Proposals for a subcontractors escape from conditional clauses A - - PowerPoint PPT Presentation

Proposals for a subcontractor’s escape from conditional clauses A talk of The Society of Construction Law (Gulf) in Dubai

• n 13 January 2015

Antonios Dimitracopoulos

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www.scl-gulf.org

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Right to subcontract: UAE Civil Code Art.890 2 types: “pay when paid” and “pay if paid” MC’s Risk: E delaying or failing to pay MC Solution: conditional clauses 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

Purpose: defer the timing of payment.

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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…”

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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. Common in the UAE and outlawed in some jurisdictions. 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.

Purpose: to shift the risk of non-payment from the MC to the SC.

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“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... “

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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.

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adopt SC’s claims pursue them with E 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: If not, MC cannot rely on a conditional clause.

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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 428: “A Condition must be observed as far as is possible.” 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.”

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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.

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Jurisprudence: English & UAE Law

• Section 113 Housing Grants, Construction

and Regeneration Act 1996: conditional clauses illegal.

• Durabella case: MC impliedly undertakes

to pursue SC’s claims by all means available or it cannot rely upon the provision. English Law:

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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.

Jurisprudence: English & UAE (Cont’d) UAE jurisprudence:

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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.

Jurisprudence : English & UAE Law (Cont’d) UAE Law:

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SC’s claims were made on the simple basis

• f a breach of contract for non-payment.

SC’s position was countered by application

• f Art. 420 of UAE Civil Code: condition

precedent (payment by E) not occurred.

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.

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Alternatives to pursuing SC claims

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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

• bligation to pay SC.

Alternatives to pursuing SC claims 1st Alternative: direct payment agreements

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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.”

Alternatives to pursuing SC claims 1st Alternative: direct payment agreements with the employer

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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.

Alternatives to pursuing SC claims

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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.

Alternatives to pursuing SC claims

The 2nd alternative: lack of pursuit of SC’s claims

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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.

Alternatives to pursuing SC claims

The 2nd alternative: lack of pursuit of SC’s claims

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In justifying any reluctance to sue E, MC may also argue:

• Prematurity of legal proceedings vs. E;
• commercial or contractual considerations;
• Normal process in pursuing claims vs. E;
• common industry practice before MCs sue Es.

E’s rejection of SC’s claims

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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.

MC’s options if E rejects payment:

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Advise SC of E’s decision and invoke ‘pwp’ clause. Advise SC of E’s decision and invoke ‘p.i.p’ clause.

Lack of pursuit:

• Art. 428: “pwp”

not triggered Lack of pursuit:

• Art. 428: “p.i.p”

not triggered

Option 1 Option 2

MC’s options if E rejects payment:

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adopt E’s reasoning, if it relates to an alleged or proven SC’s default. produce its own reasoning as to why SC would not be entitled to payment.

challenge E’s rejection and pursue SC’s claims neither “pwp” or “p.i.p” relevant neither “pwp” or “p.i.p” relevant MC can rely on either “pwp” or “p.i.p”.

Option 3 Option 4 Option 5

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:

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MC may have his own agenda on when and how he carries out any staggered steps towards pursuit of SC’s claims. Commencing proceedings against MC prematurely has historically been proven to be unsuccessful and that;

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TIMING S/C’s DEMAND BASIS When invoices are issued/not paid; Upon receiving negative reply. Inclusion is evidenced. E rejects payment and MC’s agrees. E rejects but MC’s does not agree. Payment; Evidence of monthly invoices/final statement inclusion. Payment/Legal Notice. Contractual Contractual Contractual Contractual- deactivation of conditional clause Legal: lack of

• pursuit. Art.428

Evidence of pursuit

• f payment.

Evidence of rejection

• f payment by E.

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TIMING S/C’s DEMAND BASIS MC objects to SC’s claim and does not refer to E. When evidence of pursuit provided. Deadline in legal notice expired. Legal action against E commenced by MC. If no legal notice/action issued. Legal Notice if: scope of works compl., DLP pass. Evidence of legal notice to E. No further action by SC. Legal: impossible condition-Art 423 Legal: lack of

• pursuit. Art.428

Legal: lack of

• pursuit. Art.428

Legal: lack of

• pursuit. Art.428

Legal Notice if: scope of works compl., DLP pass + proof pursuing MC. Evidence of legal proceedings against E.

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Timing as a key factor to SC’s strategy

• Maximum expectation for SC when suing:

MC is forced to file a legal action against E.

• Once this is evidenced: SC’s claims against

MC are ‘housed’ in an action against E.

• SC can have little control over action

against E (unless MC encourages him to assist in these) but the conditional clause will have been given the purpose and substance that the parties intended.

Question:

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If E obtains an award or judgment in its favour, should SC still sue MC and is it relevant whether a “pay when paid” or a “pay if paid” clause applies? Answer: It depends on what the reason is behind E’s exoneration:

• MC’s direct liability or
• MC’s vicarious liability

If E obtains an award/judgment in its favour, and a “pwp” clause is applicable:

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The risk of E’s non-payment is in any event not passed by MC on to SC; SC’s decision to sue MC is more dependant

• n whether the award/judgment points

towards the MC’s direct or vicarious liability.

If E obtains an award/judgment in its favour, and a “p.i.p” clause is applicable:

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The risk of non-payment by E is intended to be passed by MC on to SC; However, SC’s decision to sue MC is again more dependant on whether the award /judgment points towards the MC’s direct or vicarious liability.

Conclusion on Conditional clauses:

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• no major difference between ‘p.i.p &’pwp’;
• unopposed SC’s claims: greater reliance on

any conditional clause;

• MC challenge to SC’s claims deactivates

any conditional clause for such claims.

• lack of pursuit: a plausible argument

against any conditional payment clause;

• timetable can increase pressure on MC;
• SC’s decision to sue MC, post E vs MC award

/ judgment, depends on underlying liability.

THANK YOU

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