Action plan for the implementation of the worst-case scenario: termination, default of the customer, bankruptcy of the key participant.

Without a level five, the top four may not save a business if a project fails.

FAQ

Can the liability of a ten-year guarantee be limited under Article 880 of the UAE Civil Code? Responsibility for the collapse and critical defects of the building comes within 10 years, and it cannot be excluded by contract. This risk can and should be insured.

What is best for an EPC contract in the UAE: English or UAE law? - Depends on the project. English law provides predictability for international parties, but UAE mandatory rules (e.g. decennial liability, good faith rules) will apply to the onshore construction site. A combined approach with DIFC/ADGM arbitration and local rules is often optimal.

Under many contracts, the customer is entitled to do this before the issuance of an arbitration or court decision. It is important to require a mechanism whereby the disputed portion of the LD is deposited on escrow until the final settlement is reached to prevent an unjustified cash gap.

What to do if the customer does not agree on variations, but requires additional work?The contract should contain the contractor’s right to suspend such work, as well as a clear procedure in which the absence of a customer’s response in time is considered consent to the assessment of time and cost. Without such leverage, the contractor performs the work at his own expense.

For offplan projects that involve funds of buyers, there may be special requirements. Otherwise, the arbitration clause itself does not require registration, but it is important to ensure that it is enforced through local courts in case interim measures are necessary.

Can an EPC contract be terminated due to prolonged non-payment? By default, UAE law provides for the possibility of terminating the Muqawala contract in certain cases (Article I. 892 Civil Code), but contractual notice procedures must be followed strictly.

Related services

• Construction, Energy & Infrastructure
• International Arbitration & Cross-Border Disputes
• Commercial Contracts & EPC Risk Advisory
• Regulatory Compliance & Sanctions
• Corporate Investigations & Business Integrity
• Asset Tracing & Enforcement in the UAE

Related material

• How to choose an arbitration clause for a construction contract in the UAE
• Ten-year liability of the contractor under UAE law: border and defence
• Managing variations and claims in EPC projects
• English Law vs UAE Law in Construction Disputes
• Recognition and enforcement of arbitral awards in the UAE
• Subcontracting in EPC: How to Build a Secure Chain
• Liquated damages: Protecting the Contractor from Excessive Sanctions
• Force Majeure and Changes in Circumstances in Construction Projects in the Middle East

Conclusion

An EPC contract for an international company in the UAE is not just a construction agreement, but a management of systemic risks stretched over time. The key dangers are concentrated not in one point, but in the intersection of scope, variations, liquidated damages, retention, force majeure and choice of law.

A strong position is based not on the reaction to the customer’s requirements, but on the protection mechanisms laid down in the contract, adapted to the legal realities of the UAE. The winner is not the one who offers the lowest price. The winner is the one who knows before signing how the project will end under any scenario and has turned this knowledge into legally binding contractual clauses.