A subcontractor carries out air conditioning, electrical, or finishing works on a large project, and then payment stops. The main contractor says it has not been paid by the employer and that their contract provides for payment when paid. The employer says it has no relationship with the subcontractor and that its contract is with the main contractor alone. The subcontractor is caught between two parties, neither of whom pays, having performed works, paid wages, and bought materials. This situation recurs frequently in the Kuwaiti construction market and has specific legal remedies that many contractors do not know.
The Legal Nature of Subcontracting
- Two separate contracts: one between the employer and the main contractor, and another between the main contractor and the subcontractor, each with its own parties and terms.
- No direct contractual link: in principle no contractual relationship arises between the employer and the subcontractor, which is the root of the problem.
- Permissibility: a contractor may entrust performance of all or part of the works to another unless the contract prohibits it or the contractor's personal qualifications were material to the engagement.
- Consent requirements: many contracts, particularly government ones, require the employer's prior written consent to subcontracting, and breach exposes the main contractor to sanction and may extend to termination.
- Liability remains: the main contractor remains liable to the employer for the whole of the works, and subcontracting does not transfer that liability.
The Direct Claim: The Right Most Contractors Overlook
- Its content: the law allows a subcontractor and the workers employed for the main contractor's account to claim directly against the employer up to the amount the employer owes the main contractor at the time the claim is brought.
- Practical effect: this is an important exception to privity of contract, giving the subcontractor a route to the project funds without passing through the main contractor's distressed estate.
- Its limits: the subcontractor cannot claim more than is due from the employer to the main contractor, and where the employer has paid everything there is nothing left to claim.
- Timing is critical: bringing the claim promptly or notifying the employer before it discharges its liability is decisive, and delay empties the right of content.
- Competing claimants: where several parties bring direct claims, what the employer owes is shared among them.
- Early notice: serving formal notice on the employer that a subcontractor is owed money is an important practical step, as it renders subsequent payment to the main contractor open to challenge.
Pay-When-Paid Clauses
- Their content: a common clause making the subcontractor's entitlement conditional on the main contractor receiving payment from the employer.
- Practical approach: such clauses are read narrowly and are frequently construed as regulating the time of payment rather than extinguishing the entitlement itself.
- The essential distinction: deferring payment until receipt differs from making the entitlement itself conditional on an event that may never occur, the latter placing on the subcontractor a risk it does not control.
- Unjustified obstruction: where non-receipt is due to the main contractor's own default, such as breaching the project obligations or delaying submission of payment applications, it cannot rely on the clause.
- Advice: negotiate a longstop date for the clause so that the sum falls due after a defined period even if the main contractor has not been paid.
Payment Applications, Materials, and Equipment
- Recording the works: no payment application is certified for undocumented works, and daily records with photographs and site minutes are a subcontractor's capital in a dispute.
- Variation orders: by far the most dangerous item. Performing additional works on an oral instruction and having them denied later is a recurring problem, remedied only by a written order before performance.
- Retention: a proportion withheld from each application and released after handover, and the date and conditions of release must be stated clearly.
- Ownership of materials: materials supplied and installed in the project become part of it, and a subcontractor may not remove them after installation to enforce its claim. Attempting to do so exposes it to liability.
- Equipment: its equipment remains its property, and entry to and exit from site should be recorded to avoid a detention dispute.
- Performance bonds: a subcontractor usually provides a performance bond, and the conditions for its release must be precisely defined to avoid it remaining frozen for years.
Liability and Warranty
- Decennial liability: the contractor and the engineer are liable to the employer for total or partial collapse and for defects threatening the safety and stability of the structure for ten years, and any term seeking to exclude or limit this warranty is void.
- Recourse by the main contractor: where the main contractor is held liable for a defect caused by the subcontractor, it may have recourse under their contract.
- Handover: a dated and signed handover record is what starts time running, and its absence leaves a subcontractor suspended indefinitely.
- Insurance: who bears project and public liability insurance must be defined, as an absence of cover turns a single incident into a financial disaster.
- The subcontractor's workers: it is their employer and bears its labour obligations in full, which the contract neither transfers to it nor away from it.
Practical Guidance
- Do not start work before signing a written contract defining scope, price, and the payment schedule, as starting on trust is the leading cause of loss.
- Request a copy of the main contract or the terms affecting you, as some of your obligations are incorporated from it without your seeing it.
- Record every variation in writing before performance, even by an exchange of messages.
- Monitor whether the employer has paid the main contractor, as the timing of your direct claim depends on it.
- Serve formal notice early at the first default in payment, as waiting empties the direct claim of value.
- Do not sign a final discharge before receiving all sums due and securing release of retention.
- Keep dated site minutes and progress photographs, as these are what a court-appointed expert relies on.
A subcontractor's position between two parties does not leave it unprotected, but its protection depends on how quickly it acts and how well it documents. Yamnak Law Firm reviews and drafts subcontracts and conducts direct claims and payment application and variation disputes before the courts and in arbitration.
