Jonathan O’Neill, senior consultant, HKA Global, gives an overview of potential relief for contractors with regards to failure by nominated subcontractors on projects in the UAE
This article explores the potential relief available to a main contractor undertaking work in the United Arab Emirates and its nominated (or perceived nominated) subcontractors fails to perform, causing a breach under the main contract.
The traditional contractual matrix
Within the traditional contractual matrix, it is generally considered that, the employer will only have a direct contractual link with the main contractor by way of the agreement made between them (the main contract). This agreement creates legal obligations and allocates duties and risks between the respective parties. In many instances, the provisions in the main contract allow the contractor to engage the services of subcontractors to carry out certain parts of the works. This is particularly prevalent where the nature of the works requires the services of a specialist subcontractor and are beyond the capability of the main contractor.
If a main contractor elects to appoint a subcontractor, it will enter a subcontract agreement for that scope of work. It is generally accepted that the purpose of this relationship is to redistribute the duties and risk the main contractor owes to the employer to the subcontractor in respect of the subcontract scope of work. In such cases, there is no privity of contract between the employer and the subcontractor. The main contractor is responsible to the employer for all works under the contract, including the works it has elected to subcontract. However, through the subcontract agreement, the main contractor will likely have an avenue for recourse against the subcontractor for any defects or defaults in relation to the subcontract scope of work.
What is nomination?
Nomination is the process by which an employer pre-selects a subcontractor to carry out part of the main contract works. The employer tenders the subcontract work and carries out direct negotiations with the specialist subcontractor, agreeing the scope of work, price and/or specific terms.
The agreement reached between the employer and the subcontractor is then imposed on the main contractor. The main contractor has the opportunity to incorporate the prime cost as agreed between the employer and the subcontractor within the main contract price, with the additional of its own overheads, profit and attendance in relation to the nominated subcontract scope of work. The main contractor will then directly appoint the nominated subcontractor for the scope of work agreed with the employer. It is highlighted that, even though the employer has negotiated the terms of the nominated subcontract, there is no direct contractual relationship created between the employer and the nominated subcontractor.
Usually, the main contract contains provisions that allow the main contractor the opportunity to reasonably object to the appointment of a nominated subcontractor. Examples of objection include financial instability, unreasonable terms of the nominated subcontract agreement, or demonstratable concerns over the nominated subcontractor’s performance. If the objection is accepted by the employer there are a number of options available to the parties including, nominating an alternative subcontractor, omission of the scope of works from the main contract, direct appointment of the subcontractor by the employer or employer indemnifying the main contractor from any liability it might suffer while contracting with the nominated subcontractor.
Nomination benefits the employer through its ability to retain control over the selection of the subcontractor without the requirement to enter into a contractual relationship with the subcontractor. The arrangements can be agreed in principle through a non-binding agreement, such as a memorandum of understanding or it can be via a formal agreement that is to be assigned to the main contractor at a later date via a novation agreement.
What are the obligations as per the Civil Code?
As per the UAE Civil Transactions Code Article 890:
- A contractor may entrust the performance of the whole or part of the work to another contractor…
- The first contractor shall remain liable towards the employer.
Accordingly, the main contractor is liable for the performance of all subcontractors under the law. It is widely considered that if the main contractor has not raised an objection to the appointment of a subcontractor, it has accepted the nomination of the subcontractor and liability for its performance under the main contract. In any event, the works become part of the main contract, so the main contractor is liable to the employer for execution of the works.
Potential challenges to the privity of the subcontract
The main contractor is liable for the progress payments of the nominated subcontract through to the completion of the works and will assess the progress of the nominated subcontractor’s works in accordance with the terms of the nominated subcontract agreement. However, even though there is no contractual relationship between the employer and the nominated subcontractor, there are usually provisions in the main contract that allow the employer may make direct payment to the nominated subcontractor in the event of non-payment by the main contractor. If such payment is made by the employer, this value will generally be offset against any payment made by the employer to the main contractor. However, it is a brave employer who would take such action without first agreeing it with the main contractor, for fear of being accused of interfering in the subcontract relationship.
In addition, the employer may, if the terms of the main contract allow, request a collateral warranty from the nominated subcontractor for its works. This ensures that the employer has recourse against the nominated subcontractor in the event of default on the part of the nominated subcontractor under its contract with the main contractor. It is important to note that the provision of a collateral warranty does not in any way relieve or lessen the main contractor’s responsibility for the proper execution of the works carried out by the nominated subcontractor.
Is relief available to the contractor for failure of the nominated party?
Whilst the Civil Code does not make an express distinction between domestic (i.e. directly selected by the main contractor) and nominated subcontractor (i.e. directly selected by the employer), the UAE courts have on occasion interpreted that Civil Transaction Code Article 890, this being essentially that the contractor is liable for the performance of subcontractors during the works (in accordance with the traditional contractual matrix summarized, above), as not applicable in the case of a nominated subcontractor.
In the Dubai Cassation Court Judgement 213/2008 and 266/2008 the Court held that contractor shall not be liable for faults attributed to a subcontractor if it has been nominated to it by the employer or the consultant. It is worth bearing in mind, this is not an open and shut case and the main contractor would need to be able to demonstrate the failings of the nominated subcontractor were solely as a result of their actions and that the main contractor had no impact on the performance of the nominated subcontractor.
In the Dubai Cassation Judgement No 340 / 1999 dated 16 January 2000, a contractor raised a claim against the employer for outstanding payment for the construction of villas. The court appointed expert, rejected the employer’s allegation that the contractor was at fault for the delay. It was found that the delay was caused by a nominated subcontractor. The Dubai Court of Cassation rejected an employer appeal and agreed with the findings of the expert. The Court held that:
“The expert noted that the [employer] commissioned some subcontractors to perform the project… Consequently it is clearly evident that the delay to the work was to a large extent caused by the subcontractors commissioned by the [employer] to perform the project … On the above grounds, the [contractor] did not delay the completion of the project beyond the time agreed upon. In summary, the subcontractors commissioned by the [employer] to undertake the project caused the delay.”
The above ruling reflects very specific scenario. It is considered that the facts of any future case would need to be very similar for this to provide an effective defense for the main contractor. The main contractor will be required to demonstrate that it performed its contractual obligations and that there were no concurrent failures by the contractor or its domestic subcontractors, for which liability cannot be transferred.
In summary, it appears that a main contractor may be afforded relief from and protection against damages for breaches caused by acts or omissions of nominated subcontractors, if the following have arisen:
- an employer or employer’s representative requires the main contractor to appoint a nominated subcontractor;
- the main contractor reasonably objects to the appointment of the nominated subcontractor but is in any event instructed to enter into a subcontract with the nominated subcontractor; or the main contractor is not permitted and/or does not have an equitable opportunity to object to appointment of a nominated subcontractor; and
- the nominated subcontractor fails to perform through no fault of the main contractor or their direct subcontractors putting the main contractor in breach of the contract.
The burden of proof is on the main contractor to demonstrate that the acts or omissions of the nominated subcontractor amount to a breach of the subcontract and have adversely impacted the main contractor performance, resulting in a breach of contract. Subject to this being demonstrable, the employer may be held liable for the failures of the nominated subcontractor, and relief provided to the main contractor for breaches flowing from the acts or omissions of the nominated subcontractor.