United Arab Emirates: Back to Basics - Players to a Construction Project – The Subcontractor in UAE Law

Introduction

This is the second article in a series of short articles which will look at some of the basic features of construction and engineering contracts under the law of the United Arab Emirates.  The first article1 looked at how a contract for construction work (a muqawala)2 is treated under UAE law, and this article will take a brief look at the underpinning in law of certain aspects of a subcontractor's relationship with the employer and main contractor, principally in terms of liability and payment.

As mentioned in our first article, Articles 872 to 896 of the UAE's Federal Civil Transactions Law No. 5 of 1985 (Civil Code) provides the legal framework for muqawala contracts and these provisions concern not just the employer, or the contractor, but also extend to subcontractors and certain designers.

The Employer and the Contractor

As a starting point, Article 877 of the Civil Code defines the key obligations between an employer and (main) contractor, as the principal players, in these terms:

"The contractor must complete the work in accordance with the conditions of the contract.  If it appears that he is carrying out what he has undertaken to do in a defective manner or in a manner in breach of the agreed conditions, the employer may require that the contract be terminated immediately if it is impossible to make good the work, but if it is possible to make good the work it shall be permissible for the employer to require the contractor to abide by the conditions of the contract and to repair the work within a reasonable period. ..."

We note that termination (to use an English language expression) under UAE law is a complex topic, outside the ambit of this article.

Subcontracting and the Civil Code

Given the nature and complexity of most construction projects, it is unlikely that many contractor's will alone possess all the requisite skills and resources to undertake and complete a large project, and consequently it is almost always necessary for some or all of the work to be subcontracted to third parties.  Article 890(1) of the Civil Code expressly recognises this:

"A contractor may entrust the performance of the whole or part of the work to another contractor unless he is prevented from so doing by a condition of the contract, or unless the nature of the work requires that he do it in person".

It is important to note that a contractor may subcontract the works, unless there is a contractual prohibition on so doing.  This was confirmed in a Union Supreme Court3, wherein it was stated:

"The law permits the contractor to entrust the performance of the whole or part of the work to one or more sub-contractors 'the second contractor', unless there is a condition in the contract prohibiting him from doing so, or unless the nature of the work requires that he should carry it out himself.  The relationship between the first contractor and the second contractor is governed by the contract by which the first entrusts the second with the performance of the works specified."

Should a contractor choose to subcontract the whole or part of the works to a subcontractor, the contractor remains liable to the employer for the performance of the works, and, the employer will be entitled to hold the contractor liable for defective or incomplete works, despite the contractor not having not actually performed the work.  This principle extends to instances where an employer has insisted that the contractor subcontracts the works to an identified subcontractor. Article 890(2) of the Civil Code states:

"The first contractor shall remain liable as towards the employer."

Employer liability to the Subcontractor

In the absence of a direct contract between the subcontractor and the employer – something which is quite rare (as to which see below), a subcontractor cannot compel an employer to pay it.  This principle is reinforced by Article 891 of the Civil Code, which states:

"A sub-contractor shall have no claim against the employer for anything due to him from the first contractor unless he has made an assignment to him against the employer."

This was confirmed in a decision by the Union Supreme Court4, wherein it was stated:

"The effect of the provisions of Articles 890 and 891 of the Civil Code is that there is no direct relationship between the employer and a sub-contractor or second contractor, and that the first head contractor is the person responsible to the employer, and the sub-contractor has no direct right of claim against the employer for anything owed to him by the head contractor...".

Subcontractor liability to the Employer

The 'flip-side' to this is the difficulty, if not impossibility, of an employer being able to sue direct a subcontractor for defective work.  Hurdles created by the absence of a legal nexus between the employer and a subcontractor are often overcome in some jurisdictions by contractual devices such as a collateral warranty agreement (or sometimes called a duty of care agreement) between the employer and subcontractor, which gives the employer a direct contractual right to sue the subcontractor. 

Some such documents are more sophisticated tripartite agreements (employer/contractor/subcontractor), and also contain a procedure by which an employer, faced with a contractor seeking to terminate the main contract or a subcontractor the subcontract, can 'step-in' to the shoes of the contractor and prevent termination of the subcontract and act as if it were the contractor, but in so doing also assume certain of the payment obligations to the sub-contractor.  However, these type of documents are not common in the Middle East in day-to-day contracting, and for many subcontractors would not be welcomed given the additional risk and limited benefit they bring.

Payment by the Contractor

A subcontractor in this region often finds itself in a precarious payment position especially if the subcontract governing the relationship between the contractor and the subcontractor contains a 'pay when paid5' or a 'pay if paid6' clause. 

There is authority to support the proposition that if a subcontractor has duly performed its obligations, and the clause is a 'pay when paid' clause (and not a 'pay if paid'), then ultimately the contractor must pay the subcontractor, even if the contractor has not been paid by the employer7.  The courts will likely enforce a true 'pay if paid' clause.

In either case (i.e., pay when paid or pay if paid), the contractor must show evidence that it has pursued the employer for payment.

Footnotes

1 Our first article looked at how a contract for construction work (a muqawala) is treated under UAE law: Back to Basics – The Construction & Engineering Contract.

2 Article 872 of the Civil Code provides, "A muqawala is a contract whereby one of the parties thereto undertakes to make a thing or to perform work in consideration which the other party undertakes to provide."

3 611/Judicial Year 27.

4 108/Judicial Year 22

5 Generally, this is interpreted to mean the subcontractor gets paid when the employer pays the contractor; payment to the contractor is not a condition precedent to the contractor's obligation to eventually have to pay the subcontractor.  In other words, it's a question of timing.

6 Generally, this is interpreted to mean the subcontractor only gets paid if the employer pays the contractor; in other words, payment to the contractor is a condition precedent to there arising a payment obligation on the part of the contractor to the subcontractor, and if there is no payment to the contractor then there is no obligation to pay the subcontractor.

7 Dubai Court of Cassation, Case 281/1995.  There are, however, cases supporting a contrary position, and enforcing such clauses against the subcontractor (e.g., Dubai Court of Cassation, Case 267 of 2007).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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