Arabtec’s woes are a joy to many!

Table of Contents

I have to admit, it was a nice break in my day seeing the spectacular collapse of Arabtec. I know that’s not very professional but their business model always felt dodgy and exploitative of small businesses like mine anyways.

Arabtec Liquidation

Arabtec was a ‘leader’ in adopting back-to-back payments, also known as Pay when paid. In its simplest formulation, back-to-back payments enable contractors to cope with the likely problem of not being paid on time or not being paid at all, by limiting their liability via terms in the contract, adversely affecting the parties down in the supply chain in the construction project.

But the trick that was happening under Arabtec was that they routinely screwed their small business suppliers by extending payment terms out to 180+ days. That is, these large, powerful conglomerates used their small business suppliers as cash cows, bleeding the small businesses of money. For a small business, it was rip-off territory. 

Interestingly, even after the liquidation of its infamous construction wing, Arabtec’s subsidiary Target Engineering claims to have numerous projects, all of which seem to be big-end-of-town types. These include the Jubail 3A, EPCC works for Adnoc offshore, and the Sunset Square in Abudhabi.

The UAE is notoriously developing a reputation of a “hard market”, which makes sense considering how late and lackadaisical many buyers are when it comes to payment. That’s right, this is capitalism at its grubby and manipulative worst. It’s the sort of behavior that provides moral justification for Marxist theories about class warfare- not between workers versus bosses but big business versus small businesses conflict.

Why should the supply chain bother?

Blame it on Arabtec’s inability to collect their Dhs 5 Billion worth of receivables.Surprisingly, the figures are equivalent to the the sum total of financial claims lodged by their subcontractors at Dubai courts.

And with many international organizations including Cimic, wrapping their bags from the Middle East, the struggle for small business owners is getting more gruesome. As early as 2020, nearly 800 small business firms had exited from the UAE due to the inability to settle their dues. Previously, a November 2019 study had found that SMEs around the country were collectively owed $26 billion, rigorously handicapping the business’s ability to deliver quality projects within the decided budget and time. Especially in the Subcontracting sector, notifications of overdue payments have soared by 26%.

Collection agencies in the UAE are faced with a harsh environment. The country ranks second on Euler Hermes’ list of most complex debt collection environments, coming at 81 out of 100 points. This is followed by South Korea and Saudi Arabia which both have ‘severe’ classification ratings that come from high levels of insolvency-related complexity (30). Other countries like Sweden seem to be easier to collect debts in than these three because they only rank as an easy 30 on their score. Business owners in the current economic climate are feeling more stress than ever before and some have even resorted to shutting down their business due to a lack of funds.

It’s not about how much money you make, it’s about how much cash you have.

Carl Green, Small Business Owner, Ras Al Khaimah

“The construction industry is in a tough spot. We have to work with no clear idea of when we might get paid for services rendered and there are fewer projects going around than before”, says Carl Green, CEO of SPD, a cable networking infrastructure provider from Ras Al Khaimah. Since the pandemic, the economy has been in a downturn, with some companies reaching their lowest point ever. 

Collect them quick or be prepared to shut down

The severe problem of reduced repayments has not only decreased the capacity of businesses to cover expenses such as rent and power but also has led to an increase in the stress and anxiety of numerous business owners. 

“Cash management is the backbone of any successful business. And, without a sound cash management system, you can’t effectively measure your company’s financial health. It will be difficult for any company to grow as needed in this competitive market”, says George Mathew, senior Analyst at Wirestork, the leading debt collection service provider in the UAE. It’s not merely about collections anymore. We have entered an era of receivable management.”

At Wirestork, we manage receivables for more than 380 local businesses, both small and mid-size. These companies have had far more success with collecting their outstanding payments than conventional firms, continues George.

6 out of 10 entrepreneurs in the UAE are unaware of the term “Receivable Management”

2020 Small business survey,

If receivables are not collected quickly, debtors often get distracted or can’t afford to pay off what they owe. Other times it’s just too expensive to chase them down — which means that sometimes debts end up going uncollected altogether. Receivables Management Services like wirestork help by providing tools and resources so businesses can manage their accounts receivable more efficiently while outsourcing some collection activities.”

Successful markets regulate good payment behavior. The contractor’s inability to collect payments should not be passed on to suppliers. The reason is that they may become insolvent, as has many in the region.

In Arabtec’s case, the damage to small businesses by the exploitative “pay when paid” game was limited. It has been seen time after time again though, if there are no regulations on how a market can self-correct then it often does more harm than good for those impacted by its effects over an extended period of time

Black market business practices are a plague on the economy. One of these occurrences is when businesses keep suppliers in limbo and never pay them back for their products or services, which increases financial instability among buyers as well as sellers. The longer this problem goes unresolved, the more money will be lost to the black hole known as bad debtors who refuse to repay loans from banks because they had no desire not only to pay those debts but also to run an honest company!

And there’s one simple principle in play. If you owe money: pay.

What is back to back payment clause in Construction contracts in UAE?

Back to back payment is a method where the terms of agreement in one step of the contractual pyramid are made a part of the agreement between the parties in the lower step. It is worth mentioning that the term ‘back to back’ is a broad term and has no defined legal meaning as its meaning depends on the construing of the relevant clause in the contract.

The main two types of the ‘back to back’ clause are: ‘back to back’ at provision level and ‘back to back’ at consequence level. The first type is concerned with the application of the same provisions of the main agreement into the subcontract agreement. If this type of back to back term is incorporated into the subcontract agreement as explained in the previous section, then special attention should be followed to check the scope of works, the time limits and rights and obligations towards the employer and other terms as those terms may affect the main contractor obligations.

The second type of ‘back to back’ term implies that it is the duty of the subcontractor to perform his obligations properly in order to ensure that the main contractor achieves his full duties towards the employer. It may include strict liability such as:
1. The sub-contractor is entitled to have additional expenses only to the extent that the contractor has such expenses covered by the employer, Or
2. The sub-contractor’s period allowed for notice of default shall be corresponding to the contractor’s period allowed for notice of default to the employer.

Such clauses imply risks for the sub-contractor since the money or the time which the sub-contractor, has no default toward it, may not receive or grant it if the main-contractor did not receive it from the employer. It is worth mentioning that in the ‘back to back’ term at consequence level, the sub-contractor depends on the main contractor’s follow up with the employer to make him perform certain duties. Thus it is recommended to reduce such risk by providing a provision in the sub-contract stating the scope of the contractor’s duty of loyalty.

What is “Payment Upon Completion” as per UAE subcontractor rules?

Payment upon certification is when the contractor will pay the subcontractor’s due amount after the consultant certifies that the main contractor’s work done of which the sub-contractor’s work is part of. Furthermore, the honoring period, mentioned in the sub-contract, which is irrelevant of the grace period mentioned in the main contract, to repay the sub-contractor should be considered. The time starts running with regards to fulfilling the main-contractor’s obligations from the date of the certification.

It is worth mentioning that FIDIC Subcontract Form of Contract in its first edition published in 2019 in Clause 14.6 provides that the certification of the sub-contractor works is required in order to enable the contractor to pay the subcontractor’s due amount.

In addition, it provides the right to the main contractor to postpone sub-contractor’s payment if the later works were not certified by the engineer or the work is certified by the engineer but not paid by the employer however it is not allowed to withhold the sub-contractor’s payment if the non certification or non-payment is due to a contractor’s default. Furthermore, the contractor is obliged to verify with supporting documents the reason why some work done by the sub-contractor is not certified by the engineer or an amount was not paid by the employer.

Is a UAE subcontractor eligible for direct payment from the employer?

Yes, provided the contract guarantees so. Under this method, the employer can pay directly to the sub-contractors. Usually this happens in the nominated sub-contractors cases where the main contractor fails to pay the due amounts to the sub-contractors.

For example pursuant to clause 5.4 of FIDIC 99 Red Book, the employer can pay directly to nominated sub-contractor if the main contractor failed to pay his dues without justifiable reasons. The clause said: ‘Before issuing a payment certificate which includes an amount payable to nominated Subcontractors, the Engineer may request the Contractor to supply reasonable evidence that the nominated Subcontractor has received all amounts due in accordance with previous payment certificates, less applicable deductions for retention or otherwise.

Unless the contractor: (a) (i)submits the reasonable evidence to the Engineer, or (I) satisfies the Engineer in writing that the contractor is reasonably entitled to withhold or refuse to pay these amounts, and (ii) submit to the Engineer reasonable evidence that the nominated Subcontractor has been notified of the Contractors entitlement, then the Employer may (at his sole discretion) pay, direct to the nominated subcontractor, part or all of such amounts previously certified (less applicable deductions) as are due to the nominated sub-contractors and for which the Contractor has failed to submit the evidence described in subparagraphs (a) pr (b) above.

The contractor shall then repay, to the Employer, the amount which is nominated Sub-contractor is directly paid by the Employer. It is worth to mention that the aforementioned clause provides a security mechanism as the employer, upon his sole discretion, pays to the nominated subcontractor where the main contractor illegitimately fails to pay to the subcontractor.

What is Conditional Payment in the UAE as per subcontract rules?

Under this type of payment to the sub-contractor, the payment provisions have one or more conditional clauses such as ‘pay when paid’, ‘pay if paid’. The different forms of these clauses will be discussed later in this chapter. The purpose of such clauses is to aid the contractor to pass the risk of not getting paid from the employer to the subcontractor. There are different views for these clauses, one of them is that the ‘pay when paid’ clause provides that conditional payment is a delaying payment. Another view is that the ‘pay if paid’ is a precedent condition to payment.

On the other hand, there are many different courts’ opinions in construing these terms, as will be explained later, so that the risk may be not transferred to the sub-contractors as expected by the contractor.

What is Termination by employer for convenience in the UAE?

Clause 15.5 of FIDIC Red Book 1999 introduced ‘termination by employer for convenience’, which enables the employer to terminate the main contractor agreement at any time. However if the sub-contract does not incorporate such clause, the main contractor will find himself liable to the sub-contractor. It is paramount to mention that the FIDIC Sub-contract in its first edition in 2011 recognized this point and it provides the contractor the right to terminate the sub-contract whenever the main contract is terminated.

What is the process of dispute resolution with the main contractor in the UAE?

Any dispute arising between the employer and the main Contractor is consequently reflected in the relationship between the main contractor and sub-contractor and vice versa. It is worth mentioning that the arbitration clause shall be in writing and cannot be back-to-back.

According to Article 203 of the UAE Civil Procedure Code:
-The parties to a contract may generally stipulate in the basic contract or by a supplementary agreement that any dispute arising between them in respect of the performance of a particular contract shall be referred to one or more arbitrators and may also agree to refer certain disputes to arbitration under special conditions.
– No agreement for arbitration shall be valid unless evidenced in writing…’

Shopping cart


No Service Requested.

Continue Shopping