UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for May 24, 2010

Securing Payment for Sub- Contractors Under UAE Construction Law

After the completion of the works in the UAE, the employer must pay the contractor and sub-contractor for their services.  However, in some cases, the employer refuses to pay or is unable to pay the contractor and sub-contractor.

Article 891 of the Civil Transactions Law, Federal Law No. 5 of 1985 states:

“The sub-contractor must not claim anything from the dues of the principal  contractor with the client unless the latter refers him to the client.”

Basically, according to this article, the sub-contractor is precluded from claiming from the employer any amounts that are claimable against the main contractor unless the main contractor has given the sub-contractor an assignment of its rights against the employer.  (Al Tamimi)

 

Therefore, the subcontractor should attempt to get the contractor to assign this right to the sub-contractor, specifically the right to claim against the employer directly for unpaid amounts owed to the sub-contractor in the sub-contract.  The sub-contractors should also strike out any ‘pay- if- paid’ clauses and instead insert a ‘pay- when- paid’ clause into the contract. 

 

Under a ‘pay- if -paid’ clause, the general contractor is required to pay the subcontractor only if the owner pays the general contractor.  If the owner does not pay the general contractor, there is no obligation on the part of the general contractor to pay the sub-contractors who bear the risk of the owner’s non-payment.

 

In regards to a ‘pay-when-paid’ clause, the general contractor is required to pay the sub-contractor within a period of time after the general contractor is paid by the owner.  Under this type of clause, the general contractor bears the risk if the owner does not pay.  According to Patrick Devine Esq.,[1] under this clause, the general contractor has made an unconditional promise to pay with the time of payment postponed until the happening of a certain event, or for a reasonable period of time if the owner’s payment does not happen. 

 

A ‘pay-when-paid’ clause may look like this: ‘All progress payments of the sub-contract sum shall be made within 10 days after payment is received by the General Contractor from the Owner.’

 

If you are a sub-contractor with the unfortunate luck of having a ‘pay-if-paid’ clause in the sub-contract, the UAE courts may strike out the clause due to public policy reasons if the dispute reaches the litigation stage in the UAE courts. 

 

Otherwise, if the sub-contract has a pay-if-paid clause and no assignment of the right from the contractor to claim directly against the employer for unpaid monies, the sub-contractor is out of luck in terms of debt recovery in the UAE.  Therefore, it is imperative for the subcontractor to have this right assigned to the sub-contractor by the contractor as well as to insert a ‘pay-when-paid’ clause and delete any ‘pay-if-paid’ clauses in the sub-contract in the UAE.

 


[1] Patrick Devine, Esq., ‘When Must A Sub-Contractor be Paid Under a Pay-When-Paid Clause?, http://www.szd.com/media/news/media.931.pdf

UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance