Privity of Contracts under the UAE Law

In the modern construction sector, subcontracting is common. Without hiring outside parties with different skills and capabilities to complete particular aspects of the works, it would almost likely be impossible for one contractor to deliver a construction project, especially if the project entails a certain level of complexity. However, from the standpoint of the project owner, it does appear preferable to hire a single primary contractor who is still in charge of all other subcontractors. In light of this, it is not unexpected that the project owner (client/employer), the main contractor, and the subcontractor are typically the main participants in construction projects. Naturally, there are a variety of contractual and legal difficulties that arise from this interactive chain.

The basic rule is that the UAE respects privity of contracts, so that a third party who is not party to a contract generally does not enjoy any rights arising from it. However, Article 254 of UAE Federal Law No. 5 of 1985 on the Civil Transactions Law of the UAE allows a contract to expressly stipulate performance for the benefit of a third party.

Under UAE law, the privity of contract is a well-established notion. In most cases, the subcontractor has no contractual obligations to the employer or the following owners because it is not a party to a contract with the employer. The subcontractor may not be subject to obligations under the construction agreement between the employer and the primary contractor unless the latter has agreed to them.

 In UAE the doctrine of privity of contract exists and it clearly states that only the parties to the contract can enforce the rights and obligations and a third person has no rights on such contracts. According to article 129 of the Civil Code, the essential elements constituting a contract are:

1. “That the two parties to the contractual agreement should agree upon the essential elements;
2. The subject matter of the contract must be something which is capable of being possible, permissible, defined, specified, or dealt in; and
3. The obligation arising out of a contract must be for a lawful purpose.

The above elements of a contract go hand-in-hand with the privity of the contract. Pursuant to article 141 of the UAE Civil Code, a contract is formed only when the agreement between the parties to the contract concerning the essential elements of the obligation.

Employer’s Liability to the Subcontractor

The law of the UAE permits subcontracting. A contractor may subcontract all or a portion of their labor unless the contract specifies otherwise, and they are still responsible to their employer, according to Article 890 of the Civil Code. The subcontractor chosen by the main contractor is known as the domestic subcontractor, whereas the subcontractor chosen by the employer is known as the nominated subcontractor.

The principal contractor and the subcontractor will make the subcontract agreement in both situations. A contractual relationship between the employer and the subcontractor won’t therefore develop. As a result, neither the subcontractor nor the employer shall have any contractual liability to the other party for any dispute under the subcontract agreement or for any delayed or substandard work under the subcontract agreement. A subcontractor cannot assert any claims against the employer that are owed to them by the principal contractor unless they have made an assignment against the employer, according to article 891 of the Civil Code.

In a ruling dated 20 April 2005, the UAE Court of Cassation rules that the main contractor’s liability against the employer continues to be the same in accordance with articles 891 and 892 of the UAE Civil Code and that there will be no direct contractual relationships between the employer and the subcontractor. Therefore, unless the main contract specifies otherwise, the sub-contract agreement establishes the rights and obligations of the main contractor and subcontractor. The employer cannot rely on this agreement. There are no contractual obligations between the subcontractor and the employer if they are not both parties to the agreement.

Practical issues arise when the subcontract agreement contains a “pay-when-paid” clause, which main contractors frequently impose. Pay-when-paid agreements are valid in the UAE. A pay-when-paid clause prevents the subcontractor from claiming the principal contractor until the employer has compensated the latter. The court may dismiss the lawsuit because the claim was filed too soon if the subcontractor sues the primary contractor before the latter has been paid.

Last but not least, the subcontractor may use Article 247 of the UAE Civil Transactions Code to halt work if payment is not received. However, due to the lack of a contractual right to halt the performance of the works for non-payment, this right must be used with caution. A subcontractor must seek legal assistance to verify that the right of suspension outlined in Article 247 can be used in their specific situation. The proper notification of the principal contractor, the fulfillment of the subcontractor’s primary contractual obligations, and whether or not the payments have been certified are just a few of the factors that should be taken into account when determining whether the subcontractor can exercise the suspension right.