Preservatory interim measures for not paying certified payments

By Ahmed Ibrahim, Partner, Fenwick Elliott

Construction contracts typically provide for payment certification processes. To progress payment, the contractor, as a common practice, is required under the contract to provide a detailed breakdown of the work carried out for which payment is sought. After the valuation of the works by the certifier, usually the engineer, the contractor obtains an interim payment certificate or a final payment certificate, as the case may be. Standard forms generally provide for an employer’s obligation to pay the certified payments within a certain time frame.  For example, under Sub-clause 14.7 of the FIDIC Red Book, the employer shall pay the contractor: “the amount certified in each Interim Payment Certificate within 56 days after the Engineer receives the Statement and supporting documents; and the amount certified in the Final Payment Certificate within 56 days after the Employer receives this Payment Certificate”.

In case of conflict or dispute, employers may unilaterally opt to withhold payment of certified amounts regardless of whether grounds for such withholding exist or not. There are also cases where the employer suffers a lack of funding and consequently stops payment. These are not uncommon scenarios between employers and contractors or main contractors and subcontractors, and the ultimate result is a cash flow issue on the payee’s part.

Unlike most common law jurisdictions, there is no statutory adjudication in the UAE. Adjudication might otherwise have been used by contractors in the above scenarios to obtain a binding but not final decision compelling the employer to pay. On the other hand, contractual adjudication does not appear to be an effective means in the UAE given the lack of enforcement teeth. As a result, contractors attempt to find alternative approaches to effect payments or at least to preserve their rights.   

Legal action in reliance on payment certificates

Most construction contracts provide for arbitration as the ultimate means of dispute resolution. However, contractors tend to be reluctant to initiate arbitration unless they have no choice but to do so. This is understandably to avoid the significant costs, time and effort that are typically associated with any arbitration.

Instead, there may be cases where the contractor can at least preserve their rights by way of relying on Payment Certificates to obtain a preservatory attachment order. This approach may also be elected as a pressure tactic to motivate the employer to settle certified payments. From an employer’s perspective, an early settlement, given the attachment over its own assets, would obviously be a preferable route.

A preservatory attachment order is a legal method of freezing/holding assets on a temporary basis until a final judgment is issued in the merits of a dispute. Attachment orders may apply to assets or monies in the possession of the debtor (the “Possessed Assets”), or on assets owned by the debtor that are in the custody of a third party (the “TP Assets”). Examples of Possessed Assets are the company’s movable assets, vehicles, equipment, office furniture, etc. Examples of TP Assets are the funds in the company’s bank accounts, company shares listed in the capital market, shares and bonds owned by the company in the custody of a third party and any other due entitlements of the company with a third party. 

Preservatory attachment orders are issued ex parte, meaning without having to first notify the debtor, by a summary judgment in most cases within the same day of the application.  Ex parte attachment orders are designed to provide urgent relief, for instance because there is a risk that the assets in question would be dissipated if the respondent was given notice of the application. To issue an attachment order the summary judge must see proof of a debt.  UAE law provides very little guidance on the meaning of debt except that it be liquid and due. In practice, the UAE courts tend to treat Payment Certificates as sufficient proof of an acknowledged debt. 

Before issuing such an attachment order, the summary judge usually requires the applicant to sign an undertaking declaring its responsibility for any losses incurred by the debtor should it be proved later that the applicant had no right to seek such an order.

A preservatory attachment order on the debtor’s assets is provided for under Articles 140 and 252 of the UAE Civil Procedure Code (the “CPC”), which sets the general rules of the preservatory attachment orders. Particular provisions covering the procedures for attachments over Possessed Assets and TP Assets are found in Articles 253–266 of the CPC.  

The summary judge has a wide discretionary power to allow or dismiss an application for an attachment order. In practice, for the application to succeed, the applicant must show a debt and a risk that the debtor’s assets may be dissipated before a final decision on the merits of the dispute has been rendered.         

Effective pressure tool 

In practice, the use of preservatory attachment orders to apply pressure to motivate payment seems to be a successful tool in many cases. To apply efficient pressure on the employer, the contractor would obviously need to ensure the obtaining of a broad order that particularly includes the freezing of the employer’s bank accounts. To do so, specific banks must be notified so that the summary judge can order them to disclose the debtor’s accounts. It is worth noting that seeking the summary judge’s order to identify the bank accounts of the debtor through the UAE Central Bank will likely fail because this function is not provided for in the Central Bank’s laws and regulations.

If the employer is a publicly listed company, an attachment over its shares in the capital markets would certainly be a serious and effective pressure factor.  

After a preservatory attachment order is rendered, the contractor must file an application called a Validation of Attachment Order and Establishment of Substantive Rights (the “Validation Application”). This is a mandatory action that the creditor should take within eight (8) days, starting from the date on which the attachment order is issued.

The Validation Application includes two aspects: (i) validation of attachment order, and (ii) establishment of substantive rights. Since the contract likely contains an arbitration agreement, the state court judge would have no jurisdiction to hear the substantive merits of the dispute.  In this case, the common practice is that the applying party seeks the judge’s decision merely with regard to the first aspect (the validation of attachment). However, the summary judge would need to see proof that at least a request for arbitration has been filed. To do so without incurring considerable cost, contractors commonly file a simply drafted request for arbitration with payment of the arbitration registration fees, which are relatively low (e.g. AED 5000/US Dollar 1361 for DIAC cases).

The employer will be notified that a Validation Application has been filed and will be invited to provide written submissions and attend a hearing on the same.

As such the employer’s reaction to a preservatory attachment order can either be to wait until the Validation Application has been filed by the contractor, or to immediately file a grievance before the same judge who issued the attachment order. In either case, the employer would need to challenge the payment certificates, if possible, and deal with the risk that the element of danger that its assets will be dissipated prior to the arbitration being resolved.  

In practice, employers tend to adopt an amicable settlement approach to avoid undesirable consequences of attachment orders. The use of this pressure tool is widely common in the UAE; however, legal advice must be sought to ensure that the strategy can be adopted in the particular circumstances, and that the attachment application is properly filed.   

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