Privity of Contracts Under UAE Law

The doctrine of privity of contract is a well-established principle under UAE law. This principle states that the rights and obligations in an agreement arise only between the parties to that contract and are enforceable between them and a third party cannot exercise such rights and obligations. The effect of this doctrine is that, if two parties enter into a contract for the benefit of a third party, the third-party is not allowed to enforce any of the terms agreed in this contract.

Article 125 of Federal Law Number 5 1985 on the Civil Transactions Law of the United Arab Emirates (the Civil Code) defines the contract as a meeting of a valid offer expressed by one of the contracting parties with an acceptance made by the other party in the contract. The making of a contract requires mutual consent of the two parties which creates a legal obligation between the two parties. 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. An example of the doctrine of privity of contract is the case of Dunlop Pneumatic Tyre Company Ltd vs. Selfridge & Co Ltd, UKHL 1 (26 April 1915), AC 847. In this case, Dunlop is a tire manufacturing company that does not want to sell its products below the standard resale price. Dunlop agreed with its dealer Dew & Co. not to sell the tire below the recommended retail price. Dunlop also required their dealers to get the same undertaking from their retailer Selfridge also. As per the agreement, if retailers sold the tire below the recommended price, they would have to pay 5 euros per tire as damages to Dunlop. This was agreed between Dew and Selfridge and thus Dunlop was the third party to the agreement between Dew and Selfridge. Later Selfridge failed to comply with the agreement and sold the tire below the recommended price. Hence Dunlop sued Selfridge for damages and also filed an injunction to stop them from continuing the sale. The decision was in favor to Dunlop in the initial trial. And in appeal by Selfridge, the decision was reversed in favor of Selfridge. The Court held that Dunlop could not claim for damages since they are not a party to the agreement between Selfridge and Dew and also, has no contractual relationship with Selfridge.

 

Liabilities of Subcontractor And Employer

Sub-contracting is permissible under UAE law. According to Article 890 of the Civil Code, a contractor is allowed to sub-contract its work in whole or in part unless otherwise stated in the contract, and it also states that the contractor shall be liable towards the employer. The sub-contractor nominated by the employer is called the nominated sub-contractor, whereas the sub-contractor selected by the main contractor is called the domestic sub-contractor. In both cases, the sub-contract agreement will be made between the main contractor and sub-contractor. Hence there will not arise any contractual relationship between the employer and the sub-contractor. As a result, the employer is not contractually liable towards the sub-contractor for any disagreement under the subcontract agreement as well as the sub-contractor is also not contractually liable towards the employer for any delayed or defective works under the subcontract agreement. According to article 891 of the Civil Code, a sub-contractor is not entitled to claim anything against the employer which is due to them from the main contractor unless they have made an assignment against the employer. The UAE Court of Cassation in a decision dated 20 April 2005 rules that, according to articles 891 and 892 of the UAE Civil Code, the liability of the main contractor against the employer remains the same and there will be no direct contractual relations between the employer and the sub-contractor. Thus, the sub-contract agreement determines the rights and responsibilities of the main contractor and sub-contractor in which the employer cannot rely on such agreement unless the main contract provides to the contrary. 

The sub-contractor who is not a party to the agreement with the employer is not under any contractual obligation towards the employer. However, to create a bond between the sub-contractor and employer, both parties can rely upon up a collateral warranty, which is enforceable under the UAE law through which both parties can sue or claim for damages suffered. Warranties are considered as one of the sources of the obligation under articles 124, 276, and 278 of the Civil Code. Under this collateral warranty, the employer can sue the sub-contractor for his defective work or performance. But taking into consideration of article 890(2) of the Civil Code, the main contractor will remain liable for the subcontractor’s defective performance. However, in a nominated contractor, the main contractor might take a defense by proving that he had not played any part in the delay or default of the sub-contractor. A well-known decision of the Dubai Court of Cassation in case number 266 of 2008, held that if the sub-contractor was selected by the employer or its consultants, the employer will be liable for any delay or defective performance from the part of the sub-contractor and the main contractor shall not be held liable for any penalty for delay if he can prove that such delay is caused by the sub-contractor and he didn’t play any part in such delay. But this decision made by the court is contrary to the general rule set out in article 890(2). Hence to succeed in the defense the main contactor must seek help from commercial lawyers to demonstrate to the court that he has properly performed his contractual obligations and supervision duty yet the defective performance or the delay could not be avoided for the reasons solely accountable to the fault of the nominated sub-contractor.

According to article 891 of the Civil Code, a sub-contractor is not entitled to claim anything against the employer which is due to him from the main contractor unless they have made an assignment against the employer. Since there is no direct contract between the employer and sub-contractor, the employer is not under any obligation towards the sub-contractor and also the sub-contractor may not claim damages from the employer as per the law. However, the sub-contractor can seek due payments from the main contractor. But problem arises when there is a clause of ‘pay-when-paid” is imposed in the subcontract agreement, which is enforceable under the UAE law. In such cases, the sub-contractors are not able to claim its due from the main contractors until the main contractor has been paid by the employer. If the sub-contractor sues the main contractor for damages before the main contractor get paid by the employer, then the court has the authority to dismiss the case on the ground of premature filing of the claim. However, by creating a valid assignment between the employer and the subcontractor, both parties can sue or claim damages to each other and such assignment enables the sub-contractor to bring a direct action against the employer for non-payment of the dues.

The doctrine of privity of contract is also applicable to heirs. According to Section 3(2) the Civil Code, the heirs, beneficiaries, and successors of the contracting parties to the contract are included in the scope of that specific contract. Article 252 of the Civil Code provides an exception to the doctrine of privity of contract, that a contract may confer right on a third party. However, such an agreement cannot impose an obligation upon a third party. Bank guarantee, documentary credit, discharging the debt of another, and third-party insurance policies are the exceptions to the doctrine of privity of contract. Article 253 defines that “a person who binds himself to procure the performance of an obligation by a third party does not in so doing bind the third party. If the third party refuses to perform the obligation, the person who engaged himself to obtain such performance shall be liable to pay damages to the other contracting parties. He may avoid paying damages by performing himself the obligation he undertook to procure. Where the third-party consents to perform the obligation, his consent is effective only from the time that it is given, unless it is indicated that he intended expressly or impliedly that the consent is retrospective as from the time of issuing the undertaking.