The importance of local knowledge

Dubai World's recent woes remind contractors of the need for care and caution on international projects.

One month ago, Dubai World asked its lenders for a six-month “standstill” on debt repayments. As a major investment vehicle of the Dubai government, news it might be in financial difficulties sent shockwaves through stock markets.

It is now seeking to restructure its debts and those of property development subsidiaries, Nakheel and Limitless. The announcement last week that Dubai has secured $10bn of financial support from its UAE neighbour, Abu Dhabi, appears to have re-established some market confidence. This funding should cover Dubai World's interest payments and operating costs until an arrangement can be reached with its creditors.

Nevertheless, the episode serves to highlight some of the issues for UK contractors in doing business in Dubai's developing economy.

Good due diligence remains paramount

Some have questioned whether Dubai World's lenders' due diligence identified the absence of a sovereign guarantee of indebtedness. Only the banks themselves can answer that but it is likely they knew. This should have been clear from Dubai Law No. (3) of 2006, under which the company was established.

Contractors should reduce exposure by watching for signs that the employer is experiencing cash flow difficulties. The industry press and grapevine should be monitored

Statutes aside, obtaining detailed financial and corporate information from public sources can be difficult in the UAE. Contractors should consider requiring employers to disclose relevant documents.

Stay vigilant

Contractors should reduce exposure to outstanding monies by chasing up late payments and watching for signs that the employer is experiencing cash flow difficulties. The industry press and grapevine should be monitored, and contract processes reviewed for possible weaknesses.

Consider payment security

In a bankruptcy or winding-up of an employer, contractors are likely to rank as unsecured creditors and stand last in line for repayment. Contractors should therefore ask for security where they have concerns about the employer's financial covenant. It the risk cannot be satisfactorily reduced, trade credit insurance or uplifting of the contract price can be considered.

Understand local systems

Specialist knowledge is important. Insolvency in the UAE, for instance, is governed principally by the Commercial Transactions Law and the Commercial Companies Law. Contractors should familiarise themselves with the provisions – the Civil Procedures Code provides, for instance, that public assets of the federal government or any of the seven emirates cannot be seized in any bankruptcy or winding-up.

The past month has underlined another gap in the insolvency regime – it does not apply to Dubai World which is a company formed by decree. Its establishing law should have either stated that the federal insolvency code applies or prescribed alternative provisions.

Contract amendments may be required to ensure it works with the insolvency regimes for the jurisdiction of each party's domicile and the place the project is being carried out

It did neither, but the government moved swiftly to rectify this with decree no. 57 of 2009. This set out a restructuring framework for the company and its subsidiaries and established a tribunal of distinguished international judges to supervise any reorganisation and determine related disputes.

The insolvency code is based on that of Dubai's financial free zone, the DIFC, rather than the federal one. This was a prudent election since the DIFC regime is the more developed.

Consider contractual and other rights

The FIDIC form influences the majority of construction contracts in the Gulf. Its standard wording permits the contractor to terminate upon the occurrence of certain events which may indicate that the employer is insolvent. Nonetheless, contract amendments may be required to ensure it works with the insolvency regimes for the jurisdiction of each party's domicile and the place where the project is being carried out (note that UAE courts have bankruptcy jurisdiction over foreign companies operating in the country). This should help avoid any doubt as to whether a party was entitled to terminate.

If a contractor believes its employer may be insolvent, it should ascertain its contractual rights and whether it has the benefit of any payment security. Other remedies will depend on the governing law of the contract. If UAE law applies, article 879 of the civil code may allow the contractor a statutory lien. It should also examine its supply chain. Do sub-contracts include pay when paid clauses (permissible under UAE law)? Can they be terminated?

Contractors should be wary of what an unscrupulous employer might do in retaliation for, or to discourage, the contractor taking action. Unconditional bonds - popular internationally - enable the employer to call without having to prove any entitlement. The risk of a wrongful call may be mitigated by drafting the contract and any bonds to prevent this and incorporating a mechanism in any performance bond for its value to automatically reduce as the project progresses.

Dubai is not quite the Wild West some commentators have depicted it as. Similar to other developing economies, sensible parties should identify, monitor and mitigate at all stages of the project. Understanding the local market and its laws is an essential part of this.