Subcontract works under UAE Law
Subcontracting is quite popular in today's construction business. Without engaging third parties with diverse experience and capacities to carry out certain aspects of the works, it would almost likely be unmanageable for one contractor to complete a construction project, especially if the project entails a certain level of complexity.
However, from the standpoint of the project owner, it appears more ideal to hire one primary contractor who is accountable for all other subcontractors. Having stated that, it is not unexpected that the major participants in most construction industry are the project owner may it be the employer and client, the actual contractor, and the subcontractor.
The United Arab Emirates Civil Transactions Code enables the main contractor to subcontract the entire or a portion of the task to a 3rd party without gaining approval from the employer, except as otherwise defined in the agreement or if the implementation of the work is dependent on the contractor's professional efficacy.
In reality, however, employers are likely to have some control over the principal contractor when it comes to subcontracting the job and selecting subcontractors. The extent to which such control is exercised varies. The contract may limit the extent of subcontracting by forbidding subcontracting the entire scope of work.
This provision is quite prevalent in conventional contract forms; for example, Clause 4.4 of the FIDIC Red Book 1999 stipulates that the Contractor must not outsource the whole Works. The contract may also require the primary contractor to get the prior agreement of the employer or even the engineer before engaging a potential subcontractor if the employer has not identified that subcontractor.
The subcontractor may be recommended by the employer or chosen by the primary contractor . The subcontract agreement must be signed by both the primary contractor and the subcontractor in both circumstances. As a result, no explicit contractual relationship exists between the company as well as the subcontractor. As a consequence
A - the subcontractor is not contractually accountable to the employer for late delivery or faulty work; and
B- the employer is not contractually obligated to the subcontractor for payment of its subcontract agreement rights.
Subcontractor’s Liability to the Employer
A well-established principle in UAE law is Privity Contract . In typical situations, because the subcontractor is not a party to a contract with the employer, it has no legal obligations to the succeeding owners or employers. The construction agreement between the employer and the primary contractor may not impose a duty on the subcontractor unless the latter accepts such duty.
In reality, employers may demand subcontractors to offer a collateral guaranty on which the employer can depend to pursue direct accountability from the subcontractor for faulty work. As per United Arab Emirates' law, a collateral warranty is valid& enforceable . Pursuant to Article 276 of the Civil Transactions Code, it is considered a unilateral act; hence, the subcontractor is obligated by its provisions according to Article 278. A collateral warranty would often include provisions for assignment and step-in rights to guarantee that the employer can assign the warranty's responsibilities to other beneficiaries such as succeeding owners or renters.
Whether or not a collateral warranty is issued, the primary contractor is nonetheless accountable to the employer for the subcontractor's performance, pursuant to Article 890(2) of the Civil Transactions Code. In numerous situations, the UAE courts stressed that the primary contractor is contractually accountable for the subcontractor's conduct or defaults even if the subcontractor really carried out the employer's instructions over the course of the project.
Because the aforementioned Article 890(2) does not distinguish between nominated and domestic subcontractors, the prevailing norm is that the primary contractor's obligation remains in force in the event of a nominated subcontractor. However, the principal contractor may have a defense basis by contesting the element of causation, which is required for the creation of contractual liability.
In a famous decision of the Dubai Court of Cassation in case No. 266 of 2008, the court ruled that when the subcontractor is chosen by the employer or its consultants, the employer is accountable for any delay in the execution of the subcontracted component, and the prime contractor is not accountable for any delay penalties if they can establish that the problem was caused by such subcontractor and also that the principal contractor had no involvement in the wait.
Since the court provided no stated threshold for violating the wide norm provided in Article 890, the grounds for this verdict have been disputed . As a result, this disputed decision is viewed as an exception to the general rule that the primary contractor's responsibility continues even when selected subcontractors are engaged.
Nonetheless, in some instances, a principal contractor may depend on the preceding judgment as a defense basis. For this defense to be successful, the prime contractor must correctly prove to the court that it has executed its contractual obligations, along with its supervisory responsibility, and that the postponement or faulty performance couldn't be prevented for causes directly related to the appointed subcontractor's mistake. If the principal contractor has no authority to object to the selected subcontractors, there could be a supporting basis for this defense to succeed.
To limit its risk, the main contractor may demand an indemnification clause in the main contract, often if the contract does not provide for a right to object to nomination. This clause requires the employer to compensate the main contractor against and from the effects of the nomination.
Employer’s Liability to the Subcontractor
There is no direct contractual tie between the employer as well as the subcontractor, as demonstrated above. As a result, the employer is under no responsibility to the subcontractor.
Furthermore, Article 891 of the Civil Transactions Code states that the subcontractor may not demand any dues to the main contractor from the employer unless delegated to do so by the main contractor.
As a result, the subcontractor has little choice except to seek payment from the principal contractor. Practical issues arise when a “pay-when-paid” clause is included in the subcontract agreement, which is routinely enforced by primary contractors. Pay-when-paid agreements are legally enforceable in the UAE. A pay-when-paid provision prevents the subcontractor from claiming its dues from the primary contractor until the latter has been paid by the employer. If the subcontractor files a lawsuit against the primary contractor before the latter has been paid, the court may reject the case on the grounds that the claim was filed prematurely.
To mitigate the harshness of “pay-when-paid” clauses, the subcontractor may try to get a direct payment requirement from the client via contract negotiations. In practice, however, employers rarely accept this..
In exceptional instances, the subcontractor may argue that the employer's failure to pay is wholly the responsibility of the primary contractor. For instance, if the primary contractor fails to submit the needed performance bond under the primary contract. In other cases, the subcontractor may allege that the primary contractor is in violation because it did not pursue its claim against the employer. In this regard, it may be prudent for the subcontractor to negotiate a contractual condition requiring the primary contractor to pursue its claims against the employer to the maximum degree possible.
Ultimately, Article 247 of the UAE Civil Transactions Code to halt work if payment is not received maybe invoked by the subcontractor . However, this authority must be employed with caution, especially in the absence of a contractual right to cease job performance for nonpayment. A subcontractor must seek legal counsel to guarantee that the right to suspend provided for in Article 247 can be utilized in their specific circumstances.
A number of factors should be considered when determining whether the subcontractor can exercise the suspension right, such as proper notification of the main contractor, successful performance of the subcontractor's primary obligations under the contract, and whether or not the payments are certified.
Subcontracting is legal in the Emirates and is widely used in practice. Standard forms frequently include provisions for limiting the terms of subcontracting. Subcontracting does not establish a direct relation between employers and the subcontractor as per United Arab Emirates law. As a result, the principal contractor is often held responsible for the successful delivery & performance of subcontracted work.
In some instances, the primary contractor may have reasons to defend itself from liability for nominated subcontractors. Unless there is a direct payment commitment, the subcontractor may not seek compensation from the employer. Pay-when-paid provisions are widespread in the UAE. However, there are ways to restrict the impact of such provisions in each circumstance.
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