Subcontracts are common in the construction and engineering industries. This reflects specialisation, efficiency, the increased skill base and complexity. General contractors employing all various trades and specialists are very rare in modern times.
Construction contracts usually limit the extent to which the main contractor may undertake its contractual obligations through subcontractors. The consent of the employer or contract administrator to subletting the works will usually be required. It may be provided that this is not to be unreasonably withheld or delayed. Some, less typical contracts may specifically allow subcontracting.
Under basic contract law, there is no relationship between the employer and the subcontractor. The employer may only look to the contractor with whom he is in a contractual relationship. The contractor’s responsibility remains notwithstanding that he has subcontracted his obligations with permission.
A domestic subcontractor is one chosen by the contractor. The employer has no part other than giving consent. This is generally something for the benefit of the main contractor. The main contract will usually require that the subcontract contain certain clauses protecting the interest of the employer. This may deal with matters such as direct warranties and provision for termination.
The main institutions provide forms of subcontract for use in connection with and in conjunction with the principal contract. Commonly, the relationship between the contractor and subcontractor is a matter between them and the general architect/contract administrator is not involved.
The Construction Contracts Act 2013 has made provision in respect of the payment of contractors and subcontractors. Certain types of clauses that were formerly commonly employed have been prohibited or restricted.
Rights and Obligtions
A nominated subcontractor may be directly liable to the employer in negligence for defective work. Domestic subcontractors are unlikely to have a direct relationship of proximity for the purpose of civil liability.
The contractual duties of the contractor remain with the main contractor, notwithstanding the appointment of the subcontractor. Generally, the contractor has no claim for damages or time arising out of a subcontractor’s default.
If the subcontractor breaches causing the contractor to breach, then the employer has a claim against the contractor and the contractor and the contractor has a claim against the subcontractor. It is important that the relevant obligations are aligned. Difficulties may arise if one party ends up being insolvent or lacks the capacity to perform the contract.
Although the main contractor is responsible for breaches of contract on the part of the subcontractor, there is no equivalent liability in tort. A claim by a third party against the main contractor for pure financial loss is not available. If the loss is purely financial, the courts have held it not to be recoverable in this context.
In the absence of contractual provision, the subcontractor would have no direct right of recourse against the employer. However, contracts may provide for rights of payment. The Construction Contracts Act may also apply.
Formerly, contracts might provide that the subcontractor would be paid only when the main contractor was paid. These were not unusual but not found in standard contracts. Statute has limited the effectiveness of these so-called ‘paid when paid’ contracts.
Generally, the subcontractor has no direct right to payment against the employer. Exceptionally, the employer may specifically undertake direct obligations.
Contractors and subcontractors may employ retention of title clauses. They will be effective only in respect of unfixed materials. As regards the contractor, provisions of the contract may pass title in respect of goods owned by the contractor on payment of certificate. However, this does not apply to goods which the contractor does not own whether because it is the property of the contractor or a third party.
The Sale of Goods Act provides that where a person who has bought or agreed to buy goods is allowed by the seller to have possession, they may pass title to a bona fide purchaser. Questions may arise as to whether there is a contract to supply goods or a contract to supply or not in the context of building. The contract may preclude the contractor from employing subcontractors who retain title.
Assignment and Subcontracting
Neither the employer nor the contractor may assign the building contract. The contractor may sublet part of the works with the consent of the architect.
The nomination of a subcontractor allows the employer/architect to control subcontracting various aspects of the job. In most construction works, there will be a significant number of subcontractors. The entire job may be subcontracted to one or a number of parties or trades, specialties by the contractor.
The architect will generally require the contractor to obtain prices from a number of subcontractors, prior to nomination. The contractor is entitled to object to a nominated subcontractor The contractor may be liable to the employer for breach of contract caused by a subcontractor, but he would in turn, have recourse against the subcontractor. There will commonly a direct agreement, a collateral contract, between the employer and subcontractor.
Under standard contracts, employers may be entitled to specify that certain work even though done by the main contractor, is to be carried out by a contractor listed in the bills. It may contain a certain number of names. If the number falls more names may be added by agreement. The contractor remains responsible. The person selected becomes the contractor/subcontractor.
Standard form contracts generally require a nominated subcontractor to enter a collateral agreement with the employer under the main contract. It is less common to require direct warranties from a domestic subcontractor. Where, however, the subcontractor has design responsibilities, this may occur.
The practice of an employer being entitled to nominate a subcontractor gives it control over the quality of the subcontract work. Specialist subcontractors may be required to be chosen in advance, ordered early, perhaps before the main contract is awarded. This precludes the main contractor from having to seek tenders from every specialist subcontractor.
Where there is a prime cost or provisional sum on the main contract, the main contractor prices for attendance and profit only.
The main contractor’s responsibility for defaults in part of the nominated subcontractor is generally limited. Contracts may provide for cash discounts for prompt payment of subcontract.
Contracts may make provision for the nomination of subcontractors. The main contractor has neither the right nor the obligation to carry out the work which is to be carried out by a nominated subcontractor under the contract documents, or pursuant to a prime costs sum.
The contractor may be entitled to a tender for the work, provided it is the type of work that the contractor carries out.
The fact that the subcontractor is effectively selected by the employer does not mean it is a nominated subcontractor under the contract. The nomination must be made in accordance with the contract.
Form of Sub-Contract
It is generally provided that the contractor and subcontractor must enter a specified form of subcontract. The subcontract will be usually required to enter into a collateral contract with the employer. It provides the employer with a direct right against the subcontractor for certain defaults.
The subcontractor is to tender on a particular form under the standard form building contracts. Once the employer chooses the subcontractor, he must complete the relevant collateral agreement. The employer completes the remaining form and the tender is passed to the main contractor with a preliminary notice of nomination. The main contractor and the subcontractor settle the outstanding terms within 10 days. If they do not do so, the subcontractor may re-nominate.
Once the contractor and subcontractor have agreed on the terms, the contractor nominates the subcontractor in a specified form. When the document is issued the main contractor and subcontractor are bound by the terms of the subcontract.
Nominated subcontractors may not be employed where the contractor makes a reasonable objection. They must enter into a subcontract that indemnifies the contractor against the same obligations in relation to the subcontract, for which the contractor is liable under the main contract.
Where the contract documents allow for work to be executed on-site and for materials and goods to be supplied and fixed by a firm selected by the architect, they are deemed to be a nominated subcontractor employed by the contractor.
Sum to be paid to nominated subcontractors for work, are to be paid by the contractor within five days of receipt of payment on the architect’s certificate for the value of the relevant works, from the employer, less any detention or discount.
The architect may require the contractor to prove that all previous accounts have been paid as a condition for the issue of further certificates under the contract. There is a provision for the final payment of a nominated subcontractor before the final payment of the contractor for the full job. The nominated subcontractor must satisfactorily indemnify the contractor against latent defects.
The contractor is responsible for the employer for the works comprised in the subcontract. If the contractor terminates the employment of the nominated subcontractor under the terms of the contract, another subcontractor selected by the architect may be appointed. Unless the termination of the contract or set aside is the result of litigation or arbitration, the contractor is not liable for the increase of the subcontract work.
Nominated Suppliers, Prime Cost and Provisional Sums
The contract documents may provide the selection by the architect of a nominated supplier.
The contract documents may provide for provisional sum. These are at the disposition of the architects. They are to be spent as he directs. They may involve the appointment of nominated subcontractors or nominated suppliers.
If compliance with the architect’s instructions involves work by the contractor, it is valued for his benefit.
Prime cost sums are provisions to meet prospective payments by the contractor to nominated subcontractors or nominated suppliers. If payments to such parties arise, they must be authorised by the architect. If they are more or less than the relevant sum, the contract prices is varied up or down accordingly.
Provided the contractor does not object, the employer may engage artists, tradesmen or others to carry out works not specified in the contract which would not normally be part of it. The costs are to be paid by the employer, who shall indemnify the contractor against any claims arising out of their employment. The contractor may be entitled to payment for attendance and use of any plant or equipment.