Subcontracting in the UAE: Heba Osman, Fenwick Elliott
Subcontracting has become a necessity for modern construction projects due to the increased complexity and specialized nature of projects. Imagine a modern day project without subcontractors, where the main contractor would be required to maintain and pay a huge number of employees and workforce with various capabilities and specialisations regardless of the main contractors actual workload. This is simply unsustainable economically.
The use of subcontractors has hugely benefited the construction industry as it allowed main contractors to reduce their costs (and thereby contributed to overall reduction of project costs) and to mitigate risks through the sharing of these risks with the subcontractors.
The UAE law recognizes the main contractors need to subcontract the works. In fact, the UAE allows the main contractor not to only subcontract certain parts of the works but rather the whole of the works, unless (1) the construction contract contains a provision to the contrary or (2) where the contractor has been chosen for his person. This is provided for in Article 890 (1) of the UAE Civil Code reading:
The contractor may subcontract the performance of all or part of the work to another contractor unless a condition in the contract prohibits him for doing so, or unless the nature of the work is such as to require him to do it in person.
In respect of the first prohibition, most standard main construction contracts prohibit the main contractor from subcontracting the whole of the works, and in many instances also require that the main contractor obtain the prior approval of the employer or the engineer on the appointment of the subcontractor. For example the FIDIC 1999 Red Book provides clearly in its Sub-Clause 4.4 that [T]he Contractor shall not subcontract the whole of the Works.
In respect of the second prohibition, it is quite unusual that a contractor be chosen for his person in the context of a construction contract. This prohibition usually applies in the context of a personal service contract such as a contract for an artist to draw a painting or a singer to perform in a concert.
As such, it can be said that the general practice in the UAE construction industry is to only subcontract certain parts of the works. These subcontracts are generally governed by the same legal principles governing the main construction contracts. However, due to their nature, subcontracts contain some peculiar provisions and/or give rights to the employer or subcontractor vis-à-vis one another, which are worth considering in this article.
The Subcontract and incorporation of terms
It is not rare that subcontractors get hired through the issuance of a letter of acceptance, purchase order or similarly named documents. Such documents tend to set out the basic terms of the subcontract and in many instances incorporate either the standard subcontract form and/or the main contract itself.
The question that sometimes arises is whether these incorporated terms apply. The answer will depend on how clear is the wording of the provisions incorporating these terms. A clear wording would be something along the lines of It is agreed between the parties that the terms of document X will apply by incorporation and will be deemed part of this subcontract.
As such, it is quite important for subcontractors to ensure that they are aware of the terms being incorporated as part of their subcontract and must insist on being provided with such terms.
Privity of Contract
The principle of privity of contract is a cornerstone concept of the UAE law. This principle means that the rights and obligations arising from a contract are only enforceable between the parties of that contract and no third party may exercise such rights or obligations. In the context of a subcontract, which is a contract between a main contractor and a subcontractor, this means that the employer being a third party to this subcontract has no rights or obligations in relation to this subcontract.
However, due to the nature of construction projects and the employers need to be in control of certain aspects of the project, the employer in practice does retain some rights (through the contract) in respect of the subcontract such as the requirement for the subcontractor to provide certain warranties for the work carried out directly to the employer or if the employer retains the right to have subcontracts assigned to him if the main contract is terminated. These terms are usually found in the main contract rather than the subcontract itself.
Main Contractor Responsibility
Although UAE law allows the main contractor to subcontract the works, this does not diminish the main contractors liability for the work. In this respect, Article 890 (2) of the Civil Code provides that the main contractor responsibility vis-à-vis the employer shall remain as it is in respect of the subcontract works.
As such, any delay or failure by the subcontractor is deemed, in the eyes of the employer, as a delay or failure by the main contractor. This is, of course, unless the main contract provides otherwise. The FIDIC 1999 Red Book provides main contractors with the opportunity to divert of this position, and provides in Sub-Clause 4.4 that The Contractor shall be responsible for the acts or defaults of any Subcontractor, his agents, employees, as if they were the acts or defaults of the Contractor unless otherwise stated in the Particular Conditions.
As such, the basic position is that the main contractor remains responsible for all acts and defaults of any subcontractor vis-à-vis the employer, and therefore carries the burden of ensuring that subcontractors are properly selected, managed and controlled.
Domestic v Nominated Subcontractors
In this context, and while the basic position is that the main contractor remains fully liable for acts and defaults of his subcontractors, it is worth discussing domestic and nominated subcontractors.
Nominated subcontractors are those subcontractors that are named as such in the main contract or which the engineer instructs the main contractor to employ. The UAE law does not differentiate between domestic subcontractors and nominated subcontractors and therefore from a legal point of view, and absent any contractual conditions to the contrary, the main contractors liability for nominated and domestic subcontractors is the same.
However, the differentiation between domestic and nominated subcontractors usually emanates from the contract. For example, the FIDIC 1999 Red Book deals with the issue of nominated subcontractors in its Clause 5 and provides that a main contractor is under no obligation to hire a nominated subcontractor if (1) there are reasons to believe that the nominated subcontractor does not have sufficient competence, resources or financial strength to carry out the works, or (2) the subcontract itself does not provide for certain indemnifications to the main contractor, provided that the main contractor promptly notifies the employer of his objection:
If the employer insists on the contractor hiring this nominated subcontractor despite the main contractors objection and agrees to indemnify the main contractor from the consequences of the matter objected to, then the main contractor is obliged to hire this nominated subcontractor but due to this employers indemnity, it can be said that the main contractors liability has been shifted either in full to the employer or in part (depending on whether the matter indemnified materializes or not).
Another difference between domestic and nominated subcontractors is payment. The main contractor, under the terms of the main construction contract, has a general obligation to evidence that payment was made to the nominated subcontractors and if he fails to do so, then the employer has a right to make direct payments to the nominated subcontractor.
Payment and back to back provisions
The main position under the UAE law, is that the subcontractor has no rights vis-à-vis the employer unless is referred to the employer by the main contractor in accordance with Article 891 of the UAE Civil Code.
It is common in the UAE that subcontracts include back-to-back obligations or pay when paid provisions. In many other jurisdictions, back to back payment provisions appear to be considered illegal and/or have been nullified by courts. However, this does not appear to be the position adopted by the Dubai Courts that has upheld back-to-back payment provisions on the basis of the principle of freedom of contract. Nonetheless, from a practical point of view this position can spiral down causing damages to the smaller players in the market and in certain jurisdictions the regulator has interfered to prohibit these provisions and/or require the main contractor to provide the subcontractors with guarantees to ensure that payment would be made on time.
However, in the UAE, subcontractors may have the option to suspend carrying out the works under Article 247 of the UAE Civil Code on the basis that if one of the parties fails to perform his obligation, the other party is entitled to suspend the corresponding obligation.
Not all subcontracts are created equally. It is important that a subcontractor considers the actual provision of the subcontract agreement and ensure that it contains some form of guarantee for payment, or at least may allow its recourse against the employer.