Qatar construction contractor payment pressures build after ruling

The court held that pay-when-paid clauses cannot be relied on indefinitely by main contractors to withhold payment to subcontractors, even where the main contractors themselves have not been paid for works.

The judgment provides some clarification on an uncertain area of law in Qatar, but it will add to the financial pressures on main contractors. Those businesses may want to consider mediation as a route to recover payments owed them by Qatari government entities in light of the ruling.

The utility of pay-when-paid clauses

Construction projects are prone to many uncertainties, such as variations, delays, or supply shortages. Payment defaults are not uncommon in Qatar and can happen at any stage of the supply chain. When an employer defaults on payment, main contractors are hindered from performing their contractual obligations.

Pay-when-paid clauses allocate a greater portion of this risk to subcontractors, by making the subcontractor’s payment from the main contractor contingent on the employer making payment to the main contractor. The clauses are a commonly used compensation method in construction contracts, and essentially mean that the subcontractor does not get paid until the main contractor has been paid.

What the Qatari Court of Cassation considered

Under the Qatari Civil Code, subcontractors have a legal path of recourse to main contractors, and in some cases to the employers, when there is a default on payment. Pay-when-paid clauses in the subcontracting agreement are intended to limit that path of recourse to allow more breathing room for the main contractor, which doesn’t want to be stuck in a situation where the employer isn’t paying them, while the subcontractors are demanding payment.

In the case before it, however, the Qatari Court of Cassation considered whether there were any limits to how long main contractors can rely on pay-when-paid clauses in their subcontractor agreements to delay payment to subcontractors after completion of works.

That question is not neatly answered by the wording in the Qatar Civil Code, which merely provides, in Article 697, that employers shall pay the contractor's fees when taking over the work unless otherwise stipulated by agreement or customary practice.

What the  Qatari Court of Cassation found

With no clear boundary on how long non-payment by a main contractor to a subcontractor can extend, it fell to the Court of Cassation to provide some guidance on how long is too long for main contractors to be able to rely on pay-when-paid clauses as the basis for non-payment to subcontractors.

The dispute before the court involved a main contractor and a subcontractor: the subcontractor demanded payment from the main contractor, which resisted making that payment on the basis that they still haven’t been paid by their employer and on the pay-when-paid clause in the subcontracting agreement.

The court ruled in favour of the subcontractor, highlighting that the pay-when-paid clause “is granting the original contractor a temporary extension between the completion of the work and the payment”. It emphasised that this clause “deviates from the standard practice of paying the subcontractor immediately upon completion of the work”. The court said that the temporary extension “should not extend to an indefinite or excessively long period, but rather allow for a reasonable delay in payment”, noting that the “determination of what constitutes a reasonable period is a factual matter subject to the court’s discretion”. However, guidance from other jurisdictions like the UAE indicates that a period of more than five years would certainly be unreasonable.

The economic context for the ruling

The ruling comes at a time when there is somewhat of a cash flow crisis in the prime and subcontractor market in Qatar. This has arisen as Qatar has temporarily shifted its focus away from ‘traditional’ infrastructure, like roads and other transport projects, to energy infrastructure projects – in particular, the North Field Expansion gas project being let by QatarEnergy.

This shift is borne out in data that shows how Qatar’s investment in infrastructure has changed in the past decade. According to MEED, in 2014, there were $27 billion worth of construction and transport awards made from Qatari tenders, as the country ramped up its preparations for hosting the FIFA World Cup in 2022, while in 2023 just $1bn of awards were made in the same sectors. In addition, major capital expenditure by the Qatari government is forecast to reduce by 8.3% in 2024.

The cash flow crisis in construction is, according to recent reports, impacting banks in Qatar, which are having to swallow losses from defaults on loan repayments.

The ruling’s impact on main contractors and why mediation offers a solution

Qatar’s construction industry has played a major role in shaping the country’s economy in recent years. However, with rapid development on the scale we have seen, there are always risks of claims and disputes.

The introduction of a specialised commercial court in Qatar has fast-tracked access to justice for contractors with claims, which has of itself led to increasing volumes of construction cases being litigated.

As the construction industry waits for the capital being invested in the North Field Expansion gas project to generate the returns necessary to trigger the next wave of investment in traditional infrastructure in Qatar, it seems likely that the Court of Cassation’s ruling will serve as a catalyst for a growing number of claims against main contractors. Subcontractors that have been held back from escalating claims will be pleased with the ruling if they have been waiting an excessively long period for their claims to be assessed.

The result is that even more pressure will fall on main contractors in Qatar to resolve claims under their main contract with employers, which are typically a Qatar government entity. This is not an easy ask, and escalation through formal proceedings is always a last resort.

The use of alternative dispute resolution, especially mediation, is a good solution for main contractors, especially because mediated settlement agreements have the same statutory recognition as a judgment or arbitral award under the Qatar’s 2021 Mediation Law.