PITFALLS & TIPS OF DEALING WITH SUBCONTRACT NOMINATION UNDER FIDIC & UAE CIVIL LAW
The construction industry is a complex and challenging field, where many parties are involved in completing a project. One such party is the subcontractor, who is often nominated by the main contractor to perform a specific portion of work. The use of subcontract nomination is common practice in construction projects under the FIDIC and UAE Civil Law frameworks. However, it is not without its pitfalls. In this article, we will explore the risks associated with subcontract nomination, the necessary amendments to main and subcontract conditions, the procedures of subcontract nomination, the rights and obligations of nominated subcontractors (NSCs), the consequences of the default of NSCs, and how to improve nomination practice.
Why Nominate? Subcontract nomination is a common practice in the construction industry. The main contractor may not have the expertise or resources to perform certain portions of work, or they may want to reduce their risk exposure by delegating certain responsibilities to specialized subcontractors. Nomination can also provide cost savings for the main contractor, as they can negotiate favorable rates with their preferred subcontractors.
Nomination Risks Nomination is not without its risks. The main contractor may nominate a subcontractor who is not competent or financially stable, leading to delays or defaults in project completion. The subcontractor may also fail to perform according to the agreed-upon terms, leading to additional costs and potential litigation. Furthermore, the main contractor may be liable for the actions of the nominated subcontractor, making it critical to nominate subcontractors with a proven track record of performance.
Contractual & Legal Frameworks Nomination is governed by both contractual and legal frameworks. Under the FIDIC and UAE Civil Law frameworks, the main contractor is responsible for nominating subcontractors and ensuring their performance. The contract must specify the scope of work to be performed by the subcontractor, the agreed-upon rates, and the timeline for completion. The contract must also include provisions for termination and re-nomination if the subcontractor fails to perform.
Necessary Amendments To ensure a successful nomination process, necessary amendments must be made to the main and subcontract conditions. The main contractor must be given the authority to nominate subcontractors and specify the scope of work. The subcontract must clearly state the rights and obligations of the subcontractor and include provisions for default, termination, and re-nomination.
Procedures of Subcontract Nomination The nomination process begins with the main contractor issuing a letter of intent to the proposed subcontractor. The letter should specify the scope of work, rates, and timeline for completion. The subcontractor then provides a formal acceptance, and the main contractor issues a subcontract agreement. The subcontractor must then provide performance security, such as a performance bond, to ensure timely completion of work.
Rights & Obligations of NSCs Once nominated, the subcontractor has certain rights and obligations. They have the right to carry out the scope of work as specified in the contract and must provide timely completion of work. They must also ensure compliance with the contract and maintain appropriate insurance coverage. The subcontractor is responsible for their own resources, tools, and equipment, and for the safety of their workers.
Objection to Nomination If the main contractor objects to the proposed subcontractor, they must provide valid reasons for their objection. The subcontractor has the right to respond to any objections and provide evidence of their competence and financial stability. If the objection is not resolved, the main contractor may nominate an alternative subcontractor.
Dealing with Default of NSCs If the subcontractor defaults, the main contractor must take appropriate action to mitigate the impact on the project. This may include terminating the subcontract and re-nominating an alternative subcontractor. The main contractor may also be entitled to claim damages from the defaulting subcontractor.
Suppose a construction project is being undertaken in Dubai, UAE, under the FIDIC contract. The employer nominates a subcontractor to perform electrical work on the project. The main contractor must ensure that the subcontractor has the necessary permits and licenses to perform the work, and their obligations align with those of the main contractor and employer.
The payment terms for the subcontractor are set out in the contract, with a payment schedule based on the completion of specific milestones. The subcontractor must have adequate insurance coverage, including liability insurance and workers’ compensation insurance.
This article discusses the use of subcontract nomination in construction projects under the FIDIC and UAE Civil Law frameworks. It explores the reasons for nomination, the associated risks, necessary amendments to main and subcontract conditions, procedures of subcontract nomination, rights and obligations of nominated subcontractors, objections to nomination, and dealing with default of nominated subcontractors. The article emphasizes the importance of nominating competent and financially stable subcontractors and taking appropriate action in case of default. It concludes with recommendations on how to improve nomination practice.