This month we have a packed Law Update focusing on a sector that is a vital pillar for the region as it continues to push its economies to diversify. Education.
The Education sector has experienced, and overcome, its fair share of challenges. Today, across the region, it serves as an educational hub for nationals, residents, and a growing number of inbound international students.
The advances being made in the Education Sector are a result of Government initiatives being put in place to propel the sector to a global standard. This has piqued private sector interest and we are seeing more public private and international partnerships.
With Education being vital to the progress the region is making, we have a created an edition of Law Update that provides insights, commentary, and updates on the most pertinent developments within the sector. The articles come from a number of jurisdictions across the region and highlight key considerations and the latest legal trends taking shape.Read the full edition
Traditionally, under UAE law, a subcontractor has very limited grounds upon which to pursue an employer for unpaid amounts due from a main contractor under a subcontract.
In this article, we review a recent judgment of the UAE Federal Supreme Court (Judgment 851 of 2021) concerning claims made by a subcontractor against an employer and highlight some of the key practical considerations subcontractors should consider when negotiating the terms of a subcontract.
The employer engaged a main contractor under a muqawala (or building) contract, dated 20 June 2013, for the construction of a new private school on a plot of land belonging to the employer
The main contractor subsequently subcontracted out a portion of the works for execution by the subcontractor.
The subcontractor alleged that, despite satisfactorily completing the subcontracted works, the main contractor (and the project consultant) had not performed their obligations regarding the subcontractor’s legitimate entitlement to payment, despite various requests for them to do so.
The subcontractor therefore initiated legal action to recover AED 10,493,252 plus interest, jointly and severally, against the employer, the main contractor and the project consultant.
On 31 August 2020, the Court of First Instance ordered the main contractor to pay to the subcontractor the sum of AED 5,352,291 plus interest. No order was made against the employer or the project consultant.
Both the subcontractor and the main contractor appealed the Court of First Instance’s decision.
On 6 July 2021, the Court of Appeal held that:
The employer predictably appealed the decision of the Court of Appeal, arguing that the Court of Appeal’s reasoning was flawedfor the following reasons:
The Federal Supreme Court found in favour of the employer and granted the appeal.
In doing so, the Federal Supreme Court reaffirmed the importance of Articles 872, 890 and 891 of the UAE Federal Law No. (5) of 1985 on the Civil Transactions Law of the United Arab Emirates (otherwise more commonly known as the “UAE Civil Code”) as being settled law. In summary:
Based on these provisions, the Federal Supreme Court concluded that the subcontractor could not directly claim from the employer any sums otherwise due to it from the main contractor, unless: (i) the subcontractor concluded a direct contract with the employer (i.e. thereby creating privity of contract between the two parties); or (ii) the main contractor had assigned its right to seek payment from the employer to the subcontractor. Neither of these preconditions had occurred in this case.
The Federal Supreme Court’s judgment provides helpful clarification of the limited circumstances in which a subcontractor may claim against an employer under UAE law.
From a practical prespective, subcontractors may therefore wish to consider the following points:
⇒ If the subcontractor has completed and handed over to the main contractor its scope of work in accordance with the subcontract, UAE law prescribes that the subcontractor may seek a provisional attachment in respect of undisputed amounts owed to the main contractor by the employer (or indeed from other third parties) until a final judgment has been issued;
⇒ Where a pay-when-paid clause is included in a subcontract (as is typically the case), the subcontractor my try to mitigate the impact of such a provisionby seeking:
The Federal Supreme Court’s important judgment is a timely reminder to all stakeholders in the UAE construction market of the central importance of pacta sunt servanda and privity of contract under UAE law. It is clear that the UAE courts will not impose payment regimes that differ from those expressly agreed between the parties in accordance with the relevant underlying contract. Consequently, we recommend that parties keenly negotiate their contractual ‘red-lines’, particularly in respect of payment terms.
 Although a conditional letter of acceptance had been concluded between the Employer and the Subcontractor, this agreement never actually entered into effect.
Al Tamimi & Company’s Construction and Infrastructure team regularly advises on all elements of the construction procurement process. For further information please contact Euan Lloyd or Leith Al-Ali.