Subcontracts in Cyprus Construction Industry

A subcontract is a legal agreement between a prime contractor and a subcontractor for the completion of specific tasks or services related to a larger project. This arrangement is common in industries such as construction, information technology, manufacturing, and various service sectors. 

General Principles governing a subcontract agreement 

In the context of subcontracting, the parties shall engage in negotiations and enter into a subcontract agreement which will be dealing with, among other matters, the following: 

1. Legal Framework:
   – Contract Law in Cyprus: The parties shall be familiar with the relevant provisions of Cyprus contract law, including any recent updates or amendments in the any relevant primary and secondary legislation that may impact the subcontract agreement.
2. Formation of Subcontracts:
   – Offer and Acceptance: The parties shall ensure that the subcontract is formed through a clear offer and acceptance process, and that the essential elements of a valid contract are present.
3. Terms and Conditions:
   – Scope of Work: The scope of work shall be clearly defined. For the avoidance of any future dispute as to the scope of work, the subcontract may be supported by appendices with full details as to the agreed scope of work.
4. Payment Terms:
   – Payment Provisions: Clearly stipulate the payment terms, including the method of payment, invoicing procedures, and any milestones or conditions that trigger payments.
5. Dispute Resolution:
   – Dispute Resolution Mechanisms: Include provisions for dispute resolution, such as arbitration, and specify the jurisdiction for resolving disputes.
6. Insurance and Indemnity:
   – Insurance Requirements: Specify any insurance requirements for the subcontractor and outline indemnity provisions to address liability issues.
7. Confidentiality and Non-Disclosure:
   – Confidentiality Clauses: Include clauses addressing confidentiality and non-disclosure to protect sensitive information related to the project.
8. Default and Termination:
   – Termination Provisions: Clearly outline the conditions under which the subcontract can be terminated and the consequences of termination, including any rights to compensation.
9. Review of the Main Contract:
   – Alignment with the Main Contract: Ensure that the terms of the subcontract align with the terms of the main contract to avoid conflicts.
10. Other areas of laws:
    – Cyprus-Specific Regulations: The parties shall consider any specific regulations in Cyprus that may impact the subcontract agreement, including and not limited to employment law issues.

Options available for the parties 

In Cyprus, as in many jurisdictions, subcontracting arrangements can take various forms, and the choice of the type of subcontract depends on the specific needs and circumstances of the parties involved. Here are three common options: 

1. Y2 Subcontract:
   – This type of subcontract involves adopting the same terms and conditions as the main contract between the client and the main contractor. Essentially, the subcontract mirrors the provisions of the main contract. This can simplify the process and maintain consistency throughout the project. However, it’s crucial to ensure that the terms of the main contract are suitable for the subcontractor and that any potential risks are appropriately addressed.
2. Back-to-Back Subcontract:
   – In a back-to-back subcontract, the terms and conditions of the subcontract mirror, as closely as possible, the terms of the main contract. However, there might be slight adjustments to account for the different relationship between the prime contractor and the subcontractor. The goal is to ensure alignment between the subcontract and the main contract, but some modifications may be necessary to accommodate the subcontractor’s role and responsibilities.
3. Tailored-Made Subcontract Agreement:
   – A tailored or customized subcontract agreement is specifically drafted to address the unique requirements and circumstances of the subcontracting arrangement. This option allows for greater flexibility in tailoring the terms to the needs of both parties. It provides an opportunity to address specific risks, obligations, and conditions that may not be adequately covered by a standardized or back-to-back approach. However, it requires careful drafting to ensure clarity and legal enforceability.

When deciding on the type of subcontract, parties should consider factors such as the complexity of the project, the relationship between the parties, the risks involved, and the level of control and coordination required. Legal advice should be sought to ensure that the chosen subcontracting approach aligns with Cyprus laws and regulations, and that the terms are fair and enforceable. 

LOIZIDES & ASSOCIATES LLC 

Our law firm has been appointed as the legal advisors of  a well established and reputable (i) mechanical contractor as well as (ii) electrical contractor in Cyprus in relation to a significant construction project in Cyprus. 

The main contract is a contract between the Republic and a Cyprus joint-venture members of which are the two main constructors in Cyprus. Based on the provisions of the public tender, the total amount of the main contract was agreed for the amount of Euro 90.000.000. 

The subcontractors have entered into negotiations for multi-million subcontract agreements with the main contractor. 

This appointment signifies the trust and confidence placed in our firm’s expertise and experience in handling complex legal issues within the industry. 

As legal advisors, our role will be to provide comprehensive guidance and support regarding various construction matters, including and not limited to the drafting of the subcontract agreements for the construction of the 90million project.