Lawyers have warned that contractors in the UAE could be hit with bills of millions of pounds owing to the rise in the number of developers calling in performance bonds
The bonds are guarantees put up by contractors as security for developers under the terms of most UAE contracts and are usually worth 10% of the contract value. They differ from performance bonds in the UK because they are typically provided on an “on demand” basis, meaning sums are paid out before the client has to prove work is faulty.
Legal experts have warned that as more bonds are called in by under-pressure developers in the region, particularly in Dubai, contractors will increasingly face cash flow difficulties.
Paul Taylor, a partner at HBJ Gateley Wareing, said: “It has become the first port of call for many clients trying to ease cash flow.”
One major contractor in the region, which declined to be named, said the calling in of bonds was a growing problem for contractors working with “less scrupulous developers”.
It has become the first port of call for many clients trying to ease cash flow
Paul Taylor, lawyer
Another said: “It’s a sensitive subject. We’re trying to avoid contracts that include on-demand bonds – with varying success.”
Paul Suckling, a partner in law firm Holman Fenwick Willan, added: “Two years ago, calling in bonds would have been seen as the final straw – it was unheard of. Now, clients are much more commercially aware; it’s a worrying time for contractors working in the UAE.”
Contractors can contest a claim, but lawyers warn that this can take years to resolve.
Developers have also started to increase the value of performance bonds, with one lawyer saying he was aware of a contractor with a bond that was worth 30% of a project.