"A usually more successful approach would be for the subcontractor's claim to be presented, as the main contractor's failure to pursue the subcontractor's claim"
The often-dreaded pay-when-paid clause in subcontracts has deterred many from pursuing what is an otherwise legitimate claim.
The common concern has always been that a defence would almost certainly be raised by the main contractor that no corresponding payment has been made by the employer and, as such, the subcontractor's claim is premature.
However, it has been recently demonstrated that pay-when-paid clauses are not undefeatable, provided a strategic approach is adopted.
In the past, attempts by subcontractors to claim amounts due to them, have been dismissed mainly because of the way they were pleaded.
If the subcontractor's payment is dependent on payment to the main contractor by the employer, it may not be sufficient for the subcontractor to simply claim that the main contractor has not made payment.
This is because a contactor may plead non-payment by a party further up the contractual chain and avoid any further liability.
Recently, a different approach to arguing what the main contractor should have done but did not, has proven to be far more successful.
This approach focuses on the fact that an implied obligation exists on the part of a main contractor to pursue the rights and entitlement of a subcontractor.
This, a contractor must do with every means that the subcontractor would, if it could enjoy a direct contractual relationship with the employer.
Therefore, a usually more successful approach, would be for the subcontractor's claim to be presented, as the main contractor's failure to pursue the subcontractor's claim.
To achieve this, the subcontractor must apply continued pressure on the main contractor who would need to demonstrate that a pursuit of the subcontractor's claim is purposefully made.
There are instances where the main contractor has gone to great lengths in ensuring that the subcontractor's claims are stopped in their tracks, by carefully crafted clauses within the subcontract, in addition to the pay-when paid provisions.
For instance, certain subcontracts provide that the main contractor can unilaterally suspend any proceedings that the subcontractor commenced against it, pending resolution of any corresponding dispute the main contractor has with the employer.
Even in those instances, continued pressure on the main contractor has proven to be effective in paralysing even the most stringent subcontract clauses because, ultimately, all clauses in any contract must be administered in good faith.
The overriding principle of good faith is set out in Article 246 of the UAE Civil Code, an English translation of which provides that: "a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith".
Therefore, a pay-when-paid clause that is relied upon by the main contractor without pursuit of the subcontractor's claims can be argued to be in bad faith.
The same applies to an abusive suspension of the dispute resolution process commenced by the subcontractor if no corresponding dispute resolution process is actively and meaningfully pursued by the main contractor against the employer.
Therefore, an effective strategy on the part of the subcontractor wishing to defeat the pay-when-paid clause, would be to argue that the main contractor cannot evade payment simply because it has not received corresponding payment from the employer.
This is because, it is irrelevant whether payment from the employer has been received by the main contractor, to the extent that the main contractor demonstrates no attempt to legally pursue and obtain, from the employer, payment of the subcontractor's dues.
If one takes a step back and considers for a moment the purpose of the pay-when-paid clause, it will become apparent that its purpose is to bridge the gap of a lack of privity of contract between a subcontractor and an employer.
Essentially, a pay-when paid clause amounts to an undertaking by the subcontractor to bear the risk of a delay in payment by the employer.
Therefore, given the lack of privity of contract, the consideration that the subcontractor must enjoy, by agreeing to the unenviable pay-when-paid clause, is that its claims for payment must be adopted and pursued by the main contractor, as actively as if they were its own.
Any failure to do so, can be argued to be in breach of the principle of good faith and, as such, must prohibit the main contractor from relying on the pay-when-paid clause, thus making him directly accountable to the subcontractor for the amounts it claims.
From a contractor's point of view, his first impulse would of course be to argue that he has not received corresponding payments and that the subcontractor's resorting to court or arbitration is premature and in breach of, what can be said to be, clear and express payment terms under the subcontract.
When confronted with a lack of pursuit argument, main contractors have often responded with an assertion that a pursuit was made but this rarely amounts to anything more than a few imploring letters to the employer.
In those instances where the option to suspend the dispute resolution process is available, main contractors will often resort to it.
Whenever the pressure mounts on them to disclose active pursuit of the subcontractor's claims, they have been known to trigger a suspension clause, if available to them that would freeze the entire dispute resolution process for the subcontractor.
However, this approach only worsens the main contractor's position because it stresses even more the absence of good faith in the way he administers the subcontract.
A suspension option is usually available to protect the main contractor from an impatient subcontractor who, despite the main contractor's best efforts to obtain payment, nevertheless wishes to expedite the process and obtain payment faster than what he contractually agreed to.
However, if the main contractor fails to prove that meaningful efforts have been made, resorting to suspension only exacerbates his already vulnerable position.
Tribunals will often allow a reasonable suspension of proceedings, purely in order to give the benefit of the doubt to a defending main contractor and to afford an opportunity for disputes to be either streamlined (in one process against the employer) or settled.
Even in instances where an arbitration is formally commenced against the employer by the main contractor, the subcontractor would be in no position to know exactly how his claim is pursued, if at all.
This is why, Tribunals that hear a subcontractor-main contractor dispute, will often require that regular updates be provided to ensure that the main contractor continues to pursue the subcontractor's claims until they are resolved.
At this point, the subcontractor's case begins to gain traction.
This is because, he will either have his claim actively pursued by the main contractor (and at the main contractor's expense) or the proceedings he has commenced against the main contractor will resume, with no further recourse to the pay-when-paid clause.
In summary, like in most cases, it is not so much the result that matters but what preceded the result.
This applies particularly to subcontractor's claims which are often plagued by conditional clauses, suspensions and endless deferment of their dues.
In short, if a subcontractor presents his case on the core breach of the main contractor (i.e., lack of pursuit and breach of good faith) rather than the current result (lack of payment) he is far more likely to ensure that his claim is met with justice.
Originally Published by MEP Middle East
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
