Subcontracting has long been a fixture of the UAE’s commercial and construction sectors. It enables main contractors to delegate portions of work to specialized entities, promoting efficiency, cost control, and timely project delivery.
However, with two contracts and three parties involved, subcontracting structures can become complex. A subcontract derives from the main contract between the project owner and the main contractor. Under the main contract, the main contractor is obliged to perform the agreed work for the project owner in exchange for payment. The main contractor may then delegate part or all that work to a subcontractor, who undertakes those tasks for consideration from the main contractor. This creates a distinct contractual relationship solely between the main contractor and the subcontractor.
Given this triangular arrangement, questions often arise regarding liability, payment, and the limits of contractual relationships.
Legal Framework
Subcontracting is expressly permitted under UAE Federal Law No. 5 of 1985 (the “Civil Code”). Article 890 allows the subcontracting of all or part of the work, except where the main contract prohibits it or where the nature of the work requires the main contractor’s personal performance.
At the same time, the Civil Code upholds the principle of privity of contract. Even when a main contractor delegates work, they remain fully liable to the project owner for its proper execution. Article 891 further provides that subcontractors have no direct claim against the project owner unless the main contractor assigns them their right to payment.
In essence, no party bears obligations or enjoys rights under a contract to which they are not a party. The project owner contracts with, and expects performance from, the main contractor. The main contractor, in turn, contracts with the subcontractor, who is entitled to payment only from the main contractor. Simply, there are no obligations borne by the project owner and subcontractor towards each other, as there is no contractual relationship between them.
Issues Arising From Subcontracting
For project owners, issues rarely arise from subcontracting, given the fact that they are not party to the subcontract, and they owe the subcontractors nothing under those contracts. However, subcontractors may be a source of confusion if the main contractor transfers some or all their rights to the subcontractor. But even then, the owner’s obligations remain governed solely by the main contract, and no further obligations are introduced.
For subcontractors, the main challenge is typically non-payment. Many subcontracts include “pay-if-paid” clauses, under which the subcontractor is paid only once the main contractor has received payment from the project owner. UAE courts have upheld such clauses as valid suspensive conditions. The risk, however, is that a subcontractor may remain unpaid despite having performed their work in full if the project owner fails to pay the main contractor for whatever reason.
For main contractors, subcontracting presents the most significant risks. Before proceeding, they must confirm that subcontracting is permitted; some contracts, particularly public procurement contracts, prohibit it outright. Even when permitted, the main contractor remains liable to the project owner for all work performed, including that executed by subcontractors. Under Article 880 of the Civil Code, this liability can extend for up to ten years following delivery.
Confidentiality obligations also persist, and the main contractor is liable for breaches committed by subcontractors. To mitigate such risks, main contractors often replicate key obligations from the main contract within the subcontract, ensuring that subcontractors are bound by similar terms and obligations.
Payment obligations can also strain the main contractor’s cash flow, particularly when the project owner delays or defaults on payment. This is why pay-if-paid clauses are a common risk management tool to align payment timelines and protect the main contractor’s financial position.
Practical Considerations in Drafting Subcontracts
For both the main contractor and the subcontractor, careful drafting is essential to manage the risks inherent in subcontracting. The subcontract should not only reflect the commercial understanding between the parties but also align closely with the main contract to prevent inconsistencies and unintended exposure.
The subcontract must clearly and precisely define the scope of work, deliverables, materials, and performance standards to minimize the potential for disputes. It should also specify the completion timeline and set out the consequences of delay, including any entitlement to extensions of time or liquidated damages.
Obligations imposed on the main contractor under the main contract should be effectively flowed down into the subcontract. These typically include technical specifications, quality and safety standards, insurance, indemnities, confidentiality, and compliance obligations. Failing to replicate such obligations may leave the main contractor exposed to liabilities that cannot be passed on to the subcontractor, even when arising from the subcontractor’s conduct.
Termination provisions must likewise be consistent with the main contract. The subcontract should enable the main contractor to suspend or terminate the subcontract if the main contract is suspended or terminated, ensuring the main contractor is not left with residual obligations once its own contract has ended.
Finally, the subcontract should clearly set out its dispute resolution mechanism and governing law. Best practice is to align these with the main contract in terms of dispute resolution forum, governing law, arbitration seat/competent court, and procedural rules. While subcontract disputes may be resolved through litigation like any other contractual dispute, arbitration and other alternative dispute resolution mechanisms have become increasingly common in recent years, offering greater flexibility and confidentiality. Subcontracting remains an essential mechanism in the UAE’s construction and commercial sectors. While it offers flexibility and efficiency, it also introduces layers of risk and potential liability. Careful drafting and alignment between the main and subcontracts are key to avoiding disputes and ensuring successful project d