Terms of employment

In part two of our latest legal series, Dennis Brand, senior legal advisor for Berrymans Lace Mawer looks in more detail at the issues of nominated subcontractors.

COMMENT, Human Resource

In the event that a contractor refuses to enter into a contract with a nominated subcontractor, the engineer may do any of the following:

  • nominate an alternative subcontractor to whom the contractor would not object;
  •  omit from the contract the work that is the subject of the nomination and have it carried out by an independent contractor. It should be noted that this may lead to claims by the contractor;

  •  seek to negotiate more favourable contractual terms with the nominated subcontractor;
  •  subject to the contractor's agreement, indemnify them against any liability they might suffer from working with the nominated subcontractor on the terms that the subcontractor will accept;
  •  direct the contractor to carry out the work or arrange for the supply of the goods through a variation under Clause 51 of the International Federation of Consulting Engineers' (FIDIC) Red Book 4th Edition. However, taking such action may also result in claims by the contractor.

FIDIC design requirements

One important provision in the Red Book 4th Edition relates to the inclusion of design requirements in a nominated subcontract.

Clause 59.3 provides: If in connection with any provisional sum, the services...include any matter of design or specification...of the permanent works...to be incorporated therein, such requirement shall be expressly stated in the contract and included in any nominated subcontract. The subcontract shall specify that the nominated subcontractor will indemnify the contractor from all claims, proceedings, damages, costs, charges and expenses arising out of any failure to perform such obligations or to fulfil such liabilities.

It is clear therefore that a subcontractor will be liable for any design that they are contracted to produce if it subsequently proves to be faulty. Where design does arise expressly in construction contracts, the standard of design duty is normally set out in the form of an undertaking by the designer that they will exercise all reasonable skill and care.

Payment terms

Payment for a nominated subcontractor is included within a contract's provisional sums. Clause 58.2 of Red Book 4th Edition provides that the engineer will have authority to issue instructions in respect of the work.

The contractor and subcontractor will be entitled to payment in accordance with Clause 52 (variations) and Clause 59.4 respectively.Therefore, the contractor's financial risk is substantially reduced as long as the provisional sum is sufficient to cover the value of the subcontractor's services.

Dealing with defects

The contractor is responsible for the acts, defaults and neglects of any subcontractor as fully as if they were their own. Where a nominated subcontractor is providing design or specification of any part of the permanent works or of plant to be incorporated therein, the subcontract must provide that they will indemnify the contractor in connection with any failure to perform such obligations or to fulfil such liabilities.

Red Book 1999

The Red Book 1999 is recognised as one of the more up to date FIDIC standard forms of contracts for construction. It contains definitions and provisions in respect of subcontractor and nominated subcontractors that are similar to FIDIC's Red Book 4th Edition.

Notwithstanding the provisions of the various standard forms of construction and engineering contracts available, if a contract is to be performed in the UAE it is likely that the governing law of the initial contract and any subcontract will be that of the UAE and the particular Emirate where the project is to be constructed.

Therefore, the provisions of The Civil Code will apply.

Federal Law No 5 of 1985 (The Civil Code) contains express provisions about contracts to make a thing or perform a task (Muqawala) and includes specific provisions concerning construction and engineering contracts.Article 890 of The Civil Code provides that a firm may subcontract whole or part of the work unless prevented by the contract or if the nature of the work requires the contractor to perform it in person. However, the main contractor will continue to remain liable towards the employer.

Article 891 of The Civil Code expressly precludes the subcontractor from claiming directly from the employer any amounts that are properly claimed against the main contractor unless the contractor has assigned their rights in respect of the employer to the subcontractor.

The Civil Code takes in Article 890 a somewhat simplistic view as to what basis a subcontractor can be engaged and the extent of their liability, or more particularly that of the contractor. However, with regards to design liability, Articles 880-883 of The Civil Code have imposed strict joint liability upon the contractor and architect for a ten year period from the date of delivery of the work that 'threatens the stability or safety of the building' .

Current practice

The Civil Code does not differentiate between the types of subcontractor employed within the construction and engineering industry. This would indicate that the courts (or arbitrators applying the law) will not consider it necessary to distinguish between nominated subcontractors and domestic subcontractors, as are included in the various standard forms of construction and engineering contract.

For that reason it is to be assumed that a contractor will likely be held responsible for the performance of a nominated subcontractor. Therefore the recommended methods of protection as described within this article, insofar as they are available to the contractor, should be applied.

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