Impact of ‘back to back’ payment clause on the cash flow of subcontractor in the UAE
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Date
2013-05
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The British University in Dubai (BUiD)
Abstract
Any default by the employer, by not paying on time or nonpaying at all, will
adversely affect the parties down in the supply chain in construction project. The
contractor tries to cope with such problem by limiting his liability via terms in the
contract, such as back-to-back payment terms, with his subcontractors and suppliers.
Back to back payment clause has different meanings and forms and its interpretation
may vary among the different legal systems. Common law is inclined to invalidate
such clause. The situation under the UAE law is different as there is no explicit term
in the current law that invalidates the back to back payment clause.
The research aimed at investigating the impact of ‘back-to-back’ payment terms on
the cash flows of subcontractors and main contractor’s and try to find solutions for
securing the subcontractor payments. A total of 96 questionnaire responses were
collected from different construction professionals involved in the contract
administration or drafting in the UAE.
The research asserted that most of the professional participated in the survey felt
uncomfortable with back to back payment term. Furthermore, most of the
subcontractor participated in the survey have encountered problems due to back to
back payment clause
Back to back clause has significant impacts in the cash flows of the main contractors
and subcontractors. As 65% of the entire professionals participated in the survey
claimed so. Furthermore, according to most of the respondents to the survey, back to
back clause in unfair term and should be invalidated by the law
To conclude, it is worthwhile to the parties to be clear in their contract terms with
regards to payment certification and mechanisms. In addition, the legislator should
be inspired by the other common laws to adopt payment mechanisms and certainty in
the construction industry.
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Keywords
payment clause, cash flow, United Arab Emirates (UAE), construction project, legal systems, construction professionals, construction industry, law