By Dr Samer Skaik
Subcontractor nomination is a common practice in the UAE construction industry, often governed by the FIDIC suite of contracts and the local Civil Code. However, the legal intricacies surrounding the rights and liabilities of nominated subcontractors (NSCs) and Main Contractors (MCs) can be complex. This blog post explores the legal framework of subcontract nomination in the UAE, shedding light on the key issues of liability, contract privity, and the role of collateral warranties.
Subcontractor Liability and the Rule of Privity of Contract
During the course of construction projects, unforeseen circumstances such as subcontractor liquidation can lead to significant delays. In such cases, MCs may seek an extension of time to complete the works, often citing the delays caused by the defaulting NSC as justification. However, under UAE law, as reflected in common law principles, the MC is generally not entitled to claim compensation from the Employer for delays attributable to the NSC. This is rooted in the rule of privity of contract, which prevents third parties from claiming damages on contracts to which they are not a party.
While this rule is foundational, it has faced criticism, particularly in cases where the contract benefits a third party. To address this, the practice of using collateral warranties has emerged. A collateral warranty creates a direct contractual relationship between the Employer and the NSC, essentially bringing the NSC into a legal framework where they are accountable directly to the Employer. This warranty often stipulates a nominal amount payable to the Employer in case of NSC default. However, it’s important to note that a collateral warranty does not absolve the MC of their liability for the NSC’s performance.
The Legal Framework of Nomination in the UAE
The UAE’s legal system, influenced by French, Roman, Egyptian, and Islamic laws, governs construction contracts through its Civil Code. FIDIC contracts are widely adopted, and the practice of subcontract nomination is prevalent. However, the UAE Civil Code does not explicitly distinguish between domestic and nominated subcontractors. Article 890 of the Civil Code allows MCs to subcontract part or all of the work unless the contract specifies otherwise or the nature of the work requires personal execution. Importantly, this article holds that the MC remains liable to the Employer for the performance of the subcontracted work, including that of NSCs.
A common misconception in the UAE is that MCs do not have the same legal relationship with NSCs as they do with domestically selected subcontractors. However, UAE courts have consistently interpreted Article 890 to include NSCs, thereby affirming the MC’s continued liability for the performance of NSCs.
Payment and Direct Recourse: The Role of Article 891
Article 891 of the UAE Civil Code further clarifies that subcontractors, including NSCs, do not have a direct claim against the Employer for payments unless the MC assigns this right to the Employer with the agreement of all parties involved. This means that without an explicit assignment, the subcontractor’s entitlement to payment remains a matter between the MC and the subcontractor, with no direct recourse against the Employer.
Despite this, it is common practice for Employers to request that NSCs provide a direct warranty regarding the quality and fitness of their work. While this warranty provides additional assurances to the Employer, it does not alter the fundamental legal relationship governed by the contract. The subcontractor remains bound by the terms agreed upon with the MC, and any rights or liabilities remain within that contractual framework.
Case Law and Practical Implications
The Federal Supreme Court of Abu Dhabi, in a 1999 judgment, reinforced the principles laid out in Articles 890 and 891. The Court ruled that subcontractors cannot demand payment directly from the Employer if the MC has not fulfilled its payment obligations, as the MC remains liable to the Employer for the subcontracted work. However, specific provisions in the main contract may allow for direct payment to NSCs under certain conditions, offering a potential avenue for resolving payment disputes.
Conclusion
Understanding the legal framework governing subcontract nomination in the UAE is crucial for both Employers and Main Contractors. The principles of liability, privity of contract, and the use of collateral warranties play significant roles in defining the rights and obligations of the parties involved. By navigating these complexities with a clear understanding of the law, construction professionals can better manage risks and ensure that their projects proceed smoothly, even in the face of challenges such as subcontractor default.