Challenges facing the Middle East construction industry: price escalation

Price escalation is a widespread concern amongst many contractors in the Middle East. The price of steel has increased globally, whilst shipping costs have increased fivefold and are unsustainable. In our new series of market insights, we explore the key challenges facing the construction industry in the Middle East, commencing with price escalation.

In this article, we discuss the challenges of increased costs and the potential options available to contractors operating in the UAE to recover their additional costs.

The UAE Code, Article 887(1) provides: “If a muqawala contract is made on the basis of an agreed plan in consideration of a lump sum payment, the contractor may not demand any increase over the lump sum as may arise out of the execution of the plan.” 

In order words, in relation to a lump sum construction contract, a contractor will not be paid any more than the lump sum agreed for performance of his contractual obligations. The starting point is therefore a statement of the obvious, which is often missed, namely that there needs to be a sound legal basis for any claim to additional payment.

Inflation isn’t caused by the employer; he isn’t at fault. There is no entitlement to additional money just because it seems unfair (and concepts of good faith, abuse of rights and ‘estoppel’ will not assist). A proper legal basis will need to be identified and articulated.

There are three potential legal bases available to a contractor:

1. An entitlement to additional cost pursuant to the terms of the construction contract. The terms of the construction contract could include specific clauses which provide a mechanism for a contractor to recover actual cost if certain events take place, or an escalation or “cost adjustment” clause which defines the circumstances in which inflation gives rise to a specific entitlement pursuant to the contract.
2. A breach of contract, which generates an entitlement to compensation in respect of the actual loss that is suffered by a contractor, which may include an inflation element.
3. Article 249 of the UAE Civil Code, which deals with “exceptional circumstances” of a public nature, and empowers a court or arbitral tribunal to rebalance the contractual obligations between the employer and contractor where the six conditions of the article have been fulfilled.

We expect price escalation will continue to be a prevalent concern across the global construction sector in 2022. Alexa Hall and Richard Harding QC explore the options available to contractors in our podcast.

Follow our Project and Construction podcast channel

If you would like to learn more about this subject or have a related legal query, please contact our Projects and Construction specialists.