Qatar subcontracting and the interpretation of back-to-back clauses

The use of back-to-back contractual mechanisms is common in Qatar for energy and infrastructure projects, where sub-contractors are often engaged by a main contractor to deliver a project for an employer. There are, however, some challenges in determining how back-to-back terms are to be interpreted.

Back-to-back clauses and settlement payments

Often in subcontracts the phrase “the subcontract operates back to back with the main contract in respect of the subcontractor’s scope of work” appears, or the Latin phrase “mutatis mutandis” is used. 

In a subcontract, the phrase means that where the terms of the contract say “main contractor”, it should be replaced with “subcontractor” without affecting the main point of the clause. It passes the right or obligation completely to the subcontractor.

In Qatari subcontracts, there are often “equivalent project relief” or “pay-when-paid” or “pay-if-paid” clauses. 

In some jurisdictions, like England for example, pay-when-paid provisions are prohibited.

Qatar has not legislated against these provisions and, on the face of it, the Qatari Civil Code, which respects parties’ freedom to enter into whatever contract terms they choose – the principle of ‘sanctity of contract’ – means that such clauses are valid and enforceable. 

Pay-when-paid clauses become more complicated, however, when the main contractor has entered into a settlement agreement with the employer and the agreement includes settlement of claims that the subcontractor has advanced against the main contractor.

The scenario

Consider the scenario where:

• The subcontractor has escalated claims to the main contractor;
• The main contractor has escalated them to the employer together with other claims, such as claims for the main contractor’s own losses, as well as claims from other subcontractors;
• The main contractor and employer reach a settlement in respect of all claims;
• There’s a back-to-back provision in the subcontract saying the subcontractor gets paid when the main contractor gets paid under the main contract.

The scenario raises some questions:

• What if the main contractor didn’t try hard enough to pursue the subcontractor’s claims? Is the subcontractor still not entitled to its full claim because of the back-to-back clause?

   

• What if the main contractor accepts a lower amount for the subcontractor claims than the subcontractor thinks they are worth?

Article 579 of the Civil Code can be helpful in interpreting what should happen in those cases. The English translation states: “Any benefit or damage from reconciliation shall be limited to its parties, even if reconciliation relates to an indivisible item. However, consolidating parties, whether creditors or debtors, may hold to the reconciliation made by any of them if they believe that such reconciliation is in their interest.”

This means that settlement agreements shall not result in a benefit or a damage for something other than what will affect the contracting parties.

In other words, there is an argument available to subcontractors that a settlement between main contractor and employer cannot be relied upon by the main contractor as a basis for denying the subcontractor its claim because the settlement agreement it entered into with the employer cannot affect a third party’s right under to Article 579, despite the existence of a pay-when-paid clause in the contract.

There are counterarguments, however, including that the subcontractor did not provide sufficient information to enable the main contractor to properly ‘plead’ the subcontractor’s claim to the employer.

Ultimately, a court or tribunal tasked with considering these arguments would likely be influenced by the principle in Article 172 of the Civil Code, which provides that the contract must be performed in accordance with its contents and in a manner which consistent with the requirements of good faith, and that the contract is not confined to obliging a contracting party to its contents, but also includes its requirements in accordance with the law, custom and equity as per the nature of the obligation.

Back-to-back clauses and taking-over certificates

Another tension that can arise in the context of back-to-back provisions is in relation to Taking-Over Certificates (TOCs).

TOCs are important contractually in that they constitute recognition that the work has been completed to the satisfaction of the party certifying it. They are also important commercially since consequences flow from their issuance. Often there are consequences on warranties, insurances and performance guarantees.

A subcontractor’s right to receive their TOC is often linked to the main contractor’s receipt of the same under the main contract, in a back-to-back contractual mechanism. 

Often in Qatar, main contractors have to fight hard to obtain a TOC and it is common for TOCs to be withheld beyond the date the contractor applied for it. This creates a tension if the employer’s withholding of the TOC from the main contractor constitutes a breach of contract. 

If the main and subcontractor have done everything necessary to demonstrate completion has taken place, and the employer is in breach of contract for failing to issue the TOC, it raises a question as to whether the main contractor is permitted to rely on the back-to-back provision prohibiting the subcontractor from receiving the TOC from the main contractor. 

One possible answer is that the back-to-back mechanism in the subcontract is only valid in circumstances where the main contract is properly operated and complied with by the employer. There is an argument that if the employer is in breach of the main contract by unreasonably withholding the TOC then the relevant back-to-back clause in the subcontract is not operable.