Subcontract Agreement

A subcontract agreement is one of the most prominent contracts for the execution of works. The construction contract is a contract whereby the contractor shall complete a particular work for the employer, for a fee. As the works of construction contracts develop and diversify, the contractor's ability to perform the work solely without hiring any third parties is almost impossible, except for some simple types of contracting that the contractor can execute directly.  

However, most modern contracting can only be executed by third parties, by what is known as subcontracting, such as in major construction contracting, or at least using them as the main contractor's assistants.

I. Subcontract Agreement as defined in the Egyptian Civil law:

In the subcontracting, the main contractor shall engage subcontractors to perform the contract works to which it is bound in the main contract. The subcontractor shall perform such work independently of the main contractor's supervision and direction, as set out in Article 661 of the Egyptian Civil Code, which stipulates that:

"(1) A contractor may entrust the execution of the whole or part of the work to a sub-contractor unless he is precluded from so doing by a clause in the contract or unless the nature of the work presupposes reliance on his skill.

(2) In such a case, the contractor remains responsible to the master for his sub-contractor.”

With the evolution of architectural art methods and compulsory professional specialty in a specific field, sub-contractors have become today in prominent positions. Specialized contracting works have been developed in various fields, including, but not limited to, construction, restoration, demolition, design, decoration, electrical and electronic installations, stone works, etc., and other works relating to bridges and tunnels. These contracting works are known as "subcontracting”. This type of contract is used in two cases:   

Case 1:

Lack of proper technical and material capabilities of the main contractor to complete the project being of a large-scale nature, resulting in a need for further capabilities to be able to implement the project, given its limited skills for the volume of the project.

 Case 2:

If the main contractor does not have the required time to deliver the project within the period agreed upon in the main contract, it hires subcontractors to hand over the project within the agreed period, to avoid a breach of its contractual obligations. In both cases, other specialized subcontractors are engaged to expedite the execution of the work and to deliver the project within the required time and performance.

2. Difference between subcontracting with other contracts: 

A) Definition of Subcontract:

The subcontracting is mainly an exception to the principle that only the parties to the contract are concerned with the performance of the contract and shall perform the contract themselves. If the main contractor shall carry out the work agreed with the employer, this does not inevitably imply executing such works directly. Unless it has been contracted for personal considerations or has been expressly authorized in the contract. The main contractor, therefore, resorts to subcontracting, as per the work requirements.   

It is also considered a key feature of the contracting to give the contractor several ways to fulfill its obligations, as the contractor can subcontract with a third party. (Subcontractor), to fulfill all or some of its obligations under the subcontract, in addition to the fact that it can assign a a third party to complete certain work, in particular, its workers through the conclusion of employment contracts for example. The "subcontract" may therefore be similar to certain acts, such as the waiver of the construction contract, the employment contract, and the agency, so it was necessary to distinguish such legal act from the subcontract.

B) Difference between "subcontracting" and "assignment of contract":   

The construction main contractor may assign a subcontractor to implement a part of the project, as may be agreed to carry out the whole work of the project or transaction. This already reflects a subcontract, but the subcontractor's assuagement to carry out the project is subject to the contract, and may cause some ambiguity in the extent to which the conduct is considered a subcontract or a waiver of the contract. 

The status of "waiver" is realized when the contractor assigns all the contractor's main contract works to third parties with the rights it includes, and the "waiver" contractor replaces the waiver in the contractor's contract, in respect of the full rights and obligations arising from the contract by agreement between them, as the latter becoming responsible to the employer. 

The assignment provisions shall then be applied in relation to the transfer of obligations arising out of the contract. Therefore, the employer shall accept the assignment as a debtor in order for the assignment to be effective, in accordance with the rules established in the assignment of debt, as informing the employer of such assignment is not adequate for the transfer of obligations, in accordance with the transfer of all the debt subject to the consent of the creditor, as the obligations shall be transferred including all characteristics and components to the assignor. For the difference between a contractor's assignment of works or a subcontracting procedure, the following points shall be noted: 

1. The subcontract, as we have already stated, is a separate contract that is separate from the main contract and does not lead to the cancellation of the main contract, but the contractual relationship between the main contractor and the employer remains as it is. 
2. In the event of an assignment, the relationship between the employer and the main contractor shall be precluded and replaced by a new relationship between the assignee and the employer, once the assignment has been informed and approved by the employer. The assignee's relationship with the employer shall then become direct, contrary to its relationship with the subcontractor, which remains indirect. 
3. Subcontracting does not result in the transfer of the main contractor's rights and obligations to the subcontractor. Indeed, each party remains bound by the contract. To ensure the completion of the project, the subcontractor is not bound by the guarantee, i.e., what is known as the 10-year guarantee, commencing from the date of receipt of the works provided for in the Article. (651) of the Egyptian Civil Code, where the assignee contractor shall be subject to the provisions of this guarantee, as the contract was transferred to it. Also, the assignor contractor shall not be liable to the assignee contractor vis-à-vis the employer, contrary to the provisions of the subcontract, where the main contractor remains liable to the employer for the subcontractor.   
4. The most important standard used by the jurisdiction in differentiating between subcontracting and assignment of the contract remains the standard of "the will of the parties". If the will of the main contractor tends to exit from the contractual relationship to be replaced by another contractor for the execution of the project, such an act is an assignment of the contract. If, however, the main contractor intends to maintain its contractual relationship with the employer, it entrusts a subcontractor with the completion of certain work, without fully assigning the main contract. 

C) Difference between "subcontracting" and “employment contract": 

As stated above, to fulfil its obligations arising from the main contract, the contractor concludes several contracts simultaneously for the performance of such obligations. The two most important contracts are the sub-contractor and the employment contract. To clarify the difference between the two contracts, the most important differences shall be identified: 

1. The basic elements of an employment contract are as follows: Work, pay, dependency, and time. 
2. b. The basic elements of subcontract are as follows:   Work, previous contract, pay, and time. 

Thus, the dependency element of the subcontract is evidenced by the fact that the subcontractor does not act in accordance with the main contractor, but performs its obligations independently. Conversely, the worker performs their obligations under the legal dependence of the employer, consisting of the authority to oversee, supervise and direct the worker in the performance of their work. The latter is bound to obey such orders and instructions issued by the employer. It is evident from this that the same work can be carried out through two forms of contract, the employment contract, in which the completion of a work is for a fee and the full dependence of the main contractor, or the sub-contract, which is supposed to be performed for a fee but independently. In both cases, another person shall perform the work for the employer.

Thus, the lack of an association of dependence in the relationship between the main contractor and the subcontractor, and the latter's independence, does not imply the absence of any control over it. However, the main contractor has the right to control the sub-contractor in the execution of the agreed-upon work, as the main contractor is obliged to complete the project under specific technical specifications. This explains the fact that some of the main contractors used to develop the so-called “Terms Sheet” with the subcontractor, under the main contractor’s authority to regulate the work. Also, the law stipulated that the main contractor shall be liable for the subcontractor to the employer. 

D) Difference between "subcontracting" and “sale contract": 

Although some might think that the difference between both contracts is obvious, however, such thoughts soon disappear, if the contractor's obligation to supply the materials is fabricated and used in the construction process. Here we can say that we are in the process of the selling process, as the contractor serves as the product or manufacturer of such materials, and, therefore, we should differentiate between them based on the legal adaptation in the case of that supply. 

1. If the work performed by the contractor is on a property, then we can resolve the matter by reference to the ownership of the plot. If the ownership of the land is for the contractor engaged in the construction, such supply is a sale. If the contractor is engaged in construction work on the plot owned by others, the supply of materials shall fall within the contract not a sale process. 
2. If the contractor's work is on a movable asset, then the manufacture and supply of the material is considered to be a sale and another contract, in which case the contract is likely to be incorporated by reference to the comparison between the value of the work and the value of the used materials. If the value of the work prevails, this transaction shall fall within a contract. If the value of the material prevails, the contract shall fall within the sale process.