Arabtec completed the Burj Khalifa in 2010 © Karim Sahib/AFP via Getty Images
Arabtec completed the Burj Khalifa in 2010 © Karim Sahib/AFP via Getty Images

Construction sector in ‘state of chaos’ after Arabtec collapse

20 October 2020

The liquidation of Arabtec could have a “significant impact” on subcontractors and the wider UAE construction industry, lawyers have warned.

Law firm Abdulla Alawadi & Associates said Arabtec’s liquidation alongside the Covid-19 pandemic had created a “state of chaos” for the construction industry. 

Abdulla Alawadi, chairman of the law firm, said: “Subcontractors and suppliers dealing directly with the main contractor in cases of liquidation of the main contractor such as Arabtec could experience a significant impact on their businesses and may also have to bear other financial challenges during this period.

“Firstly, payments from developers to contractors/subcontractors are in constant scarcity or have even completely stopped. Secondly, the reduction of the headcount of construction workers made it even harder to deliver projects on time. 

“Thirdly, there are other procedural aspects that forced itself onto the scene and obstructed the delivery of units to purchasers, such as the VAT on developers, which could amount to millions of dirhams for major developers.”

Shareholders of Arabtec, the contractor which helped build the world’s tallest building the Burj Khalifa in Dubai, decided the firm should file for insolvency at the beginning of October after reporting a net loss of $213m in the first half of 2020. 

Waleed Al Mokarrab Al Muhairi, chairman of Arabtec, blamed “limited liquidity in the construction sector” which had been “exacerbated by the effects of Covid-19”. 

“Despite efforts to pursue legal and commercial entitlements and a restructuring of the company’s finances and operations, the situation in which Arabtec finds itself today is untenable,” he said. 

Abdulla Alawadi & Associates said the pandemic had caused confusion in the construction industry concerning the handover of prolongation costs and other rights and obligations, which impacted stakeholders along the supply chain.

Hesham El-Samra, senior associate – litigation at the law firm, explained: “In case of the liquidation of the main contractor and if the developer is unable to complete the project on time then, the purchaser/customer has the right to cite the relevant articles and defend his rights where claims can be initiated for unjust enrichment or termination of the agreement. 

“Other aspects must be taken into consideration, like acting in good faith and serving formal notification to the party in breach. Considering the above, if the court ruled for the termination of the contract, then refund, i.e. what has been already paid by the purchaser and damages, might be granted.”

However, Hesham added the liquidation of Arabtec would allow competition in the UAE construction industry to ease up.

“The situation of suppliers not dealing with Arabtec or willing to enter the UAE market now is more promising and there's a good chance to expand and grow, since the competition will ease up a little bit,” Hesham said.

“Furthermore, it will take suppliers engaged with Arabtec sometime in order to get over this situation and they may have to raise external sources of funding to meet their current obligations.”

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