China’s Belt and Road Initiative and developments in the construction sector in the UAE
China’s Belt and Road Initiative (the BRI) promises an economic and commercial development strategy that is unmatched by any other global trade programme. As the United Arab Emirates (UAE) sits geographically on the crossroads of the programme, cooperation between China and the Emirates is of great importance to the success of the BRI. The UAE not only has excellent transport links, but is also home to large ports that are well positioned to service trade between Asia, Africa and Europe.
China is one of the UAE’s largest trading partners with bilateral trade reportedly forecast to grow to US$70 billion by 2020. The exchange of skills and experience, materials and resources in the construction industry is the reason for much of this success.
As a consequence of the BRI, the UAE started to gear up for becoming the hub for Chinese inbound investments into the Middle East and Africa. Multi-billion dollar infrastructure projects have recently been announced by the UAE, which it is anticipated will help the UAE to create a centre for trade to the region and a gateway to Africa and the wider Middle East.
To support ongoing commercial cooperation between the UAE and China, the UAE has taken important steps towards the modernisation of the Emirates’ federal legislation in civil and commercial matters and enhanced judicial cooperation between the two nations:
New arbitration laws
In 2018, the UAE enacted new arbitration laws, largely modelled on the United Nations Commission on International Trade Law (or UNCITRAL) Model Law on International Commercial Arbitration. It adopts a modern and favourable approach to arbitration and addresses problematic procedural issues that arose under the previous arbitration regime. Arbitration has always been a preferred dispute settlement mechanism for international contractors carrying out work in the UAE, specifically those active in the energy and power projects. Although the UAE governmental entities can still impose the country’s local court system in their tendering process, it is anticipated that an increasing number of disputes in various high value projects will be settled by arbitration.
Introduction of the Foreign Direct Investment Law
In 2018, the UAE also relaxed the rules relating to restrictions on foreign ownership of UAE companies, with the introduction of the Foreign Direct Investment Law (Federal Law No. 19 of 2018). The new law provides a framework for foreign shareholders to own up to 100% of companies in certain designated sectors.
In June 2019, the UAE Cabinet (the executive branch of the Federation of the UAE) announced a list of 13 sectors that will be eligible for up to 100% foreign ownership. The construction sector is one of those sectors eligible to offer new economic opportunities for international investors, including investors from China, looking to explore the UAE market. It is reported that in excess of one hundred economic activities will fall under the 13 eligible sectors. It is anticipated that construction will have the lion’s share, particularly in infrastructure, renewable energy and hybrid power plants.
Historically, a common reason for construction disputes has been the structure of the project company underpinning the nationality requirement, previously fixed at 51% of the shares. With a regulatory framework now in place allowing a similar approach (between the UAE and other jurisdictions) to risk management and financing, shareholders’ disputes are expected to decrease. In addition, the smoother process in approving interim payments and variations should help facilitate timely completion of projects.
Memorandum of Understanding
On 26 October 2016, the Dubai International Financial Centre Courts (the DIFC) and Shanghai High People’s Court entered into a Memorandum of Understanding on Judicial Cooperation. As set out on the DIFC website this represented a “milestone supporting the “One Belt and Road” initiative”, with the agreement strengthening “bilateral collaboration between the two courts, paving the way for the judiciaries to work together more closely as commercial courts.”
In search of a permanent presence in the UAE, the BRI is likely to encourage continued international merger and acquisition activity to invest and develop the UAE’s infrastructure, particularly as a result of China’s growing interest in the Middle East and African construction markets. The legislative developments described above, are likely to be welcomed by contractors in China, however, entering into new markets always has its challenges. Therefore, it is always advisable to have a thorough understanding of the UAE’s legal and regulatory environments, and more specifically the legal and mandatory provisions governing the construction industry, from the design stage through to maintenance and operation.