CLI ARTICLE ON SUBCONTRACTING

Proposals for a subcontractor’s
escape from a conditional clause
Antonios
Dimitracopoulos
Bin Shabib &
Associates, UAE
Types of conditional clauses
Conditional clauses can be broadly divided
into two categories, namely ‘pay when paid’
and, ‘pay if paid’ clauses.
Pay when paid clauses generally contain a
condition such that payment by the main
contractor to the subcontractor will be
dependent upon payment being first received
by the main contractor from the employer.
The main purpose of a pay when paid
clause is to defer payment to a point in time
The common practice is that the main contractor will contractually delegate various elements of
its works to specialist subcontractors. Such subcontractors may be sourced and chosen by the
main contractor or may be specifically nominated by the employer.
The UAE Civil Code1
at Article 8902
expressly provides for the right of the main contractor to
subcontract, provided there are no contractual terms preventing this in the main contract.
Therefore, main contractors are potentially exposed to making payments to their subcontractors
when they have not themselves received the corresponding payments from the employer.
Main contractors, therefore, often include conditional payment clauses in subcontracts so as to
confer payment related risks onto the subcontractor.
that is determined by a specific event, namely
payment by the employer to the contractor.
The occurrence of pay if paid clauses in
the UAE is relatively uncommon. In general,
whenever pay if paid clauses are included in
subcontracts internationally, they may
amount to specific wording that aims to
clarify that a shift of the risk of non-payment
has been agreed to. Instances of pay if paid
clauses, identified in primarily US cases, can
be focused particularly on clearly and
aggressively reflecting the parties’ intentions.
CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 2 June 2015 25

SUBCONTRACTOR’S ESCAPE
As indicated above, the intention of pay if
paid clauses depends on the eventuality
rather than on deferring the timing of
payment and to shift the risk of non-payment
from the main contractor to the
subcontractor.
UAE statutory law background to
conditional payment structures in
construction
UAE law provides a protective barrier for
the employer and confirms, in the Muqawala
section of the UAE Civil Code, Article 891,
that no claim may be addressed by the
subcontractor to the employer, save for
instances of assignment.3
This being the position, one must ask what
consideration does the subcontractor enjoy
in return for this unenviable shift in
risk-taking that conditional clauses impose?
For conditional clauses to have a fair sense
of purpose in a subcontract, the answer to
that question must revolve around the
following:
• the main contractor is obliged to adopt the
subcontractor’s claims for payment as if the
claims were its own;
• to the extent it considers the claims valid,
the main contractor must then pursue them
with the employer, again as if they were its
own; and
• any failure to do so should prohibit the
main contractor from relying on any
conditional clause, thus rendering it
directly accountable to the subcontractor.
In terms of legal authority, the concept of
conditional payments seems to fall squarely
within the ambit of Part 3, Section 1 of the
UAE Civil Code, relating to ‘Dispositions
conditional by suspension or deferment’,4
Article 428 of which supports the view that if
the performance of an obligation is subject
to a condition, then efforts must be made for
that condition to be observed.5
It is not relevant how much time has passed
since payment to the subcontractor became
due, but rather what can be proven to have
taken place during such time. This would
appear to be a more dominant driver in
determining the operation of a conditional
clause under UAE law.
By contrast, if it can be shown that no
demonstrable efforts (in the context of
Article 428) have been made to observe the
condition, then it would be arguable under
UAE law that the main contractor can no
longer rely on a conditional pay when paid
clause and that to effectively avoid making
payment to the subcontractor, it would have
to resort to more substantive defences.
As will be seen below, recent UAE
jurisprudence has indicated that, in the
presence of a conditional clause, a claim
against the main contractor based purely on
a breach of the subcontract for non-payment
is likely to fail.
UAE jurisprudence
Whilst many disputes arising out of
subcontracts will be referred to private and
confidential arbitration, there have been a
few instances where an arbitration clause was
absent and litigation ensued.
From the cases readily reported, save one
case in 1995 where a distinction was made
by the Dubai courts on whether a project
had been completed or not6
before a
conditional payment clause could be relied
upon, most subsequent cases7
upheld the
validity of a pay when paid clause and
rejected the claims filed by the
subcontractors on the basis of them being
premature.Inonesuchcase,8
theapplication
of conditional payment clauses in a
subcontract was analysed as follows:
• the contractor imposed a condition that
payments to the subcontractor would be
paid when such moneys from the employer
were paid;
• this is an obligation suspended until the
conditional fact materialised; and
• the subcontractor, therefore, did not have
the right to claim the balance of its dues
until the condition was met, that is, payment
was received by the main contractor from
the employer.
In all these cases, the subcontractor’s claims
were made on the simple basis of a breach
of contract for non-payment. They were not
based on an argument that the true breach
was that the main contractor had failed to
pursue fully the subcontractor’s claims against
When faced with a
conditional payment clause,
the subcontractor’s main
strategy in pursuing its claims
against the main contractor is
one of timing
26 CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 2 June 2015

the employer. Nor were they based on the
employer having rejected such claims, thus
containing the dispute strictly between the
main contractor and the subcontractor. The
subcontractor’s position was countered by a
straightforward application of Article 420 of
the UAE Civil Code,9
in that the condition
precedent (of payment by the employer) had
not yet occurred.
Alternative bases for the
subcontractor to pursue its claims
In light of the above, and given the factors set
out below, we explore two alternative bases
upon which a subcontractor can successfully
pursue its claims against the main contractor,
including whether the timing of any actions it
needs to take to achieve this:
• pay if paid clauses are relatively rare in the
UAE;
• pay when paid clauses defer the timing of
payment;
• the UAE Civil Code acknowledges that
some effort must be made for a condition
to materialise; and
• that the consideration that the
subcontractor must enjoy is the main
contractor’s obligation of pursuing the
subcontractor’s claims.
Direct payment agreements with the
employer
Although the ability for subcontractors to
successfully negotiate the terms of their
subcontract are usually very limited, we
have seen instances where nominated
subcontractors managed to extract a direct
payment obligation by the employer, at least
for certified amounts, thus bypassing the
main contractor.
This option is also envisaged by UAE
law, in the Muqawala section of the Civil
Code,10
as a possible exception to be
executed by way of assigning the obligation
to pay the subcontractor from the
contractor to the employer.
Two issues are of note in instances where
direct payment mechanisms have been
attempted in the UAE:
• thestandardobligationofthemaincontractor
to effect payment to the subcontractor (on
a pay when paid basis) is often not removed
from either of the two subcontracts; and
• court proceedings that are normally
brought by the subcontractor against both
the employer and the main contractor
have resulted in the court ordering the
subcontractor to proceed first to arbitration
under the subcontract against the main
contractor and, if that were to fail or result
in non-payment, then – and only then –
could the subcontractor proceed in court
against the employer under the direct
payment agreement.
Direct payment agreements are seldom
well-coordinated with the contents of either
the main contract or the subcontract and
commonly serve as a tool for the employer
to deflect liability for the subcontractor’s
payments onto the main contractor and
vice versa.
Lack of pursuit of subcontractor’s claims
A further option for the subcontractor
is to argue that the true breach lies in
the main contractor failing to pursue the
subcontractor’s claims against the employer
to the fullest extent permissible by law. The
instances where the subcontractor could
legitimately argue this include:
• when the employer has rejected the
subcontractor’s claim, the main contractor
has not accepted such rejection, but has
failed to pursue the matter by way of a
dispute resolution process or otherwise; or
• when the employer has deferred payment
to an indefinite point in time that can
no longer be considered reasonable and
the main contractor again fails to pursue
the matter whether by way of a dispute
resolution process or otherwise.
Article 428 of the UAE Civil Code sets out the
degree to which fulfilment of the condition
must be pursued. This lends itself to an
argument that a main contractor’s failure
to pursue the subcontractor’s claims could
effectively amount to a failure to observe the
condition (of payment by the employer) to
the maximum degree possible.
In the presence of a conditional clause, it is… unwise for the
subcontractor to commence legal proceedings against the main
contractor on the simple basis of a debt collection exercise

SUBCONTRACTOR’S ESCAPE
One must be mindful of the fact that main
contractors would commonly be reluctant to
start a dispute resolution process against an
employer purely in order to pursue their
subcontractors’ claims. In demonstrating such
reluctance, the main contractor may argue:
• that at the stage the subcontractor’s action
commenced, it would be unreasonable for it
(the main contractor) to have commenced
legal proceedings; or
• that this may be supported by reference
to various commercial or contractual
considerations.
Whichever option the main contractor
adopts, it is likely that if pursuit of the
subcontractor’s claim is to be argued as a
condition precedent for any conditional
SEQUENCE TIMING S/C’s REQUEST/DEMAND BASIS
A
When invoices become
overdue.
Payment of its outstanding invoices/
dues.
Contractual.
B
When negative reply is
received from main contractor
(MC) on first request.
Evidence of inclusion of its work in
monthly invoices to Employer (E).
Contractual/correspondence based.
C
Once evidence of inclusion
in monthly invoices/final
statement of accounts has
been provided.
Evidence of rejection of payment by E. Contractual/correspondence based.
D
Pay when paid (PWP): once
confirmation of E’s rejection
and MC’s agreement to this is
obtained.
Payment of dues by MC.
Legal: impossibility of condition, Article 423
of Civil Code.
E
Pay if paid (PIP)/PWP: whether
or not E has rejected payment
& whether or not MC has
contested any rejection by E.
Evidence of pursuit of payment.
Legal: lack of pursuit, Articles 420 and 428
of Civil Code.
F
Once the scope of
subcontractor’s (SC) work has
been completed.
of Civil Code.
G
Again when the project has
been handed over.
of Civil Code.
H
Again when the defects
liability period has expired.
of Civil Code.
I
When negative reply is
received from MC on the
above request.
Evidence of a legal notice issued for
amounts inclusive of the subcontractor’s
dues.
Legal: Lack of pursuit, Articles 420 and 428
of Civil Code.
J When the deadline of a legal
notice expires.
Evidence of legal proceedings having
been commenced.
Legal: Lack of pursuit, Articles 420 and 428
of Civil Code.
clause to be relied upon, then such condition
could be easily satisfied in most instances,
save for the case of the main contractor
formally commencing legal proceedings
against the employer.
Employer’s outright rejection of a
subcontractor’s claim
As indicated above, instances of an outright
rejection by the employer of a main
contractor’s claim that includes or relates to
the subcontractor’s works would convert the
question of when payment would be made to
a definite non-payment.
In terms of how this can be
accommodated within the confines of
28 CONSTRUCTION LAW INTERNATIONAL Volume 10 Issue 1 March 2015

UAE law, Articles 420–428 of the UAE
Civil Code deal with ‘Dispositions
conditional by suspension or deferment’,
essentially relating to conditional clauses.
The main contractor’s options in instances
of outright rejection by the employer would
be to:
• challenge the merits of the subcontractor’s
entitlement (rather than simply its timing)
and adopt arguments raised by the
employer/engineer;
• challenge the merits of the subcontractor’s
entitlement (rather than simply its timing)
and produce its own arguments for doing so;
or
• challenge the employer’s rejection,
pursuing claims that would include those
of the subcontractor.
Which option the main contractor adopts
can be of critical relevance to the application
of either a pay when paid clause or a pay if
paid clause.
Pay when paid clauses are based on a
presumption that payment would eventually
be made. They would, therefore, become
inapplicable if the employer refused to pay,
for the simple reason that for the main
contractor to rely on them, it would have to
unilaterally convert the condition of ‘when’
to a condition of ‘if/whether’.
Timing as a key factor to a
subcontractor’s strategy
When being faced with a conditional payment
clause, the subcontractor’s main strategy in
pursuing its claims against the main contractor
is one of timing. Therefore, a subcontractor
that is deprived of its dues should sequence
its approach to a conditional payment clause
by documenting its requests as follows.
Once the main contractor is forced to file a
legal action against the employer, the
subcontractor’s claims against the main
contractor are effectively carried over onto
an action against the employer. Whilst the
subcontractor can have little control over
suchproceedings(unlessthemaincontractor
encourages them to assist), the conditional
clause will have been given the purpose and
substance that the parties intended.
On the assumption that an award or
judgment is eventually issued and, despite
the main contractor’s perceived best efforts,
the subcontractor’s claims (or any part
thereof) are not awarded, the question arises
whether this would be the end of the road for
the subcontractor. The answer to this
question would depend a lot more on what
the reason is behind the employer’s
exoneration, rather than on whether the
subcontract contained a pay if paid or a pay
when paid clause.
Conclusion
In the presence of a conditional clause, it is
generally accepted that it is unwise for the
subcontractor to commence legal proceedings
against the main contractor on the simple
basis of a debt collection exercise as it is
unlikely to succeed.
Ironically, the more unopposed (by the main
contractor) a subcontractor’s claim is, the
more difficult it is to control the payment
process and the more hindered it is by a
conditional clause. Conversely, any direct
challenge to its claims by the main contractor
may block the triggering of a conditional
clause, thus making the dispute resolution
process an affair that is confined solely between
the main contractor and the subcontractor.
Finally, the question of whether a
subcontractor can pursue its claims against the
main contractor, even after the employer has
been exonerated of any liability, will depend
more on the reasons behind this, rather than
on the nature of the conditional clause.
Notes
1 Federal Law No 1/1987.
2 An English translation of which states: ‘(1) A contractor
may entrust the performance of the whole or part of
the work to another contractor unless he is prevented
from so doing by a condition of the contract, or unless
the nature of the work requires that he do it in person.
(2) The first contractor shall remain liable as towards
the employer.’
3 An English translation states that: ‘Article 891:
A sub-contractor shall have no claim against the
employer for anything due to him from the first
contractor unless he has made an assignment to him
against the employer.’
4 Arts 420–428 of the Civil Code.
5 An English translation states: ‘Article 428: A Condition
must be observed as far as is possible.’
6 Dubai Court of Cassation Case No 281 of 1995: the
distinction related to an obligation by the main
contractor to pay the subcontractor, despite a
conditional clause, if the project has been completed.
7 Dubai Court of Cassation Case No 267 of 2007, Dubai
Court of Cassation Case No 83 of 2009.
8 Dubai Court of Cassation Case No 240 of 2006.
9 An English translation of which provides that: ‘Article
420: A Condition is a future matter upon the existence
or absence of which the full effectiveness (of a
disposition) depends.’
10 Art 891, as previously mentioned.
Antonios
Dimitracopoulos
MCIArb is a partner
with Bin Shabib &
Associates, practising
in the UAE since 1995.
He is dually qualified as
a solicitor of the Senior
Courts of England &
Wales and a Greek
attorney at law and a
registered arbitrator
with the Dubai
International
Arbitration Centre. His
practice focuses on all
aspects of dispute
resolution within the
local construction
industry, often acting
for subcontractors. He
has rights of audience
before the DIFC courts
and extensive
experience in both
UAE litigation and
arbitration. He can be
contacted at antonios.
dimitracopoulos@
bsa.ae.

CLI ARTICLE ON SUBCONTRACTING

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