Construction Law/Performance Bond


QUESTION: For a real estate project under execution in the UAE, the Employer is threatening the Contractor to pull the Performance Bond.
TOC has been received by the Contractor and the project is in the DLP stage.
The issue has arisen due to the sub-contractors' refusal to attend to DL maintenance related works owing to the failure of the Contractor to pay them for the works completed prior to TOC.
The Employer has asked the Contractor to undertake to clear subcontractors' dues by a deadline, failing which he shall pull the Performance Bond to make payment possible to the subcontractors on behalf of the Contractor.
Kindly advise if the Employer is contractually justified in pulling the bond for the stated reasons and under the above circumstances.

ANSWER: Dear Sarvesh,

You did not mention the form of contract nor the applicable law, so the foollowing comments are generic.  

Generally, the Employer has no control over subcontractors and all instructions must be given to the Main Contractor.  Therefore, it would not be right for him to take money from the Performance Bond to pay the Subcontractor.  One solution, in this instance, is to take sufficient money, and no more, from the Retention to pay the subcontractor for the required maintenance related works.  It is dangerous to make a call on a Performance Bond without ironclad justification.  

However, care is needed.  It could be that there is a dispute between the main contractor and the subcontractor, which is the reason for non-payment.  Further the main contractor may have included the cost of the maintenance works in the subcontract, and the subcontractor is not due any extra payment.  

---------- FOLLOW-UP ----------

QUESTION: Many thanks, Peter, for your prompt and well reasoned answer in spite of my missing out relevant information. The form of contract is Fidic '87('92.
The reason behind the Employer's insistence on PBG may be owing to  Retention not being sufficient to meet the subcontractor dues.
From available evidence, non payment of dues by Contractor may be solely due to financial reasons.


Dear Savesh,

I reiterate my advice to move with care.  I suggest that you get the main contractor's written agreement to the proposal to pay the subcontractor direct, before taking action.  Remember, the pulling of a performance bond could create further financial problems for the contractor and force him into bankruptcy.

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Peter M. Elliott


First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol before submitting a question.


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Institution of Civil Engineers, Association of Chartered and Certified Accountants, Society of Construction Law, Dispute Resolution Board Foundation

B Sc(Hons) in Civil Engineering

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