Proposals for a subcontractor’s escape from conditional clauses A talk of The Society of Construction Law (Gulf) in Dubai on 13 January 2015 Antonios Dimitracopoulos www.scl-gulf.org 1
Right to subcontract: UAE Civil Code Art.890 MC’s Risk: E delaying or failing to pay MC Solution: conditional clauses 2 types: “pay when paid” and “pay if paid” Purpose : conferring payment risk onto SC Exceptions to relying on a conditional clause: - MC’s own default - MC’s own rejection of SC’s claim 2
Pay when Paid example: “…10% advance payment against an approved bank guarantee, balance within 14 days of receipt of corresponding payment from the Employer…” “…Time for payment by the Main Contractor to the Subcontractor following receipt of corresponding payment by the Employer: 7 days…” Purpose: defer the timing of payment. 3
How “pay when paid” is triggered: “Pay when paid”: The presumption is that E will pay, the only issue is when payment is actually made, rather than if . When E rejects payment, “pay when paid” is not triggered: risk of non-payment (which was not passed on to SC) still remains with MC. Common in the UAE and outlawed in some jurisdictions. 4
“Pay if Paid” example: “Subcontractor agrees that Contractor shall never be obligated to pay Subcontractor under any circumstances, unless and until funds are in hand received by Contractor in full...This is a condition precedent to any obligation of Contractor, and shall not be construed as a time of payment clause... “ Purpose: to shift the risk of non-payment from the MC to the SC. 5
How “pay if paid” is triggered: “Pay if paid”: even though the risk of non- payment is intended to be passed on to the SC, a simple statement by E that it would not be making payment may again not be sufficient for as long as payment by E may still be possible following legal action. Rare in the UAE and against public policy in some jurisdictions. 6
Consideration for conditional clauses Conditional clause = SC risks financing works because according to Article 891 of the UAE Civil Code, he has no access to E. What does SC obtain in return? MC must: adopt SC’s claims pursue them with E If not, MC cannot rely on a conditional clause. 7
UAE statutory law background to conditional payment structures in construction Art.891 of UAE Civil Code: no access to E. Arts. 420-428 of UAE Civil Code: “Dispositions conditional by suspension or deferment ” Art 423 : “In order for the suspension to be valid, the Condition must be an event which has not taken place, but which could take place and is not impossible.” Art 428 : “A Condition must be observed as far as is possible.” 8
Conditional clauses in UAE practice - Amicable settlement; - SC hopes for payment to be made by a party over whom it has no control, i.e. E; - If no payment or settlement, SC threatens MC with legal action; - Basis: not been paid, no other target. 9
Jurisprudence: English & UAE Law English Law: - Durabella case: MC impliedly undertakes to pursue SC’s claims by all means available or it cannot rely upon the provision. - Section 113 Housing Grants, Construction and Regeneration Act 1996: conditional clauses illegal. 10
Jurisprudence : English & UAE UAE jurisprudence: Dubai Ct of Cass. Case No. 281/ 1995: Upheld obligation by MC to pay SC, before receiving payment from E and despite a “pay when paid” clause, if project complete. Dubai Ct of Cass. Case No. 240/2006, Dubai Ct of Cass. Case No. 267/2007, Dubai Ct of Cass. Case No. 83/2009. Upheld: MC does not have to pay . 11
Jurisprudence: English & UAE (Cont’d) UAE jurisprudence: Rationale of decisions: MC imposed a condition that payments to SC would be paid when received by E. This is an obligation suspended until the conditional fact materialised. SC cannot claim until the condition was met, i.e. payment received by MC from E. 12
Jurisprudence : English & UAE Law (Cont’d) UAE Law: SC’s claims were made on the simple basis of a breach of contract for non-payment. SC’s position was countered by application of Art. 420 of UAE Civil Code: condition precedent (payment by E) not occurred. 13
Alternatives to pursuing SC claims Given that: - UAE jurisprudence discouraging for SCs; - “ p.i.p" clauses are relatively rare in the UAE; - “ p.w.p ” clauses defer timing of payment; - Art 428: efforts req’d to realise a condition; - Consideration SC enjoys: MC’s to pursue SC’s claims, Consider: - if other alternatives exist for SC + - if their timing is critical. 14
Alternatives to pursuing SC claims 1st Alternative : direct payment agreements Muqawala section of the Civil Code, Art.891: exceptional possibility to be executed by way of an assignment by MC to E of the obligation to pay SC. 15
Alternatives to pursuing SC claims 1st Alternative : direct payment agreements Example: Letter from E to SC, cc to MC Further to our Letter of Intent, referenced above, we confirm that all your payments related to the above MEP SC Agreement with the MC shall be made directly by E to you upon receipt of the Engineer’s payment certificates at the times and manner set out in the Appendix to Form of Tender Conditions of Contract of the Subcontract Agreement entered into between the MC and yourselves.” 16
Alternatives to pursuing SC claims 1st Alternative : direct payment agreements with the employer Problems: - can serve as tool for E to deflect liability for SC’s payments onto MC and vice versa; - not be subject to an arb. clause; - SC cannot join both parties before same authority. 17
Alternatives to pursuing SC claims The 2nd alternative: lack of pursuit of SC’s claims This can be argued by SC when: - E rejects SC’s claim, and MC challenges rejection but does not pursue, or; - E defers payment to an indefinite point in time that can no longer be considered as reasonable and MC still does not pursue. 18
Alternatives to pursuing SC claims The 2nd alternative: lack of pursuit of SC’s claims MC when accused of lack of pursuit can: - argue SC’s allegations are unsubstantiated; - produce correspondence addressed by MC to E, requesting payment; - show that it has commenced legal action against E or at least has threatened this. 19
Alternatives to pursuing SC claims The 2nd alternative: lack of pursuit of SC’s claims In justifying any reluctance to sue E, MC may also argue: - Prematurity of legal proceedings vs. E; - Normal process in pursuing claims vs. E; - commercial or contractual considerations; - common industry practice before MCs sue Es. 20
E’s rejection of SC’s claims What are MC’s options , given that: - If MC does not challenge E’s rejection of SC’s claims, it cannot then rely on a conditional clause and that; - the MC would have an obligation to first show pursuit of SC’s claims before it can rely upon any conditional clause. 21
M C’s options if E rejects payment: Option 1 Option 2 Advise SC of E’s Advise SC of E’s decision and invoke decision and invoke ‘ pwp ’ clause. ‘ p.i.p ’ clause. Lack of pursuit: Lack of pursuit: Art. 428: “ pwp ” Art. 428: “ p.i.p ” not triggered not triggered 22
MC’s options if E rejects payment: Option 3 Option 4 Option 5 adopt E’s reasoning, produce its own if it relates to an reasoning as to why alleged or proven SC would not be SC’s default. entitled to payment. neither “ pwp ” or neither “ pwp ” or “ p.i.p ” relevant “ p.i.p ” relevant challenge E’s rejection and pursue SC’s claims MC can rely on either “ pwp ” or “ p.i.p ”. 23
Timing as a key factor to SC’s strategy How should SC plan his arguments against MC on lack of pursuit, whether E rejects SC’s claims or not, given that: Commencing proceedings against MC prematurely has historically been proven to be unsuccessful and that; MC may have his own agenda on when and how he carries out any staggered steps towards pursuit of SC’s claims. 24
TIMING S/C’s DEMAND BASIS Contractual When invoices are Payment; issued/not paid ; Evidence of monthly Upon receiving Contractual invoices/final negative reply . statement inclusion. Evidence of rejection Contractual Inclusion is evidenced. of payment by E. Contractual- E rejects payment Payment/Legal deactivation of and MC’s agrees. Notice. conditional clause Evidence of pursuit E rejects but MC’s Legal: lack of of payment. does not agree. pursuit. Art.428 25
TIMING S/C’s DEMAND BASIS MC objects to SC’s Legal Notice if: scope of Legal: impossible claim and does not works compl., DLP pass. condition-Art 423 refer to E. When evidence of Evidence of legal Legal: lack of pursuit provided. notice to E. pursuit. Art.428 Deadline in legal Evidence of legal Legal: lack of notice expired. proceedings against E. pursuit. Art.428 Legal action against No further action by E commenced by SC. MC. If no legal Legal Notice if: scope of Legal: lack of notice/action works compl., DLP pass pursuit. Art.428 26 issued. + proof pursuing MC.
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