Nakheel scores tribunal victory

Nakheel, Dubai's biggest government-owned developer, has scored a key legal victory in the Dubai World Tribunal

Al Shafar General Contracting obtained a guarantee in the Jumeirah Heights project.

A judge at the Dubai World Tribunal has cleared the way for Nakheel to cash up to Dh192 million (US$52.2m) of advance payment guarantees posted by a pair of contractors.

The ruling on Sunday was one of the Tribunal's most significant so far in favour of Nakheel, Dubai's biggest government-owned developer.

Nakheel had previously suffered a series of setbacks in the Tribunal, a judicial body set up to handle claims against its parent, Dubai World, as the larger company underwent a sweeping restructuring.

In his ruling, Justice Sir John Chadwick said Nakheel could recover money it paid in advance for construction contracts that were cancelled after the global financial crisis sent Dubai's property market reeling.

"It cannot have been the intention of the parties that the unrecovered amount of the advance payment should be written off by the employer [Nakheel]," the judge wrote.

The contractors, Al Shafar General Contracting and Nurol, had asked the Tribunal in separate cases for orders restraining Nakheel from cashing in advance payment guarantees they took out with local banks.

Al Shafar's guarantee related to a contract worth just over Dh1 billion that it won in 2008 in the Jumeirah Heights project near Jumeirah Lakes Towers.

Nurol won a contract worth nearly the same amount at about the same time to build 453 villas at Jumeirah Park, a large residential development near Jumeirah Heights.

Advance payment guarantees are common in the construction industry. Advance payments function much like loans to contractors intended to help them get started on projects.

An advance payment made by a developer to a contractor is typically secured through a bank guarantee, with the developer as beneficiary of the guarantee, and a contractor's liability to the developer is reduced as construction milestones are met.

Justice Chadwick said that although there was no specific language in the contracts about how advance payments were to be treated in the event of termination, "it must be taken to have been their common understanding and intention that the amount of the advance which had not been recovered … was a sum which, at the date of termination, would be recoverable by the employer [Nakheel] from the contractor".

In Al Shafar's case, the judge said the application for an injunction "should be dismissed" on those and other grounds, clearing the way for Nakheel to recover about Dh52m of advance payments. Nakheel could also cash in up to Dh140m of advance payment guarantees posted by Nurol, the judge ruled.

Nakheel's setbacks in the Tribunal before its victory on Sunday included a recent decision awarding Dh2.5m to an investor in the company's Jumeirah Islands development.

Sunday's decision also marked the Tribunal's increasingly precise distinction between insurance mechanisms commonly in play in construction contracts.

The judge described a limited scope for contractors to apply to the Tribunal to stop payment on advance payment guarantees, citing rulings in which contractors had to allege and show evidence of fraud or bad faith.

That contrasts with the somewhat less stringent standards for seeking injunctions on cashing performance bonds.

The Tribunal last October blocked Nakheel from cashing tens of millions of dirhams worth of performance bonds in a case brought by Bin Belaila Baytur, an Emirati-Turkish joint-venture company working on the Jumeirah Park development.

The Tribunal's rulings are not subject to appeal.

Nakheel declined to comment. Nurol and Al Shafar could not be reached for comment.