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Sub-Contracts Management

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(Based on FIDIC Standard)

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FOUNDATIONAL KNOWLEDGE

FIDIC – SUBCONTRACTORS

“UNDERSTANDING THE RELATIONSHIP BETWEEN

MAIN CONSTRUCTION CONTRACTORS

AND VARIOUS TYPES OF SUBCONTRACTORS

WORKING ON CONSTRUCTON SITES”


FIDIC’S APPROACH TO

SUBCONTRACTORS

FIDIC’s Red Book, Sub-Clause (SC) 4.4, provides

for the basis of Subcontracting under their

provisions.1. Unless otherwise agreed the Contractor CANNOT subcontract the

whole of the works;2. The Contractor remains wholly responsible to the employer for the acts

of that subcontractor as if those acts had been carried out by him;3. The prior consent of the Engineer is required for all subcontractors apart

from suppliers and subcontractors named in the Contract;4. The Contractor must give the Engineer 28-days notice of both the

intended and actual commencement date of any subcontract’s work;and



SUBCONTRACTORS (CON’T)

5. The subcontract must contain suitable provisionsentitling the employer to require the subcontract toassigned to him in the event of termination. Sub-Clause (SC) 4.4(d) states:

– “…each subcontract shall include provisions which wouldentitle the Employer to require the subcontract to be assignedto the Employer under Sub-Clause 4.5 [Assignment of Benefitof Subcontract] (if or when applicable) or in the event oftermination under Sub-Clause 15.2 [Termination byEmployer]...”



SUBCONTRACTORS (CON’T)

FIDIC’s Sub-Clause 4.4, provides for the basis of

Subcontracting under the Red Book.

6. Whereas Sub-Clause (SC) 4.5 (Assignment of Benefitof Subcontract) reads:

– “..If a Subcontractor’s obligations extend beyond the expiry dateof the relevant Defects Notification Period and the Engineer, priorto this date, instructs the Contractor to assign the benefit of suchobligations to the Employer, then the Contractor shall do so.Unless otherwise stated in the assignment, the Contractor shallhave no liability to the Employer for the work carried out by theSubcontractor after the assignment takes effect…”


DIFFERENCES ACROSS FIDIC’S

RAINBOW: SUBCONTRACTORS

Under the Silver Book – for example – the Contractor only

has to notify the Employer of the appointment of a

subcontractor, but also providing pertinent details about thesubcontractor in question:

– Subcontractors past performance and experience– When they intend to begin work on the project;– Other information as required

Red and Pink Book, reference the language under 4.4(d) previously stated;

Gold Book provisions referencing subcontractors – state:

– “…If the Subcontractor is entitled to any relief from risk on broader terms thanthose specified between Contractor and Employer, then those additionalcircumstances shall not serve as an excuse for non-performance by theContractor…”


FIDIC’S RULE: CONTRACTOR

RESPONSIBLE FOR SUBCON ACTIONS

• REMEMBER: No matter what version of FIDIC, THECONTRACTOR WILL ALWAYS BE WHOLLY RESPONSIBLE for theperformance (or NON-performance) of the subcontractor.

• This includes time, quality and paying the subcontractor inaccordance with (IAW) the contract between the main contractorand subcontractor regardless of any issue between the maincontractor and the employer.

• THIS OBLIGATION – extends not only to subcontractorsappointed by the contractor (Domestic), but also to thesubcontractors NOMINATED by the employer in accordance withclause 5 of the Red Book. (SC 5.1)


SUBCONTRACTORS, CONTRACTORS

& EMPLOYERS

BASIC TERMINLOGY GROUNDING

SUBCONTRACTOR’S INTO

THE INDUSTRY OF THE UAE


CASE STUDY: SHANKLIN PIER LTD

V DETEL PRODUCTS LTD

• Shanklin Pier Ltd (hereinafter called “Shanklin” or

“Claimant”) owned a pier and intended to repair it.

(have it repainted);

• Detel Products (hereinafter called “Detel”), warranted

to Shanklin that their paint would provide rust

protection for up to 10 years;

• Claimant relied upon this warranty and when

engaging the Main Contractor (MC), instructed the

MC to place an order for this paint.

• The paint was judged a total failure after a short

period of time!!!



v DETEL PRODUCTS LTD

• Shanklin sought to recover damages direct

from the defendant (Detel) – NOT THE MAINCONTRACTOR – as the MC had not warranted the paintmaterials used, primarily because it had been thesubcontractor (Detel) that warranted the goods to theemployer originally;

• This despite the fact that the sale of the paint

product had taken place between the MC and

the defendant (Detel)




Shanklin Pier Ltd v Detel Products Ltd [1951]

2 KB 854 remains a leading judgment on the subjectof collateral contracts in English contract law.

In it the High Court of Justice, King's Bench

Division, used the principle of collateral

contracts, to create an exception to the ruleof privity of contract where a contract may begiven consideration by entering into another contract.

Judge McNairs’ Judgement read as follows.

https://en.wikipedia.org/wiki/Privity_of_contract

https://en.wikipedia.org/wiki/Consideration_under_English_law




“This case raises an interesting and comparatively novel question whether or

not an enforceable warranty can arise as between parties other than parties to

the main contract or the sale of the article in respect of which the warranty is

alleged to have been given.... I am satisfied that, if a direct contract of purchase

and sale of [the paint] had then been made between the plaintiffs and the

defendants, the correct conclusion on the facts would have been that the

defendants gave to the plaintiffs the warranties substantially in the form alleged

in the statement of claim. In reaching this conclusion, I adopt the principles

stated by Holt CJ in Crosse v Gardner and Medina v Staughton that an affirmation

at the time of sale is a warranty provided it appear on evidence to have been so

intended.”

https://en.wikipedia.org/wiki/Sir_John_Holt

https://en.wikipedia.org/w/index.php?title=Crosse_v_Gardner&action=edit&redlink=1

https://en.wikipedia.org/w/index.php?title=Medina_v_Staughton&action=edit&redlink=1




JUDGE McNair concluded his remarks on this

precedent setting case as follows:

“…If, as is elementary, the consideration for the warranty in the

usual case is the entering into of the main contract in relation to

which the warranty is given, I see no reason why there may not be

an enforceable warranty between A and B supported by the

consideration that B should cause C to enter into a contract with

A or that B should do some other act for the benefit of A...” [1]

[1] Beale (2002) p.55

https://en.wikipedia.org/wiki/Shanklin_Pier_Ltd_v_Detel_Products_Ltd

https://en.wikipedia.org/wiki/Shanklin_Pier_Ltd_v_Detel_Products_Ltd


IDENTIFICATION AND DESCRIPTION OF

SUBCONTRACTOR

“TYPES”

OPERATING AT A WORKS SITE


RELATIONSHIP BETWEEN

MC AND SUBCON - DEFINATIONS

• THREE TYPES OF ‘SUB-CONTRACTORS’;

– Domestic

– Nominated

– Named

• “…Domestic sub-contractor (SC) is one selected and employed by the Main Contractor (MC) for whom the MC is solely and entirely responsible…”

[Nick Gould, Partner – Fenwick Elliott]


RELATIONSHIP BETWEEN

MC AND SUBCON - DEFINITIONS

• “Nominated Subcontractor is selected by the Employer butemployed by the MC…”

• “Named Subcontractor is where the Employer names one ormore ‘preferred’ sub-contractors. To that list the MC may addfurther potential sub-contractors. The cumulative list is then usedfor tendering purposes and a sub-contractor is selected by the MC.The sub-contractor is then treated as a domestic sub-contractor ofthe MC, thus avoiding the employer liability disadvantages ofnomination, but still giving the employer some element ofinvolvement in the selection process.

• THIS type of SC derives from JCT forms of contract


SUBCONTRACTING

TYPES

Nominated Sub-

Contractor

Domestic

Sub-Contractor

Named

Sub-

Contractor


WHY USE ‘NOMINATED SUBCON?

• ALLOWS EMPLOYER and/or Employers selectedARCHITECT to identify a sub-contractor who is supplying along lead item or element of the work (example – a ‘lift’ orelevator, or other specialized equipment), and moreimportantly, secures a manufacturing and delivery slot beforethe MC has been selected.

• Another advantage is the selection of ‘specialist’ sub-contractors that is required to carry out some of the initialworks on site (Early Works). Examples of this type workusually involves foundation works (piling operations).


UAE LAW’S

THAT GOVERN

“SUBCONTRACTING”


CONTRACTORS ‘LEGAL RIGHT’ TO

SUBCONTRACT UNDER UAE LAW

• EMPLOYERS in the UAE – typically – prefer to enter

into a contract with one (1) Main Contractor for

the whole works – rather than to have several

separate contracts for the performance of

separate segments of works.

• Main Contractors rarely carry out the whole of

works themselves in the UAE, and generally use

more than one sub-contractor to carry out

portions of the works.


CONTRACTORS ‘LEGAL RIGHT’ TO

SUBCONTRACT UNDER UAE LAW

Main Contractors are granted the right to sub-contract their assigned works as derived under article

890(1) of the Federal Law No. 5 of 1985, under the

Civil Transactions Code of the UAE.

Under UAE Law – the Main Contractor is lawfully entitled toentrust the performance of the whole or part of the work to anothercontractor (sub-contractor) unless he is prevented from so

doing by a condition of the contract (such as per

FIDIC SC 4.4) or unless the nature of the work

requires the MC to do it in person.


SUB-CONTRACTORS ‘RIGHTS’ UNDER

UAE SUBCONTRACTING LAWS

Claims for Payment – by the sub-

contractor for performance rendered under asubcontract lies solely with the Main Contractor(Privity of Contract rule);

Sub-contractor has no legal basis toinstitute a claim against an employer for paymentdue from the MC for performance rendered undera subcontract.




“…Article 891, UAE Civil Transaction Code

prohibits a subcontractor from instituting a

claim against an employer for any amounts that

are claimable from the MC unless the MC has

given the subcontractor an assignment of

its rights against the employer…”




• NOTE:

“…Article 891, UAE Civil Transaction Code

prohibits a subcontractor from instituting a

claim against an employer for any amounts that

are claimable from the MC unless the MC has

given the subcontractor an assignment of

its rights against the employer…”


UAE CIVIL

TRANSACTION

CODE(a.k.a., “Civil

Code” REGARDING

SUBCONTRACTING

– SPECIFICALLY

“Article 891”

NOTE:

Online Access to

Official UAE website for

legal information:

http://www.elaws.gov.ae


Full

Text


UAE GOVERNING

SUBCONTRACTING LAWS

• Article 1109(1) of the UAE Civil Transaction Code

provide terms for validity of an assignment of rights is theconsent of the assignor, assignee, and the party in whosefavor the assignment is made.

• Unless expressly provided for under the main

contract – an Employer would only be entitled to make alawful direct payment to a sub-contractor for paymentdue under a subcontract in the event that all three parties(Employer, Contractor and Sub-Contractor) haveconsented thereto.


Article 1109 “legalese

wording” describing

direct payments to a

Subcontractor by the

Employer


Article 1109

1 – “The validity of a transfer is

conditioned upon the acceptance

of he transferor, the transferee

and the third party beneficiary.”

2 – “The transfer is formed

between the transferor and the

transferee provided it is accepted

by the concerned creditor”


UAE GOVERNING

SUBCONTRACTING LAWS

• Employers typically expressly provide in

the main contract with its MC, the right

to pay a sub-contractor directly and to

deduct the sums so paid from money due

the MC, particularly where the

subcontractor is a “nominated” sub-

contractor by the Employer.


UAE GOVERNING

SUBCONTRACTING LAWS

• BUYER BEWARE!!!

“…In the event that such direct payment is in

any way determined unlawful, the Employer

would then remain liable to pay the Main

Contractor for the same work and would have to

pursue the sub-contractor in a separate cause

of action for the recovery of the direct payment

made…”


FIDIC SUBCONTRACT 2011:

“CONDITIONS OF SUBCONTRACT

FOR CONSTRUCTION

OF BUILDING AND ENGINEERING”


UNDERSTANDING SUB-CONTRACTORS

RIGHTS UNDER CLAUSE 20 (2011 Subcontract)

Introduction:

Two FIDIC Documents Examined:

1. “Subcontract for Construction of Building and

Engineering Works designed by the Employer, 1st

Edition, 2011 (known as the ‘2011 Subcontract’)”[1]

2. “The Guidance for the Preparation of the Particular

Conditions of Subcontract (the ‘Guidance’)”[2]

[1] Lexology, November 2012

[2] Ibid


jjj


“Guidance for the Preparation of

Particular Conditions of Subcontract”.




Direct application of “Clause 20” of the ‘2011

Subcontract’ provides:

• An Alternative Dispute Resolution (ADR)

procedures similar to the Main Contract FIDIC Red

Book relief remedies, mainly:

– Disputes arising under a subcontract are first referred tothe Subcontracts DAB (Dispute Adjudication Board)and thereafter (if desired), dispute escalates to anarbitration panel for final determination.




Under item number two (2) above (Guidance for

the Preparation of the Particular Conditions of

Subcontracts) - there are two (2) optional ADR

provisions;

1. Simple Dispute Resolution Procedures involving onlyArbitration;

2. Complex mechanism intended to make the

Subcontractor bound by Main Contractor DAB

decisions and Arbitration awards on disputes

related to those under the Main Contract.




COURSE GOAL - FORWARD:

• Provide a “High Level” overview to course participantsregarding the second alternative clause 20 provisionsand highlight particular areas which

contractors and subcontractors should

be concerned with.


THE “SECOND ALTERNATIVE

CLAUSE 20”

as described in

“THE GUIDANCE FOR THE

PREPARATION OF THE PARTICULAR

CONDITIONS OF SUBCONTRACTS”

(known as the “Guidance”)


SECOND ALTERNATIVE CLAUSE 20

An Overview:

IMPORTANT POINTS:

• The Clause is separated into sub-clauses dealing with

the Subcontractor’s claims for extension of time (EOT)

and/or additional payment under the Subcontract (sub-

clauses 20.1 – 20.5) and disputes (sub-clauses 20.6 to

20.8);

• For claims for extensions of time and/or additional

payment, the Subcontractor is required to give notice

within 21 days of it becomes (or should have become)

aware of the event or circumstance giving rise to the

claim (sub-clause 20.1)



An Overview:

IMPORTANT POINTS continued:

• Such claims are then separated into “RELATED

CLAIMS” (claims that arise from circumstances which

may also give rise to a claim under the Main Contract or

otherwise concern existing claims or disputes under

the Main Contract) and;

• “UNRELATED CLAIMS” – which is any disagreement

between the parties on whether a claim is “Related” or

“Unrelated” will ultimately be referred to the ICC pre-

arbitral referee procedure (sub-clause 20.2)



An Overview:

• For Unrelated Claims – the Subcontractorputs forward its detailed claim to the Contractor. If

agreement cannot be reached in respect of

the claim, the Contractor is required to

make a “fair determination” (sub-clause

20.3)


CLAUSE 20, Related Claims

Under sub-clause 20.4, Contractor obligated to submit Related Claims to

the Engineer and Main Contractor must use “all reasonable

endeavors” to secure claim from the Employer. The Sub-contractor

is entitled to be involved in any meetings with the Engineer which

concerns the Related Claim, although there is no requirement in Red Bookthat obligates the Engineer to allow the Subcontractors to be present.



An Overview:

“Unless the Subcontractor is

present in those meetings, or

refuses to attend where

permitted to do so, the

Contractor is not allowed to

reach an agreement with the

Engineer on the Related Claim(s)

without ‘prior consultation’ with

the Subcontractor.”

Given that the sub-clause goes on to state that Subcontractors could be bound by thatagreement if they do not serve a notice of dissatisfaction within a prescribedperiod, Subcontractors would no doubt want this wording to do further and prohibit theContractor form reaching any agreement with the Engineer without its prior, written,approval.



An Overview:

• Sub-clause 20.4 continues to state that, wherethe Engineer and Contractor reach agreement on the RelatedClaim(s), or the Engineer issues a determination, such thatthe Contractor is entitled to an extension of time (EOT)and/or additional costs under the Main Contract – theContractor is required to pass the share of benefit(s)applicable to the Related Claim to the Subcontractor.

• HOWEVER; the Contractor is only liable to pass on monetarybenefits if it first receives payment from the Employer, which, islikely to be controversial.



An Overview:

• If the Contractor and Subcontractor disagree

what the Subcontractor’s share of the

benefit(s) will be, the Contractor will make a

“fair determination”, which the Subcontractor

will be bound by if it does not issue a notice of

dissatisfaction on time.

• IF HOWEVER - the Engineer and Contractor agree, or the Engineerdetermines, that no additional payment and/or extension of time (EOT)is due the Contractor under the Main Contract, then the Subcontractorwill be bound by this unless it serves a notice of dissatisfaction with theprescribed period.


SUBCONTRACT DISPUTES

Sub-Clause 20.6 – 20.8


CLAUSE 20 “Disputes”

An Overview:

Similar to Claims discussed in the last

section –

• Subcontract Disputes are categorized

into two categorizes:

1. Unrelated Disputes

2. Related Disputes



An Overview: Sub-clause 20.7

NOTE: “Disputes” arising from “unrelated claims”

and “related claims” AUTOMATICALY constitute

“Unrelated Disputes” and “Related Disputes”.

Accordingly;

• Sub-clause 20.7 – “Unrelated Disputes” – can bereferred by either the Contractor or the Subcontractor foradjudication by the Subcontract DAB.

• If either party issues a notice of dissatisfaction in relation to theSubcontract DAB’s decision the parties shall attempt to amicablysettle the dispute or proceed directly to the ICC Arbitration.



An Overview: Sub-clause 20.8

• Sub-clause 20.8 – “Related Disputes” – are initiallyreferred by the Contractor to the Main Contract DAB and theContractor is required to “use all reasonable endeavors” to pursuethe claim on the Contractor’s and Subcontractor’s behalf and forboth their benefit(s).

• The Subcontractor is required to provide information to theContractor to pursue the Related Dispute and is to be provided areasonable opportunity to be involved in (amongst other things)preparing written submissions an making oral submissions to theMain Contract DAB


Related Claims (SC 20.8) Chart

SC MC

Subcontractor shares common, related dispute with Main Contractor. Subcontractor supports the Main Contractor by suppling relevant and timely information related to the mutual dispute, and is

included in the all written submissions to the Main DAB. SC is allowed also to participate in “oral arguments” before the Main DAB.

DAB convenes Board and listens to Oral Arguments from both the MC and the Sub-Contractor

Main Contract attends DAB and presents joint Related Claim evidence for DAB consideration.

MC & SC share a similar Claim



An Overview: Sub-clause 20.8 (Con’t)

Sub-clause 20.8 – “Related Disputes” (continued)

• If the Subcontractor is not able to be involved in

the Main Contract procedure in this way then (which, again,is certainly likely given that, again, there is nothing in the Red Book that obligates

the Employer to agree to this) the Contractor is not entitled to

reach any settlement with the Employer on the

Related Dispute without prior consultation with

the Subcontractor.

• Concern for the Subcontractor: Contractor reaching anagreement with the Employer that might ultimately be binding onthe Subcontractor.





• The Contractor is required to notify the Subcontractor

of the Main Contract DAB decision, which will in turn bebinding on the Subcontractor unless it provides a notice of dissatisfactionwithin 7 days.

• If the Main Contract DAB finds in the Contractor’s favor,

then the Contractor has to use all reasonable

endeavors to secure the relevant benefit(s) form the

Employer, and keep the Subcontractor updated as to its progress. Aswith the Related Claims provisions, receipt of payment from the Employeris a condition precedent to the Contractors liability to the Subcontractorin respect of the same, and there is a similar provision in relation todetermining the parties’ respective shares of the benefit received.





• If the Subcontractor serves a notice of dissatisfaction

(NOD) wit the Main Contract DAB’s decision, the

Contractor will need to serve a corresponding notice to

prevent the Main Contract DAB’s decision from

becoming final and binding under the Main Contract.

• Under Red Book Conditions of Contract, the

Contractor’s NOD is a condition precedent to its

entitlement to refer the dispute for final determination

by the ICC arbitration.





• If the Contractor does not respond to the

Subcontractor’s NOD, or does not serve a

corresponding notice against the Main Contract DAB

decision to prevent it from becoming final and binding

under the Main Contract – then the dispute will be

considered an “Unrelated Dispute”.

• Sub-clause 20.7 will then apply. The Subcontractor will

essentially need to start again and refer the now

Unrelated Dispute to the Subcontract DAB for a

decision.


Employer Main Contractor

Disputes Adjudication Board

(1) Employer and MC come to resolution on Dispute presented at the Main Contract DAB.

Subcontractor

(2) However, upon informing the SC of the decision, the SC is not content, issues a Notice of Dissatisfaction (NOD) to MC7 Days Max before resolution is final, SC must notify MC

with NOD during this time

No guidance within FIDIC on timing of notification back to DAB or Employer of Subcontractor NOD from Main

Contract DAB Decision. Reasonable timing is thought to be same notification timing as Subcontractor – 7 days.

Employer Main Contractor

(3) Main Contractor, upon receiving NOD from SC, must then notify the Employer and DAB that their mutual decision reached earlier btw Employer and Contractor, cannot be implemented.

SC 20.8 RELATED DISPUTE GRAPHICAL

REPRESENTATION





• If the Contractor does issue a NOD under the Main

Contract, it will first try to reach a settlement with the

Employer and if, unsuccessful, will proceed to

commence ICC arbitration proceedings against the

Employer in respect of the Related Disputes under the

Main Contract.

• The Subcontractor will be given the opportunity to be

involved in the proceedings. [NOTE: Subcontractor will

NOT be entitled to become party to those proceedings]





• The award under the Main Contract arbitration is

deemed to be binding on the Subcontractor to the same

extent as it is binding on the Contractor.

• The contractual benefit of any award shall be shared

with the Subcontractor to an appropriate extent to be

determined by the Contractor.

• Any disagreement as to the level of the share shall be

deemed an Unrelated Dispute to be settled by

arbitration between the Contractor and Subcontractor.


RELATED DISPUTES –

Depicted Graphically

ICC Arbitration Decision

Main Contractor

Sub-Contractor

Arbitration Decision is binding on both MC

and SC, unless monetary award to SC is not agreed. In this case, a new disputes

is recorded as a “unrelated Dispute”

Favorable Decision awarded to MC only

Financial benefits of ICC Decision shared between MC and SC

as determined by MC or previously

agreement btw MC and SC.





• NOTE: Wording within the 2011 Subcontract Form - is notclear and contractors are best advised to tighten up theircontract language in respect to ensure that if theSubcontractor does not give a timely NOD, then it will be

bound by the Main Contract DAB decision,otherwise the Contractor could find itself bound by the MainContract DAB decision but still defending a Subcontractarbitration in relation to the same dispute (Double-jeopardy).


FIDIC’S SIMILARITIES WITH OTHER

“FORMS” REGARDING SUBCON’S.

• COLLATERAL WARRANTIES:

– Usually found in Joint Contracts Tribunal (JCT) contract

forms; Collateral warranties may be formed informally, eitherwith correspondence or even verbally;

– Represents a “separate, legally enforceable” contract from theobligations under the main contract.

– Collateral warranty exists…

“…where an employer insists upon the main contractor enteringinto a subcontract with a particular sub-contractor after thewarranty has been given by the sub-contractor to the

employer…”

– In this type of situation, the employer can sue the sub-

contractor or supplier for any loss caused by breach of

warranty.


COLLATERAL WARRANTIES

• In practice - EMPLOYERS may require theSUBCONTRACTORS to provide a collateral warranty thatthe employer can rely upon to seek the subcontractor’sdirect liability for defective works.

• A COLLATERAL WARRANTY is enforceable under

the UAE law.



• It is deemed a unilateral act according to Article 276 ofthe Civil Transactions Code; thus, the subcontractor isbound by its terms according to Article 278 of the sameCode.

• A COLLATERAL WARRANTY typically contains provisionsfor the assignment and step-in rights to ensure that theemployer may assign the obligations set out in thewarranty to other beneficiaries such as subsequentowners or tenants.


CASE STUDY – “ASSIGNMENT”

LINDEN GARDENS TRUST Ltd vs

LENESTA SLUDGE DISPOSALS LTD and others;

ST MARTIN'S PROPERTY CORPORATION LTD and another vs

SIR ROBERT MCALPINE LTD

HOUSE OF LORDS

(Lord Keith of Kinkel, Lord Bridge of Harwich,

Lord Griffiths, Lord Ackner and Lord Browne-Wilkinson)

22 July 1993.


ASSIGNMENT –

UAE CASE STUDY

• IN THIS CASE - an assignment of contractual rights inbreach of a prohibition against such assignment wasineffective to vest the contractual rights in the assignee.

• A building owner who had parted with the property couldrecover substantial damages for breach of a buildingcontract.


ASSIGNMENT –

UAE CASE STUDY

• In 1979, Stock Conversion and Investment Trust plcentered into a building contract with M & H under whichM & H was to remove asbestos from Stock's property.

• The contract was in the Joint Contract Tribunal StandardForm of Building Contract (1963 ed revised July 1975).

• Clause 17 prohibited assignment of the contract.


ASSIGNMENT –

UAE CASE STUDY

• In 1985, when asbestos which should have been removedwas found on the premises and removed by anothercompany, Stock Conversion issued a writ.

• It disposed of its interest in the property in 1987 to LindenGardens. More asbestos was found and further removalwork undertaken. Linden Gardens claimed damagesagainst M & H.


ASSIGNMENT –

UAE CASE STUDY

• A party to a building contract could have a genuinecommercial interest in seeking to ensure that he was incontractual relations only with a person whom he hadselected as the other party to the contract. There was nopolicy reason why a contractual prohibition onassignment of contractual rights should be contrary topublic policy.


ASSIGNMENT –

UAE CASE STUDY

• The existing authorities established that an attemptedassignment of contractual rights in breach of a contractualprohibition was ineffective to transfer such contractualrights. The law was satisfactorily settled in that sense.

• It followed that the Linden Gardens claim failed and itsactions must be dismissed.


ASSIGNMENT –

UAE CASE STUDY

• It was submitted that although Corporation retained itsrights under the contract, it was only entitled to nominaldamages as it had suffered no loss and had parted withthe property at the date of the breach. However, thepresent case fell within the rationale of the exceptions tothe general rule that a plaintiff could only recoverdamages for his own loss.


ASSIGNMENT –

UAE CASE STUDY

• The property, to the knowledge of both Corporation andMcAlpine, was going to be occupied by third parties. It couldbe foreseen that damage caused by a breach would cause lossto a later owner and not merely to the original contractingparty.

• It was proper to treat the parties as having entered thecontract on the footing that Corporation would be entitled toenforce contractual rights for the benefit of those whosuffered from defective performance but who could no acquireany right to hold McAlpine liable for breach.


ASSIGNMENT –

UAE CASE STUDY

• In the prolonged period of recession in the property marketmany developments have had to be sold off beforecompletion, thereby producing the risk that the ownership ofthe property might have become divided from the right to sueon the building contract at a date before any breach occurred.The original building owner would not be entitled to recoverdamages for loss suffered by others who could themselves suefor such loss.

• Therefore, Corporation was entitled to substantial damages forany breach by McAlpine of the building contract.



• Regardless of if a collateral warranty is provided or not, according to Article 890(2) of the Civil Transactions Code, the main contractor remains liable to the

employer for the subcontractor’s

performance.

• In many cases, the UAE courts emphasized that “the

main contractor remains contractually liable

for the acts or defaults of the subcontractor

even if the subcontractor in reality

performed the employer’s instructions

during the course of the project”.


COLLATERAL WARRANTIES –

UAE CASE STUDY

• In the well-known decision of the Dubai Court ofCassation in case No. 266 of 2008, the court held that:

“…when the subcontractor is selected by theemployer or its consultants, the employer shall beliable for any delay in the performance of thesubcontracted part and the main contractor shallnot be liable for any delay fines if they can provethat the delay is caused by such subcontractorand the main contractor played no part in thedelay…”


COLLATERAL WARRANTIES –

UAE CASE STUDY

• The grounds of this decision have been debatable asthe court provided no specific criteria to disregard thegeneral rule set out in Article 890(2).

• Thus, this controversial decision is deemed anexception to the general rule that the maincontractor’s liability remains in place even so withnominated subcontractors.

Conditions of Subcontract for Construction, First Edition 2011

“GUIDANCE FOR THE PREPARATION OF PARTICULAR CONDITIONS OF

SUBCONTRACT”

For Building and Engineering Works Designed by The Employer

Page 1 of 30

CLAUSE 20 NOTICES, SUBCONTRACTOR CLAIMS AND DISPUTES

This Clause has been drafted to allow for resolution of Subcontract Disputes by a Subcontract DAB,

followed by arbitration of the Subcontract dispute if either Party is dissatisfied with the Subcontract

DAB’s decision and they have been unable to settle the Subcontract dispute amicably. This Clause is also

drafted so that, in circumstances where the Contractor is of the opinion that a Subcontract dispute

involves issues(s) that is/are the subject of a dispute under the Main Contract, either Party’s entitlement

to refer the Subcontract dispute to the Subcontractor DAB is deferred by a period of 112 days or as

otherwise agreed. This suspension period gives the Contractor time to pursue resolution of his dispute

by the Main Contract DAB under the Main Contract, and to attempt to settle the Subcontract dispute

with the Subcontractor, before the resolution procedure under the Subcontract is initiated for the

Subcontract dispute.

It takes account of 84 days for the Main Contract DAB’s decision plus 28 days for the serving of a notice

of dissatisfaction (if any) (making a total of 112 days), which periods are specified under Main Contract

Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision]. It should be noted that, unless this

Clause is amended by Particular Conditions to expressly provide for such, the Subcontractor is not bound

by any decision of the Main Contractor DAB and/or any arbitral award under the Main Contract.

If it is preferred that the Subcontractor is to be bound by any decision of the Main Contract DAB and/or

any arbitral award under the Main Contract, consideration may be given to adopting the amendments as

set out in the Second Alternative below.



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If the Parties choose to have arbitration of their dispute conducted in a language other than the ruling

language under the Subcontract, then this different language should be specified in the Particular

Conditions of the Subcontract.

SUB-CLAUSE 20.5 APPOINTMENT OF THE SUBCONTRACT DAB

At tender stage, consideration should be given as to the whether a one-person or a three-person

Subcontract DAB is preferable for the Subcontract, taking account of its size, complexity,

duration, and the fields of expertise which will be involved.

The adjudication procedure depends for its success on, amongst other things, the Parties’

confidence in the individuals who will serve on the Subcontract DAB. Therefore, it is essential

that candidates for this position are not imposed by either Party on the other Party.

Under this Sub-Clause, a Subcontract DAB is to be appointed if and when a Subcontract dispute

has arisen. The Subcontract DAB’s appointment terminates when its decision is given as to the

matter in dispute, unless other disputes have been referred to the Subcontract DAB by that time

in which event its appointment terminates when the Subcontract DAB has given its decisions on

those disputes.

Alternatively, due to the size, complexity and duration of the Subcontract, the Parties may prefer

to have the Subcontract DAB appointed at the commencement of the Subcontract, as a full-term

board to decide all disputes that arise under the Subcontract, in which case the wording of this

Sub-Clause should be amended to conform to the wording of Main Contract Clause 20.2

[Appointment of the Dispute Adjudication Board] and 20.3 [Failure to Agree Dispute

Adjudication Board].



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Subcontracting On Construction Projects in the UAE

Sub-Clause 20.6 Obtaining Subcontract DAB’s Decision

The third paragraph of this Sub-Clause is intended to encourage the Parties to settle a

Subcontract dispute amicably, without the need for arbitration: for example, by direct

negotiation, conciliation, mediation, or other forms of dispute resolution. Amicable settlement

procedures often depend, for their success, on confidentiality and on the Parties’ acceptance of

the procedure. Therefore, neither Party should seek to impose the procedure on the other Party.

FIRST ALTERNATIVE If the size, complexity and duration of the Subcontract is such that

the Parties prefer a simpler dispute resolution process, involving

just arbitration, then:

EXAMPLE PROVISIONS FOR SUBCONTRACT ARBITRATION ONLY

Delete Sub-Clause 20.4 [Subcontract Disputes], Sub-Clause 20.5 [Appointment of the

Subcontract DAB], Sub-Clause 20.6 [Obtaining Subcontract DAB’s Decision] and Sub-Clause 20.7

[Subcontract Arbitration] of the General Conditions of Subcontract and substitute with Sub-

Clause 20.4 [Subcontract Disputes] as follows:

If a dispute (of any kind whatsoever) arises between the Contractor and the Subcontractor in

connection with, or arising out of, the Subcontract or the execution of the Subcontract Works,

then either Party may give a notice of the dispute to the other Party (the ‘Notice of Dispute’), in

which case the Parties shall attempt for the next 56 days to settle the dispute amicably before

the commencement of arbitration.



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Any dispute which has not been amicably settled within 56 days after the date of the Notice of

Dispute shall be finally settled under the Rules of Arbitration of the International Chamber of

Commerce, even if no attempt at amicable settlement has been made, and the provisions of

Main Contract Clause 20.6 [Arbitration] shall apply to the Subcontract dispute except that the

dispute may be settled by one arbitrator appointed in accordance with the Rules.

If the Contractor is of the opinion that a dispute (of any kind whatsoever) between the

Contractor and the Employer in connection with or arising out of the Main Contract or the

execution of the Main Works touches or concerns the Subcontract Works, then the Contractor

may be notice require that the Subcontractor provide the information and attend the meetings

in connection with that dispute that the Contractor may reasonably request.

SECOND ALTERNATIVE If the Subcontract and the Main Contract are such that it is very

likely that the anticipated subject matters of Subcontract claims

and disputes are related to the anticipated subject matters of the

Contractor’s claims, Employer’s claims and/or disputes under the

Main Contract, the Parties may prefer that any Engineer’s

determination under the Main Contract may have a bearing on and

limit the Parties’ entitlements under the Subcontract and that any

decision and/or arbitral award under the Main Contract shall be

binding on the Parties under the Subcontract.

In the example, Clause 20 set out below as a second alternative, it

is essential to understand that a Subcontractor’s claim may arise

out of the Subcontract itself (Unrelated Claim) or out of an event

or events that may also give rise to additional payment and/or an

extension of time which is/are claimable under the Main Contract



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or may concern the same issue(s) as a Contractor’s claim or a

dispute under the Main Contract (a Related Claim).

Both Parties should be acutely aware that, when the

Subcontractor serves a notice of claim, it will be

necessary at that time to establish whether the

Subcontractor’s claim is a Related Claim or an

Unrelated Claim.

Should a disagreement arise between the Contractor and the

Subcontractor as to whether a Subcontractor’s claim is an

Unrelated Claim or a Related Claim, the example Clause

20 below provides for a single fork-in-the-road

process to decide the issue by a pre-arbitral

referee in accordance with ICC Rules for Pre-

Arbitral Referee Procedure. Both the Contractor and the

Subcontractor should give serious consideration to agreeing the

name of the Referee at the time of entering into the Subcontract.

Also, the example Clause 20 set out below

includes provisions (under Sub-Clause 20.9)

where an Employer’s claim under the Main

Contract may arise from a matter for which the

Subcontractor is responsible under the

Subcontract, and where any determination,

decision and/or arbitral award concerning such

Employer’s claim under the Main Contract shall be

binding on the subcontractor under the

Subcontract.



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Contractors and Subcontractors considering this

Second Alternative will note the length and complexity

of the clauses. This is necessary because of the

number of issues that need to be catered for,

beginning with the question of whether the

Subcontract disputes are or are not related to Main

Contract disputes. The following example

provisions are suggested by FIDIC on a trial basis

only, after which they will be re-evaluated. Feed-

back form users and all suggestions for

improvements would be welcomed. Users are

advised to consult an arbitration specialist before

using these alternative provisions in a

Subcontract to ensure that they will operate

successfully.

EXAMPLE PROVISIONS WHERE A DECISION AND/OR ARBITRAL AWARD

UNDER THE MAIN CONTRACT CONCERNING A SUBCONTRACT’S CLAIM

OR AN EMPLOYER’S CLAIM SHALL BE BINDING UNDER THE

SUBCONTRACT:

Delete Clause 20 [Notices, Subcontractor’s Claims and Disputes] of the General Conditions of

Subcontract and substitute:

20 NOTICES, CLAIMS AND DISPUTES

20.1 NOTICES

Without prejudice to the generality of Clause 4 [The Subcontractor], whenever the Contractor is

required by the Main Contract to give any notice or other information to the Engineer or to the



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Employer, or to keep contemporary records (whether in relation to a claim or otherwise), to the

extent that these terms apply to the Subcontract Works, the Subcontractor shall give a similar

notice or other information in writing to the Contractor and keep contemporary records that will

enable the Contractor to comply with these terms of the Main Contract. The Subcontractor shall

do so in good time to enable the Contractor to comply with these terms. Provided always that

the Subcontractor shall be excused from any non-compliance with this requirement for so long as

he could not have reasonably known of the Contractor’s need of the notice or information form

him or the contemporary records.

Notwithstanding this Sub-Clause and Sub-Clause 3.3 [Contractor’s Claims in connection with the

Subcontract], each Party shall immediately give notice to the other Party of any delay event

which has occurred, or specific probable future events or circumstances, which may adversely

affect the other Party’s activities or delay the execution of the Subcontract Works and/or the

Main Works. The Subcontractor shall immediately give notice to the Contractor of any event

which has occurred, or specific probable future events or circumstances, which may increase the

Subcontract Price and/or the Contract Price.

If the Subcontractor considers himself to be entitled to any extension of the Subcontract Time for

Completion and/or any additional payment, under or in connection with the Subcontract, the

Subcontractor shall give notice to the Contractor describing the event or circumstance giving rise

to the claim, and settling out the contractual basis for the claim. Notice shall be given as soon as

practicable but in any case, not later than 21 days after Subcontractor became aware (or should

have become aware) of the event or circumstance. If the Subcontractor fails to give notice of a

claim within the period of 21 days referred to above, the Subcontract Time for Completion shall



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not be extended, the Subcontractor shall not be entitled to additional payment, and the

Contractor shall be discharged from all liability in connection with the claim.

20.2 SUBCONTRACTOR’S CLAIMS

Within 7 days of receipt of the Subcontractor’s notice of claim in accordance with Sub-Clause

20.1 [Notices], the Contractor may notify the Subcontractor, with reasons, that the

Subcontractor’s claim:

(a) Arises from an event or events that may also give rise to additional payment and/or an

extension of time as may be claimable in accordance with the Main Contract;

(b) Concerns issue(s) which is/are the subject of a Contractor’s claim in accordance with Main

Contract Clause 20.1 [Contractor’s Claims]; or

(c) Involves issue(s) which is/are also involved in a dispute between the Contractor and the

Employer under the Main Contract;

Unless the Contractor so notifies the Subcontractor, the claim shall therefore be considered an

Unrelated Claim for the purposes of Sub-Clause 20.3 [Unrelated Claims]. If the Contractor does

so notify the Subcontractor the claim shall thereafter be considered a Related Claim for

the purposes of Sub-Clause 20.4 [Related Claims] and the Subcontractor shall have no right to

pursue this claim under Sub-Clause 20.3 [Unrelated Claims], save;

(a) Where it is decided by the pre-Arbitral Referee in accordance with this Sub-Clause that this

claim is an Unrelated Claim, or



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(b) To the extent expressly provided for under Sub-Clause 20.4 [Related Claims].

Upon receipt of the Contractor’s notice, unless the Subcontractor raises a written objection to

the Contractor’s opinion that the claim is a Related Claim within 7 seven days, this opinion shall

be deemed to be accepted by the Subcontractor. If the Subcontractor raises an objection the

Contractor shall give all due consideration to this objection and shall give his written response,

with reasons, within 7 days of its receipt.

If the Subcontractor is dissatisfied with this response then, by notice in writing, he may refer the

question of whether the Subcontractor’s claim is a Related Claim or an Unrelated Claim to a pre-

arbitral referee for an order. Save where the provisions of this Sub-Clause require, the ICC Rules

for Pre-Arbitral Referee Procedures shall apply.

With reference to Article 2.1.1 of the ICC Rules for the Pre-Arbitral Referee Procedures, the

Referee’s sole power shall be to decide the question of whether the Subcontractor’s claim is a

Related Claim or an Unrelated Claim. The Referee shall issue his Order within 21 days from the

date on which he receives the file form the Secretariat (as defined in the ICC Rules for a Pre-

Arbitral Referee Procedures) and

(i) The costs arising out of the Pre-Arbitral Referee Procedure shall be borne in equal shares

by the Parties;

(ii) The Order of the Referee (who shall not be considered to be an arbitrator and whose

decision shall not be considered as an arbitral award) shall be binding on both Parties,

and Articles 6.3 and 6.4 of the ICC Rules for the Pre-Arbitral Referee Procedure shall not

apply;



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Whether the Subcontractor’s claim is a Related Claim or an Unrelated Claim, the Subcontractor

shall keep contemporary records that may be necessary to substantiate the claim, shall comply

with any Contractor’s Instruction to keep further contemporary records, shall permit the

Contractor to inspect all these records, and shall (if instructed) submit copies to the Contractor.

Unless the Subcontract has already been abandoned, repudiated or terminated, the

Subcontractor shall continue to proceed with the Subcontract Works in accordance with the

Subcontract.

20.3 UNRELATED CLAIMS

If a Subcontractor’s claims is an Unrelated Claim in accordance with Sub-Clause 20.2

[Subcontractor’s Claims]:

(1) Within 42 days after the Subcontractor become aware (or should have become aware) of the

event or circumstance giving rise to the Unrelated Claim, or within such other period as may

be proposed by the Subcontractor and/or approved by the Contractor, the Subcontractor

shall send to the Contractor a fully detailed claim which includes full supporting particulars of

the basis of the claim of the claim and of the additional payment and/or extension of time

claimed;

(2) If the event or circumstance giving rise to the Unrelated Claim has a continuing effect:

(a) This fully detailed claim shall be considered as interim;

(b) The Subcontractor shall send further interim claims at monthly intervals, giving the

accumulated delay and/or amount claimed, and the further particulars that the

Contractor may reasonably require, and



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(c) The Subcontractor shall send a final claim within 28 days after the end of the effects

resulting from the event or circumstances, or within the other period that may be

proposed by the Subcontractor and approved by the Contractor;

(3) Within 42 days after receiving a claim or any further particulars supporting a previous claim,

or within the other period that may be proposed by the Contractor and approved by the

Subcontractor, the Contractor shall respond with approval or disapproval and detailed

comments. He may also request any necessary further particulars, but shall nevertheless give

his response on the issue of the Subcontractor’s entitlement to the Unrelated Claim within

this time;

(4) The Contractor shall consult with the Subcontractor in an endeavor to reach agreement on

the additional payment and/or extension of the Subcontract Time of Completion to which the

Subcontractor may be entitled for this Unrelated Claim. If agreement is not reached, the

Contractor shall make a fair decision as to the appropriate and applicable additional payment

(if any) and/or extension of the Subcontract Time for Completion (if any), taking due account

of the Subcontractor’s submissions, the extent to which his claim for additional payment

and/or extension of time has been substantiated, and all other relevant circumstances; and

(5) The Contractor shall make the additional payment (if any) and /or grant the extension of the

Subcontract Time for Completion (if any) to the Subcontractor that he has decided is

appropriate and applicable. Unless and until the particulars supplied for the Unrelated Claim

are sufficient to substantiate the whole of this claim, the Subcontractor shall be entitled to

additional payment and/or extension of time only for the part that has been substantiated.



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20.4 RELATED CLAIMS

If a Subcontractor’s claim is a Related Claim in accordance with Sub-Clause 20.2 [Subcontractor’s

Claims]:

(1) The Contractor shall submit a notice of claim, including the subject of the claim which the

Contractor considers to be a Related Claim, to the Engineer in accordance with Main

Contract Clause 20.1 [Contractor’s Claim] and in good time to ensure compliance with such

provision, regardless of any objection or referral by the Subcontractor under Sub-Clause 20.2

[Subcontractor’s Claims].

(2) The Contractor shall use all reasonable endeavors to secure from the Employer and the

Engineer, for both the Contractor’s and the Subcontractor’s benefit, any additional payment

and/or extension of time as may be claimable in accordance with the Main Contractor in

respect of the Subcontract Works and shall regularly keep the Subcontractor informed of the

progress of these endeavor’s;

(3) The Subcontractor shall have no right to pursue this claim under Sub-Clause 20.3 [Unrelated

Claims] save as expressly provided under this Sub-Clause 20.4. The Subcontractor shall

comply with any Contractor’s Instruction regarding the keeping of contemporary records

relevant to the event or circumstance giving rise to the Related Claim. The Subcontractor

shall permit the Contractor and the Engineer to inspect all these reports.

(4) The Subcontractor shall submit the Related Claim to the Contractor, which shall include full

supporting particulars of:

(a) The contractual or other basis of claim, and



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(b) Additional payment claimed, and/or

(c) The extension of time

And any interim claims in accordance with Main Contract Clause 20.1 [Contractor’s Claims]

and in good time to enable the Contractor to comply with such provision;

(5) The Contractor shall submit a claim to the Engineer, which includes the supporting particulars

and any interim claims of the Related Claim provided by the Subcontractor, in accordance

with Main Contract Clause 20.1 [Contractor’s Claim] and in good time to ensure compliance

with such provision, regardless of any objection or referral by the Subcontractor under Sub-

Clause 20.2 [Subcontractor’s Claims];

(6) The Contractor shall give the Subcontractor all reasonable opportunity to be involved in any

consultation with, and to attend any meeting convened by, the Engineer which concerns the

Related Claim. Unless the Subcontractor is permitted by the Engineer to be involved in

consultation and/or to attend a meeting but the Subcontractor refuses or fails to do so, the

Contractor shall not reach any agreement with the Engineer concerning the Related Claim

without prior consultation with the Subcontractor. Where an agreement is reached under

the Main Contract or the Engineer makes a determination concerning the Related Claim, the

Contractor shall as soon as practicable but not later than 7 days of its receipt, notify the

Subcontractor of this agreement or determination. If the agreement or determination

insofar as it concerns the Related Claim is such that the Contractor has no entitlement to

additional payment and/or extension of time, unless the Subcontractor notifies the

Contractor of dissatisfaction with the agreement or determination within 7 days of his receipt

of the Contractor’s notice, this agreement or determination shall be deemed to be accepted

by the Subcontractor and as between them, shall be binding on the Parties. If the



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Subcontractor notifies his dissatisfaction with the agreement or determination within 7 days

of his receipt of Contractor’s notice, the Subcontractor’s notice shall be deemed to be a

Notice of Dispute and Sub-Clause 20.6 [Subcontract Disputes] shall apply.

(7) If it is agreed under the Main Contract or the Engineer determines under the Main Contract

that the Contractor is entitled to additional payment and/or extension of time, within 28 days

of receiving this contractual benefit from the Employer, the Contractor shall pass on to the

Subcontractor a share of the benefit as may be appropriate and applicable to the Related

Claim. In the case of a Related Claim concerning additional payment, the receipt of payment

by the Contractor from the Employer that includes a sum in respect of the claimed amount

shall be a condition precedent to the Contractor’s liability to the Subcontractor in respect of

this share. The Contractor shall consult with the Subcontractor in an endeavor to reach

agreement as to this share. If agreement is not reached, the Contractor shall promptly and

with due diligence make a fair decision as to the appropriate and applicable share, taking due

account of the Subcontractor’s views and all other relevant circumstances. The Contractor

shall, making reference to this sub-paragraph, give notice to the Subcontractor of his decision

with reasons and supporting particulars. Unless the Subcontractor notifies the Contractor of

his dissatisfaction with this decision within 28 days of receipt of the Contractor’s notice, the

share decided by the Contractor shall be taken as accepted by the Subcontractor in full and

final settlement of the Related Claim; and

(8) If the Subcontractor notifies the Contractor of his dissatisfaction with this decided share

within 28 days of receipt of the Contractor’s notice, the Contractor shall give all due

consideration to this dissatisfaction and shall give his written response within 7 days of its

receipt. If the Contractor fails to so respond to the Subcontractor’s notice of dissatisfaction,

the Subcontractor shall be entitled to treat this non-response as if the Contractor maintains



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that the decided share is appropriate and applicable. Any dispute concerning this share shall

thereafter be considered an Unrelated Dispute which shall be finally settled as between the

Parties under the Rules of Arbitration of the International Chamber of Commerce, and Main

Contract Clause 20.6 [Arbitration] shall apply to Unrelated Dispute except that the dispute

may be settled by one arbitrator appointed in accordance with the Rules.

20.5 FAILURE TO COMPLY

If, by reason of any failure by the Subcontractor to comply with the first and third paragraphs of

Sub-Clause 20.1 [Notices] and/or the provisions of Sub-Clause 20.2 [Subcontractor’s Claims],

the Contractor is prevented from recovering any sum other than in respect of Subcontractor’

claims form the Employer under the Main Contract in respect of the Subcontract Works, then

without prejudice to any other remedy of the Contractor for this failure of the Contractor shall,

subject to Sub-Clause 3.3 [Contractor’s Claims in connection with the Subcontract], be entitled

to deduct this sum from the Subcontract Price.

20.6 SUBCONTRACT DISPUTES

If a dispute (of any kind whatsoever) arises between the Parties in connection with, or arising out

of, the Subcontract or the execution of the Subcontract Works, then either Party may give a

notice of the dispute to the other Party the “Notice of Dispute”.

If the Subcontract dispute arises from an Unrelated Claim (as referred to in Sub-Clause 20.2

[Subcontractor’s Claims]), then it shall be considered to be an ‘Unrelated Dispute’ and Sub-

Clause 20.7 [Unrelated Dispute] shall apply.



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If the Subcontract dispute arises from a Related Claim (as referred to in Sub-Clause

20.2[Subcontractor’s Claims]), then it shall be considered to be an ‘Related Dispute’ and Sub-

Clause 20.8 [Unrelated Disputes] shall apply.

If the Subcontract dispute DOES NOT ARISE out of an Unrelated Claim or a Related

Claim:

(a) “within 14 days” of receiving or giving opinion that the Subcontract dispute involves issue(s)

which are also involved in a dispute between the Contractor and the Employer under the

Main Contract. If the Contractor so notifies the Subcontractor within such period of 14 days

then, subject to sub-paragraphs (b) and (c) of this Sub-Clause, the Subcontract dispute shall

be considered to be a ‘Related Dispute’ and Sub-Clause 20.8 [Related Disputes] shall apply.

If the Contractor does not so notify the Subcontractor within such period of 14 days, then the

Subcontract dispute shall be considered to be an ‘Unrelated Dispute’ and Sub-Clause 20.7

[Unrelated Disputes] shall apply;

(b) “upon receipt” of the Contractor’s notice, unless the Subcontractor raises a written objection,

to the Contractor’s opinion that the Subcontract dispute is a Related Dispute within 7 days,

this opinion shall be deemed to be accepted by the Subcontractor. If the Subcontractor

raises an objection the Contractor shall give all due consideration to this objection and shall

give his written response, with reasons, within 7 days of its receipt; and

(c) If the Subcontractor is dissatisfied with this response then, by notice in writing, he may refer

the question of whether the Subcontractor dispute is a Related Dispute or an Unrelated

Dispute to a pre-arbitral referee for an order. Save where the provisions of this sub-

paragraph require, the ICC Rules for a Pre-Arbitral Referee Procedure shall apply. With



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reference to Article 2.1.1 of the ICC Rules for a Pre-Arbitral Referee Procedure, the Referee’s

Dispute or an Unrelated Dispute. The Referee shall issue his order within21 days from the

date on which he receives the file from the Secretariat (as defined in the ICC Rules for a Pre-

Arbitral Referee Procedure) and:

(i) the costs arising out of the Pre-Arbitral Referee Procedure shall be borne in equal

shares by the Parties; and

(ii) the Order of the Referee (who shall not be considered to be an arbitrator and whose

decision shall not be considered as an arbitral award) shall be final and binding on

both Parties, and Articles 6.3 and 6.4 of the Rules for a Pre-Arbitral Referee

Procedure shall not apply.

Whether the Subcontract dispute is an Unrelated Dispute or a Related Dispute, unless the

Subcontract has already been abandoned, repudiated or terminated, the Subcontractor shall

continue to proceed with the Subcontract Works in accordance with the Subcontract.

20.7 UNRELATED DISPUTES

If the Subcontract dispute is an Unrelated Dispute:

(1) It shall be decided by a Subcontract DAB, which shall be jointly appointed by the Parties

within 42 days after the date of the Notice of Dispute or any other time as may be agreed in

writing. Unless it is stated in the Appendix to the Subcontractor’s Offer that is shall

compromise three members, the SUBCONTRACT DAB SHALL COMPRISE ONE

SUITABLY QUALIFIED PERSON. In all respects, other than as stated in this Sub-Clause,

Main Contract Clause 20.2 [Appointment of Disputes Adjudication Board] shall apply to the



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appointment of the Subcontract DAB, save that Rules 1 to 4 of the Procedural Rules annexed

to the General Conditions of Dispute Adjudication Agreement shall not apply;

(2) If the Parties fail to agree upon the appointment of the Subcontract DAB within 42 days after

the date of the Notice of Dispute, or upon the appointment of a replacement person within

42 days after the appointed person appointed by the President shall, upon the request of

either or both Parties and after due consultation with both Parties, appoint the Subcontract

DAB. The appointment shall be final and conclusive. Each Party shall be responsible for

paying one-half of the remuneration of the appointing official;

(3) Either Party may refer the Unrelated Dispute in writing to the Subcontract DAB for its

decision, with a copy to the other Party. The referral shall state that it is given under this

Sub-Clause. In all respects, other than as stated in this Sub-Clause, Main Contract Clause

20.4 [Obtaining Dispute Adjudication Board’s Decision] shall apply to the resolution of the

Unrelated Dispute, save that Main Contract Clause 20.8 [Expiry of Dispute Adjudication

Board’s Appointment] SHALL NOT APPLY;

(4) The Subcontract DAB’s decision shall be binding on both Parties unless and until it shall be

revised in an amicable settlement or an arbitral award, as described in this Sub-Clause below;

(5) If either Party serves a notice of dissatisfaction with the Subcontract DAB’s decision within 28

days after receiving the Subcontract DAB’s decision, both Parties shall attempt to settle the

Unrelated Dispute amicably before the commencement of arbitration. However, unless both

Parties agree otherwise, arbitration may be commenced on the twenty-eighth (28th) day

after notice of dissatisfaction was given, even if no attempt at amicable settlement has

been made;



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(6) Unless settled amicably, any Unrelated Dispute in respect of which the Subcontract DAB’s

decision has not become final and binding in accordance with Main Contract Clause 20.4

[Obtaining Dispute Adjudication Board’s Decision] shall be finally settled under the Rules of

Arbitration of the International Chamber of Commerce and Main Contract Clause 20.6

[Arbitration] shall apply to the Unrelated Dispute except that the dispute may be settled by

One Arbitrator Appointed in accordance with the Rules;

(7) In the event that a Party fails to comply with any decision of the Subcontract DAB whether

binding, or final and binding in accordance with Main Contract Clause 20.4 [Obtaining

Dispute Adjudication Board’s Decision], then the other Party may, without prejudice to any

other rights it may have, refer the failure itself to arbitration under the Rules of Arbitration of

the International Chamber of Commerce for the purpose of obtaining an award (whether

interim or other) to enforce the Decision, and in all other respects Main Contract Clause 20.6

[Arbitration] shall apply to the obtaining of such an award except that the award may be

rendered by One Arbitrator Appointed in accordance with the Rules. There shall be no

requirement to obtain a Subcontract DAB’s decision or to attempt to reach amicable

settlement in respect of this reference.

20.8 RELATED DISPUTES

If a Subcontract dispute is a Related Dispute:

(1) The subject of the Related Dispute shall be referred by the Contractor to the Main Contract

DAB in accordance with Main Contract Clause 20.4 [Obtaining Dispute Adjudication Board’s

Decision], with a copy to the Subcontractor, within 28 days of the Notice of Dispute. If, on

the date of the Notice of Dispute there is no Main Contract DAB in place, the Contractor shall



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refer the subject of the Related Dispute to the Main Contract DAB in accordance with the

Main Contract Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision], with a copy

to the Subcontractor, within 56 days of the Notice of Dispute. If the Contractor fails to refer

the subject of the Related Dispute to the Main Contract DAB within the period of 28 days or

56 days, whichever is applicable, the Subcontractor dispute shall thereafter be considered an

Unrelated Dispute and Sub-Clause 20.7 [Unrelated Disputes] shall apply;

(2) Where the subject of the Related Dispute is referred to the Main Contract DAB, the

Contractor shall use reasonable endeavors to pursue the dispute on the Contractor’s and the

Subcontractor’s behalf and for both the Contractor’s and the Subcontractor’s benefit, and

shall regularly keep the Subcontractor informed of the progress of these endeavors;

(3) The Subcontractor shall, in good time, afford the Contractor all information and assistance

that may be required to enable the Contractor to diligently pursue his dispute which includes

the subject of the Related Dispute on the Contractor’s and the Subcontractor’s behalf;

(4) If the Main Contract DAB proposes a period other than 84 days for giving its decision in

respect of the subject of the Related Dispute, in accordance with Main Contract Clause 20.4

[Obtaining Dispute Adjudication Board’s Decision], then the Contractor shall not give its

approval to another period without prior consultation with the Subcontractor;

(5) In any adjudication under the Main Contract with concerns the subject of the Related

Dispute, unless the Employer or the Main Contract DAB objects, the Contractor shall give the

Subcontractor all reasonable opportunity to:

(a) be involved in the preparation of any written submission to the Main Contract DAB;

(b) attend any site visit or hearing convened by the Main Contract DAB;



SUBCONTRACT”


Page 21 of 30

(c) Make any oral submission to the Main Contract DAB;

(d) Receive copies of all submissions and other documents submitted in the adjudication

which concern or relate to the Related Dispute, and

(e) Be involved in any discussions about the general strategy to be adopted in the

adjudication which concern or relate to the Related Dispute including, but not limited to,

choice of legal representation (if any), experts (if any) and witnesses.

If the Subcontractor is given such opportunity by the Employer or the Main Contract DAB, the

Contractor shall not reach any settlement with the Employer concerning the Related Dispute

without prior consultation with the Subcontractor;

(6) Where the Main Contract DAB gives a decision, which concerns the Related Dispute, the

Contractor shall as soon as practicable but not later than 7 days of its receipt from the Main

Contract DAB, notify the Subcontractor of this decision;

(7) Unless the Subcontractor notifies the Contractor of his dissatisfaction with the Main Contract

DAB’s decision within 7 days of the receipt of the Contractor’s notice, this decision shall be

deemed to be accepted by the Subcontractor insofar as it concerns the Related Dispute.

Whether or not a notice of dissatisfaction has been given, this decision shall be binding on

both Parties unless and until it shall be revised in an amicable settlement or an arbitral award

as described below;

(8) If the Subcontractor so notifies the Contractor of his dissatisfaction and the Contractor

responds by concurring with this dissatisfaction, the Contractor shall serve a notice of

dissatisfaction with the Main Contract DAB’s decision to the Employer in good time to

prevent the Main Contract DAB’s decision from becoming final and binding under Main

Contract Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision];



SUBCONTRACT”


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(9) If the Subcontractor so notifies the Contractor of his dissatisfaction but the Contractor

responds by concurring with this dissatisfaction, or fails to respond to this notice of

dissatisfaction within 7 days of its receipt or fails to serve a notice of dissatisfaction with the

Main Contract DAB’s decision to the Employer in good time to prevent the Main Contract

DAB’s decision from becoming final and binding under Main Contract Clause 20.4 [Obtaining

Dispute Adjudication Board’s Decision], the Subcontract dispute shall thereafter be

considered an Unrelated Dispute and Sub-Clause 20.7 [Unrelated Dispute] shall apply;

(10) If the Main Contract DAB’s decision entitles the Contractor to any contractual benefit, the

Contract shall use all reasonable endeavors on the Contractor’s and the Subcontractor’s

behalf to obtain this contractual benefit, and shall regularly keep the Subcontractor informed

of the progress of these endeavors. Within 14 days of receiving this contractual benefit from

the Employer the Contractor shall pass on to the Subcontractor a share of the benefit as may

be appropriate and applicable to the Related Dispute. In the case of a Related Dispute

concerning additional payment, the Contractor’s receipt of payment from the Employer

which includes a sum in respect of the disputed amount shall be a condition precedent to the

Contractor’s liability to the Subcontractor in respect of this share. The Contractor shall

consult with the Subcontractor in an endeavor to reach agreement as to this share. If

agreement is not reached, the Contractor shall promptly and with due diligence make a fair

decision as to the appropriate and applicable share, taking due account of the

Subcontractor’s submissions concerning the Related Dispute and all other relevant

circumstance. The Contractor shall, making reference to this sub-paragraph, give notice to

the Subcontractor of his decision with reasons and supporting particulars. Unless the

Subcontractor notifies the Contractor of his dissatisfaction with this decision within 28 days



SUBCONTRACT”


Page 23 of 30

of receipt of the Contractor’s notice, the share decided by the Contractor shall be taken as

accepted by the Subcontractor in full and final settlement of the Related Dispute;




receipt. If the Contractor fails to so respond to the Subcontractor’s notice of dissatisfaction

within 7 days of its receipt, the Subcontractor shall be entitled to treat this non-response as if

the Contractor maintains that the decided share is appropriate and applicable. Any dispute

concerning this share shall thereafter be considered an Unrelated Dispute which shall be

finally settled as between the Contractor and the Subcontractor under the Rules of

Arbitration of the International Chamber of Commerce, and Main Contract Clause 20.6

[Arbitration] shall apply to the Unrelated Dispute except that the dispute may be settled by

one arbitrator appointed in accordance with the Rules;

(12) If the Main Contract DAB’s decision has not become final and binding under the Main

Contract, unless the Employer objects, the Contractor shall give the Subcontractor all

reasonable opportunity to be involved in the attempts, if any, to settle the Related Dispute

amicably under the Main Contract before the commencement of arbitration. If the

Subcontractor is not given such opportunity by the Employer, the Contractor shall not reach

any amicable settlement with the Employer concerning the Related Dispute without prior

consultation with the Subcontractor;

(13) If the Contractor shall reach such an amicable settlement with the Employer, he shall

immediately notify the Subcontractor. Within 28 days of the date of this settlement, the

Contractor shall consult with the Subcontractor in an endeavor to reach agreement as to the



SUBCONTRACT”


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Subcontractor’s entitlement to contractual benefit in connection with the Related Dispute. If

no agreement is reached with 56 days of the date of the settlement, the Parties’

disagreement shall thereafter be considered an Unrelated Dispute which shall be finally

settled as between the Contractor and Subcontractor under the Rules of Arbitration of the

International Chamber of Commerce, and Main Contract Clause 20.6 [Arbitration] shall apply

to the Unrelated Dispute except that the dispute may be settled by one arbitrator appointed

in accordance with the Rules;

(14) If no amicable settlement is reached between the Contractor and the Employer under the

Main Contract concerning the subject of the Related Dispute, the Contractor shall refer the

Related Dispute to arbitration under Main Contract Clause 20.6 [Arbitration]. If the

Contractor or the Employer does not refer the subject of the Related Dispute to arbitration

within 63 days, or any other time as may be agreed, after the day on which either the

Contractor or the Employer has served a notice of dissatisfaction with Main Contract DAB’s

decision, the dispute shall thereafter be considered an Unrelated Dispute which shall be

finally settled as between the Contractor and the Subcontractor under the Rules of

Arbitration of the International Chamber of Commerce, and Main Contract Clause 20.6

[Arbitration] shall apply to this dispute except that the dispute may be settled by one

arbitrator appointed in accordance with the Rules;

(15) In any arbitration under the Main Contract with concerns the Related Dispute, the Contractor

shall use all reasonable endeavors to purse his dispute which includes the subject of the

Related Dispute on the Contractor’s and Subcontractor’s behalf and for both the Contractor’s

and Subcontractor’s benefit, and shall regularly keep the Subcontractor informed of the

progress of these endeavors. Unless the Employer or the Arbitral Tribunal objects, the

Contractor shall give the Subcontractor all reasonable opportunity to:



SUBCONTRACT”


Page 25 of 30

(a) Be involved in the preparation of any written submission to the Arbitral Tribunal;

(b) Attend any site visit or hearing convened by the Arbitral Tribunal;

(c) Make any oral submission to the Arbitral Tribunal;

(d) Receive copies of all submissions and other documents submitted in the arbitration

which concern or relate to the Related Dispute, and

(e) Be involved in any discussions about the general strategy to be adopted in the

arbitration which concern or relate to the Related Dispute, including but not limited to

choice of legal representation, experts and witnesses.

If the Subcontractor is not given such opportunity by the Employer or the Arbitral Tribunal,

the Contractor shall not reach any settlement with the Employer concerning the Related

Dispute without prior consultation with the Subcontractor;

(16) Where the Arbitral Tribunal makes an award, which concerns the Related Dispute, the

Contractor shall as soon as practicable but not later than 7 days of its receipt, notify the

Subcontractor of this award. Insofar as it concerns the Related Dispute, this award shall be

deemed to be binding on the Subcontractor to the same extent as it is binding on the

Contractor;

(17) If the Arbitral Tribunal’s award entitles the Contractor to any contractual benefit, the

Contractor shall use all reasonable endeavors on the Contractor’s and the Subcontractor’s

behalf to obtain this contractual benefit, and shall regularly keep the Subcontractor informed

of the progress of these endeavors. Within 14 days of receiving this contractual benefit from

the Employer the Contractor shall pass on to the Subcontractor a share of the benefit as may

be appropriate and applicable to the Related Dispute. In the case of a Related Dispute

concerning additional payment, the Contractor’s receipt of payment form the Employer



SUBCONTRACT”


Page 26 of 30

which includes a sum in respect of the disputed amount shall be a condition precedent to the

Contractor’s liability to the Subcontractor in respect of this share. The Contractor shall

consult with the Subcontractor in an endeavor to reach agreement as to this share. If

agreement is not reached, the Contractor shall promptly and with due diligence make a fair

decision as to the appropriate and applicable share, taking due account of the

Subcontractor’s submissions concerning the Related Dispute and all other relevant

circumstances. The Contractor shall give notice to the Subcontractor of his decision with

reasons and supporting particulars. Unless the Subcontractor notifies the Contractor of is

dissatisfaction with this decision within 28 days of receipt of the Contractor’s notice, the

share decided by the Contractor shall be taken as accepted by the Subcontractor in full and

final settlement of the Related Dispute;




receipt. If the Contractor fails to so respond to the Subcontractor’s notice of dissatisfaction

within 7 days of its receipt, the Subcontractor shall be entitled to treat this non-response as if

the Contractor maintains that the decided share is appropriate and applicable. The dispute

concerning this share shall thereafter be considered an Unrelated Dispute which shall be

finally settled as between the Contractor and the Subcontractor under Rules of Arbitration of

the International Chamber of Commerce, and Main Contract Clause 20.6 [Arbitration] shall

apply to this dispute except that the dispute may be settled by one arbitrator appointed in

accordance with the Rules.



SUBCONTRACT”


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20.9 EMPLOYER’S CLAIMS UNDER THE SUBCONTRACT

If the Contractor notifies the Subcontractor that the Employer or the Engineer has given notice of

claim under Main Contract Clause 2.5 [Employer’s Claims] and that the subject of such a claim

concerns the Subcontractor’s performance of the Subcontract:

(1) The Contractor shall provide a copy of this notice, and of all particulars given by the Employer

or the Engineer in connection with the Employer’s claim, to the Subcontractor;

(2) The Subcontractor shall comply with any Contractor’s Instruction regarding the keeping of

contemporary records relevant to the event or circumstances giving rise to the Employer’s

claim. The Subcontractor shall permit the Contractor and the Engineer to inspect these

records;

(3) The Contractor shall use all reasonable endeavors to defend against the Employer’s claim on

the Contractor’s and Subcontractor’s behalf, and shall regularly keep the Subcontractor

informed of the progress of these endeavors:

(4) The Subcontractor shall, in good time, afford the Contractor all information and assistance

that may be required to enable the Contractor to diligently defend the Employer’s claim on

the Contractor’s and Subcontractor’s behalf;

(5) The Contractor shall give the Subcontractor all reasonable opportunity to be involved in any

consultation with, and to attend any meeting convened by, the Engineer which concerns the



SUBCONTRACT”


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Employer’s claim. Unless the Subcontractor is permitted by the Engineer to be involved in

consultation and/or to attend a meeting but the Subcontractor refuses or fails to do so, the

Contractor shall not reach any agreement with the Engineer and/or the Employer concerning

the Employer’s claim without prior consultation with the Subcontractor;

(6) If it is agreed under the Main Contract, or the Engineer determines under the Main Contract,

that the Employer is entitled to be paid an amount by the Contractor, the Contractor shall

consult with the Subcontractor in an endeavor to reach agreement as to the share of such

amount that shall be paid by the Subcontractor to the Contractor. Receipt by the

Subcontractor of evidence of the amount paid by the Contractor to the Employer in respect

of the Employer’s claim shall be a condition precedent to the Subcontractor’s liability to the

Contractor in respect of this share;

(7) If agreement is not reached as to the share referred to in sub-paragraph (6) above, the

Contractor shall promptly and with due diligence make a fair decision as to the appropriate

and applicable share, taking due account of the Subcontractor’s views and all relevant

circumstances. The Contractor shall, making reference to this sub-paragraph, give notice to

the Subcontractor of his decision with reasons and supporting particulars. Unless the

Subcontractor notifies the Contractor of his dissatisfaction with this decision within 28 days

of receipt of the Contractor’s notice, the share decided by the Contractor shall be taken as

accepted by the Subcontractor;


within 28 days of the Contractors notice, the Contractor shall give all due consideration to

this dissatisfaction and shall give his written response within 7 days of its receipt. If the

Contractor fails to so respond to the Subcontractor’s notice of dissatisfaction, the



SUBCONTRACT”


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Subcontractor shall be entitled to treat this non-response as if the Contractor maintains that

the decided share is appropriate and applicable.

(9) If a dispute between the Employer and the Contractor arises from the Employer’s claim and is

referred to the Main Contract DAB under Main Contract Clause 20.4 [Obtaining Dispute

Adjudication Board’s Decision], the Contractor shall provide to the Subcontractor a copy of

the reference to the Main Contract DA, and of all additional information provided to the

Main Contract DAB;

(10) Sub-paragraphs (2) to (17) of Sub-Clause 20.8 [Related Disputes] shall apply to the dispute

and;

(i) Any reference to “the Related Dispute” shall be read as a reference to this dispute;

(ii) Sub-paragraph (10) of Sub-Clause 20.8 [Related Disputes] shall be amended to read:

“…If the Main Contract DAB’s decision required the Contractor to make payment to the Employer,

and the Contractor makes such payment, the Contractor shall consult with the Subcontractor in an

endeavor to reach agreement as to the share of such payment to be paid by the Subcontractor to

the Contractor. Receipt by the Subcontractor of evidence of such payment by the Contractor to the

Employer shall be a condition precedent to the Subcontractors liability to the Contractor in respect

of this share. If agreement is not reached, the Contractor shall promptly and with due diligence

make a fair decision as to the appropriate and applicable share, takin due account of the

Subcontractor’s submissions concerning this dispute and all relevant circumstances. The

Contractor shall, making reference to this sub-paragraph, give notice to the Subcontractor of his



SUBCONTRACT”


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decision with reasons and supporting particulars. Unless the Subcontractor notifies the Contractor

of his dissatisfaction with this decision within 28 days of receipt of the Contractor’s notice the

share decided by the Contractor shall be taken as accepted by the Subcontractor and the

Subcontractor shall immediately make payment of such share to the Contractor…”;

(iii) Sub-paragraph (13) of Sub-Clause 20.8 [Related Disputes] shall be deleted; and

(iv) Sub-paragraph (17) of Sub-Clause 20.8 [Related Disputes] shall be amended to read:

“…If the Arbitral Tribunal’s award requires the Contractor to make a payment to the Employer, and

the Contractor makes such payment, the Contractor shall consult with the Subcontractor in an

endeavor to reach agreement as to the share of such payment to be paid by the Subcontractor to

the Contractor. Receipt by the Subcontractor of evidence of such payment by the Contractor to the

Employer shall be a condition precedent to the Subcontractor’s liability to the Contractor is respect

of this share. If agreement is not reached the Contractor shall promptly and with due account of

the Subcontractor’s submissions concerning this dispute and all relevant circumstances. The

Contractor shall, making reference to this sub-paragraph, give notice to the Subcontractor of his

decision with reasons and supporting particulars. Unless the Subcontractor notifies the Contractor

of his dissatisfaction with this decision within 28 days of receipt of the Contractor’s notice the

share decided by the Contractor shall be taken as accepted by the Subcontractor and the

Subcontractor shall immediately make payment of such share to the Contractor…”.

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Proposals for a Subcontractor’s

Escape from a Conditional Clause

Published: June 2015

Publication: CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 2 June 2015

Title: Proposals for a subcontractor’s escape from a conditional clause

Practice: Construction

Authors: Antonios Dimitracopoulos

The common practice is that the main contractor (MC) will

contractually delegate various elements of its works to specialist

subcontractors. Such subcontractors (SC) may be sourced and

chosen by the main contractor or may be specifically nominated by

the employer. The UAE Civil Code1 at Article 8902 expressly

provides for the right of the main contractor to

subcontract, provided there are no contractual terms

preventing this in the main contract. Therefore, main

contractors are potentially exposed to making payments to their

subcontractors when they have not themselves received the

corresponding payments from the employer. Main contractors,

therefore, often include conditional payment clauses in

subcontracts so as to confer payment related risks onto the

subcontractor.

http://www.bsabh.com/construction/

http://www.bsabh.com/lawyer/antonios-dimitracopoulos/

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Types of Conditional Clauses

Conditional clauses can be broadly divided into two (2) categories,

namely ‘pay when paid’ and ’pay if paid’ clauses.

Pay-When-Paid (PWP) clauses generally contain a condition

such that payment by the main contractor to the subcontractor will

be dependent upon payment being first received by the main

contractor from the employer.

The main purpose of a pay when paid clause is to defer payment to a point

in time that is determined by a specific event, namely payment by the employer to

the contractor.

The occurrence of Pay-If-Paid (PIP) clauses in the UAE is

relatively uncommon. In general, whenever pay if paid clauses are

included in subcontracts internationally, they may amount to specific

wording that aims to clarify that a shift of the risk of non-payment has

been agreed to*.

Instances of pay if paid clauses, identified in primarily US cases, can

be particularly focused in clearly and aggressively reflecting the parties’ intentions.

As indicated above, the intention of pay if paid clauses depend on the

eventuality rather than on deferring the timing of payment and to shift the risk

of non-payment from the main contractor to the subcontractor.

*Term known in Western Countries as “Working at Risk”

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UAE Statutory Law Background to

Conditional Payment Structures in Construction

UAE law provides a protective barrier for the employer and confirms, in the

Muqawala section of the UAE Civil Code, Article 891 that no

claim may be addressed by the subcontractor to the employer,

save for instances of assignment.3

This being the position, one must ask, “what consideration does the

subcontractor enjoy in return for this unenviable shift in risk-taking that

conditional clauses impose?”

For conditional clauses to have a fair sense of purpose in a subcontract, the

answer to that question must revolve around the following:

The main contractor is obliged to adopt the subcontractor’s claims for

payment as if the claims were its own;

To the extent, it considers the claims valid, the main contractor must

then pursue them with the employer, again as if they were its own; and

Any failure to do so, should prohibit the main contractor from relying

on any conditional clause, thus rendering it directly accountable to the

subcontractor.

In terms of legal authority, the concept of conditional payments seems to fall

squarely within the ambit of Part 3, Section 1 of the UAE Civil

Code, relating to ‘Dispositions conditional by suspension

or deferment’,4

Article 428 of which supports the view that “if the

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performance of an obligation is subject to a condition, then efforts

must be made for that condition to be observed.”5

It is not relevant how much time has passed since

payment to the subcontractor became due but rather

what can be proven to have taken place during such time.

This would appear to be a more dominant driver in determining the operation of a

conditional clause under UAE law.

By contrast, if it can be shown that no demonstrable efforts (in the context of

Article 428) have been made to observe the condition, then it would be arguable

under UAE law that the main contractor can no longer rely on a conditional pay

when paid clause and that to effectively avoid making payment to the

subcontractor, it would have to resort to more substantive defences.

As will be seen below, recent UAE jurisprudence has

indicated that, in the presence of a conditional clause, a

claim against the main contractor based purely on a

breach of the subcontract for non-payment, is likely to

fail.

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UAE Jurisprudence

Whilst many disputes arising out of subcontracts will be referred to private

and confidential arbitration, there have been a few instances where an arbitration

clause was absent and litigation ensued.

From the cases readily reported, save one case in 1995, where a

distinction was made by the Dubai Courts on whether a project

had been completed or not6 before a conditional payment clause

could be relied upon, most subsequent cases7 upheld the validity

of a pay when paid clause and rejected the claims filed by the

subcontractors on the basis of them being premature.

In one such case,8 the application of conditional payment

clauses in a subcontract was analyzed as follows:

The contractor imposed a condition that payments to the

subcontractor would be paid when such moneys from the

employer were paid;

This is an obligation suspended until the conditional fact

materialized; and

The subcontractor therefore did not have the right to claim the

balance of its dues until the condition was met, that is, payment

was received by the main contractor from the employer.

IMPORTANT NOTE:

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I. In all these cases, the SUBCONTRACTOR’S CLAIMS were made

on the simple basis of a breach of contract for non-payment.

II. They were not based on an argument that the true breach was

that the main contractor had failed to fully pursue the

subcontractor’s claims against the employer.

III. Nor were they based on the employer having rejected such claims, thus

containing the dispute strictly between the main contractor and the

subcontractor.

IV. The subcontractor’s position was countered by a

straightforward application of Article 420 of the UAE Civil

Code,9 in that the condition precedent (of payment by the

employer) had not yet occurred.

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Alternative Bases for the Subcontractor to Pursue Its Claims

In light of the above, and given the factors set out below, we

explore the alternative bases upon which a subcontractor can

successfully pursue its claims against the main contractor,

including whether the timing of any actions it needs to take to

achieve this:

Pay-If-Paid clauses are relatively rare in the UAE;

Pay-When-Paid clauses defer the timing of payment;

The UAE Civil Code acknowledges that some effort must be

made for a condition to materialize; and

That the consideration that the subcontractor must enjoy is

the Main Contractor’s obligation of pursuing the

subcontractor’s claims.

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Direct Payment Agreements with The Employer

Although the ability for subcontractors to successfully negotiate

the terms of their subcontract are usually very limited, we have seen

instances where nominated subcontractors managed to extract a

direct payment obligation by the employer, at least for certified

amounts, thus bypassing the main contractor.

This option is also envisaged by UAE law, in the Muqawala section of the

Civil Code10 as a possible exception to be executed by way of assigning the

obligation to pay the subcontractor from the contractor to the employer.

Two (2) issues are of note in instances where direct payment mechanisms have

been attempted in the UAE:

The standard obligation of the main contractor to effect payment to the

subcontractor (on a pay when paid basis) is often not removed from

either of the two subcontracts; and

Court proceedings that are normally brought by the subcontractor

against both the employer and the main contractor, have resulted in the

court ordering the subcontractor to first proceed to arbitration under the

subcontract against the main contractor and, if that were to fail or result

in non-payment, then, and only then, could the subcontractor proceed in

court against the employer under the direct payment agreement.

Direct payment agreements are seldom well coordinated with the contents of

either the main contract or the subcontract and commonly serve as a tool for the

employer to deflect liability for the subcontractor’s payments onto the main

contractor and vice versa.

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Lack of Pursuit of Subcontractor’s Claims

A further option for the Subcontractor is to argue that the

true breach lies in the Main Contractor failing to pursue the

subcontractor’s claims against the employer to the fullest extent

permissible by law. The instances where the subcontractor could

legitimately argue this include:

When the employer has rejected the subcontractor’s claim,

the main contractor has not accepted such rejection but has

failed to pursue the matter by way of a dispute resolution

process or otherwise; or

When the employer has deferred payment to an indefinite

point in time that can no longer be considered as reasonable

and the main contractor again fails to pursue the matter

whether by way of a dispute resolution process or otherwise.

Article 428 of the UAE Civil Code sets out the degree to which fulfilment of

the condition must be pursued. This lends itself to an argument that a main

contractor’s failure to pursue the subcontractor’s claims, could

effectively amount to a failure to observe the condition (of

payment by the employer) to the maximum degree

possible.

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One must be mindful of the fact that Main Contractors would commonly be

reluctant to start a dispute resolution process against an employer, purely in order

to pursue their subcontractors’ claims. In demonstrating such reluctance, the main

contractor may argue:

That at the stage the subcontractor’s action commenced, it

would be unreasonable for it (the main contractor) to have

commenced legal proceedings; or

That this may be supported by reference to various

commercial or contractual considerations.

Whichever option the main contractor adopts, it is likely that if pursuit of the

subcontractor’s claim is to be argued as a condition precedent for any conditional

clause to be relied upon, then such condition could be easily satisfied in most

instances, save for the case of the main contractor formally commencing legal

proceedings against the employer.

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Employer’s Outright Rejection of a Subcontractor’s Claim

As indicated above, instances of an outright rejection by the employer of a

main contractor’s claim that includes or relates to the subcontractor’s

works, would convert the question of when payment would be

made to a definite non-payment.

In terms of how this can be accommodated within the confines of UAE

law, Articles 420 to 428 of the UAE Civil Code, deal with

‘Dispositions conditional by suspension or deferment’,

essentially relating to conditional clauses.

The Main Contractor’s options in instances of outright rejection by the

employer would be either to:

Challenge the merits of the subcontractor’s entitlement (rather

than simply its timing) and adopt arguments raised by the

employer/engineer;

Challenge the merits of the subcontractor’s entitlement (rather

than simply its timing) and produce its own arguments for doing so;

or

Challenge the employer’s rejection, pursuing claims that would

include those of the subcontractor.

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TIMING S/C’s REQUEST/DEMAND BASIS

A. When invoices become overdue.

Payment of its outstanding invoices/dues

Contractual.

B.

When negative reply is received from main contractor (MC) on first request.

Evidence of inclusion of its work in monthly invoices to Employer (E).

Contractual/correspondence based.

C.

Once evidence of inclusion in monthly invoices/final statement of accounts has been provided.

Evidence of rejection of payment by E.

Contractual/correspondence based.

D.

Pay When Paid (PWP): Once confirmation of E’s rejection and MC’s agreement to this is obtained.

Payment of dues by MC. Legal: impossibility of condition, Art. 423 of Civil Code.

E.

Pay If Paid (PIP)/PWP: Whether or not E has rejected payment & whether or not MC has contested any rejection by E.

Evidence of pursuit of payment.

Legal: lack of pursuit, Art. 420 and 428 of Civil Code.

F. Once the scope of Subcontractor’s (SC) work has been completed.



G. Again, when the project has been handed over.



H. Again, when the defects liability period has expired.



I. When negative reply is received from MC on the above request.

Evidence of a legal notice issued for amounts inclusive of the subcontractor’s dues.

Legal: Lack of pursuit, Art. 420, 428 of Civil Code.

J. When the deadline of a legal notice expires.

Evidence of legal proceedings having been commenced.

Legal: Lack of pursuit, Article 420, 428 of Civil Code.

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Which option the Main Contractor adopts can be of critical relevance to

the application of either a Pay-When-Paid clause or a Pay-If-Paid clause.

Pay-When-Paid clauses are based on a presumption that payment

would eventually be made. They would therefore become inapplicable if

the employer refused to pay, for the simple reason that for the main

contractor to rely on them, it would have to unilaterally convert the

condition of ‘when’ to a condition of ‘if/whether’.

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Timing as a Key Factor to a Subcontractor’s Strategy

When being faced with a conditional payment clause, the subcontractor’s

main strategy in pursuing its claims against the main contractor is one of timing.

Therefore, a subcontractor that is deprived of its dues should sequence its

approach to a conditional payment clause by documenting its requests as follows:

Once the Main Contractor is forced to file a legal action against the

Employer, the Subcontractor’s Claims against the Main Contractor are

effectively carried over onto an action against the Employer.

Whilst the subcontractor can have little control over such

proceedings** (unless the main contractor encourages him to assist), the

conditional clause will have been given the purpose and substance that

the parties intended.

**Potential for Subcontractor DAB proceedings, if earlier adopted.

Scenario 1:

On the assumption that an award or judgment is eventually issued and

despite the Main Contractor’s perceived best efforts, the Subcontractor’s

Claims (or any part thereof) are not awarded, the question arises

whether this would be the end of the road for the Subcontractor.

The answer to this question would depend a lot more on

what the reason is behind the employer’s exoneration, rather

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than on whether the Subcontract contained a Pay-If-Paid or a

Pay-When-Paid clause.

CONCLUSION

In the presence of a conditional clause, it is

generally accepted that it is unwise for the

subcontractor to commence legal proceedings against

the main contractor on the simple basis of a debt

collection exercise as it is unlikely to succeed.

Ironically, the more unopposed (by the main contractor) a subcontractor’s

claim is, the more difficult it is to control the payment process and the more

hindered it is by a conditional clause. Conversely, any direct

challenge to its claims by the main contractor may block

the triggering of a conditional clause, thus making the

dispute resolution process an affair that is confined solely

between the main contractor and the subcontractor.

Finally, the question of whether a subcontractor can pursue its claims

against the main contractor, even after the employer has been exonerated of any

liability, will depend more on the reasons behind this, rather than on the nature of

the conditional clause.

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REFERENCES:

1 Federal Law No. 1/1987

2 An English translation of which states: (1) 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. (2) The first contractor shall remain liable as towards the employer.

3An English translation states that: ‘Article 891: 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.’

4Articles 420 to 428 of the Civil Code.

5An English translation states: ‘Article 428: A Condition must be observed as far as is possible.’

6Dubai Court of Cassation Case No. 281 of 1995: the distinction related to an obligation by the main contractor to pay the subcontractor, despite a conditional clause, if the project has been completed.

7Dubai Court of Cassation Case No. 267 of 2007, Dubai Court of Cassation Case No. 83 of 2009

8Dubai Court of Cassation Case No. 240 of 2006

9An English translation of which provides that: Article 420: A Condition is a future matter upon the existence or absence of which the full effectiveness (of a disposition) depends.

10Article 891, as previously mentioned.