Legal

Has your subcontract got your back?

12 September 2017 | By Stefan Berry

Dreamstime.com

Stefan Berry examines the implications of a case where a main contract was deemed to be incorporated into a subcontract, with painful results. 

A series of words that clients, particularly subcontractors, often say to me when describing their current issues with their own sub-subcontractors lately is, “there is no written or proper contract in place”.

These words, as you might expect, sound like nails on a chalkboard to a lawyer.

Usually however, either because the client knows itself, or because they notice me wincing, the phrase is followed up by “that will be a problem, won’t it?” I, as a general rule then request, or beg if need be, the client to have me draft them standard terms to avoid the situation in future. 

Worse, however, is where I have to break the bad news to a client who has provided me with a copy of the written agreement between them and their subcontractor or sub-subcontractor, that the contract doesn’t say what they think it says and they are not in the secure position they might have otherwise thought they were. 

Often the issue arises with clauses that seek to ensure any subcontract or sub-subcontract runs back to back with the clients’ own contract.

The inclusion of these clauses is entirely understandable and indeed sensible – nobody wants to be caught between a rock and a hard place, being put under pressure or penalised under one contract and unable to pass this down to a subcontractor or sub-subcontractor who has caused the issue in the first place.

Being stuck between a demanding employer, or under pressure from a main contractor on one hand and a subcontractor seeking to extract every penny possible from the job is often not a very comfortable place to be. 

Clauses ensuring that your subcontractor is subject to the same terms as you are in your contract upstream are a good, relatively straightforward way to avoid any undue exposure, as opposed to the laborious and potentially expensive task of ensuring each clause in your upstream contract has a duplicate in your agreement with a subcontractor.

“In the case at hand, it is likely that if Dawnus had known the provisions of the main contract applied, they would have served the notices of dissatisfaction and ultimately there would have been no need for this case.”

The recent case of Dawnus Construction Holdings v Amey LG Ltd provides a few lessons for using these clauses. 

Amey LG Ltd (“Amey”) appointed Dawnus Construction Holdings (“Dawnus”) as a subcontractor in relation to a project to carry out highway works. At the conclusion of the project, Dawnus wished to take some matters to litigation to recover a potential additional £1m.   

An issue arose however, as to whether the dispute resolution clauses of the main contract had been incorporated into and were part of the subcontract between Amey and Dawnus.  

The dispute resolution provisions in the main contract required a party to refer a dispute to adjudication and give a notice of dissatisfaction within four weeks of the adjudicator’s decision, before it could begin formal legal proceedings.

By the time Dawnus had decided it wanted to litigate, it was out of time in relation to the four disputes referred to adjudication under the subcontract. In contrast, the subcontract merely set out that disputes could be referred to adjudication and decisions would be final and binding until it was finally determined by legal proceedings i.e. litigation. 

Recital 3 of the subcontract was a back-to-back clause, however, and set out that the terms of the main contract applied as if they were repeated in the subcontract. In light of the apparent conflict between the dispute resolution clauses in the main contract and the subcontract, the court was asked whether Recital 3 operated so as to incorporate the dispute resolution clause in the main contract into the subcontract. 

Put shortly, it was decided that the dispute resolution clause of the main contract had been incorporated into the subcontract. Dawnus’s right to litigate was therefore limited. 

To me this case is something of a double-edged sword, a comfort and a warning. Where, as a subcontractor you are presented with an agreement that purports to incorporate the terms of another contract or states that you are deemed to have full knowledge of another contract, or are required to comply with the terms of another contract, it behooves you to ensure you have seen that contract so as to ensure that there are no nasty surprises.

You will not later down the line be able to rely on vague inconsistencies or the fact that it substantially alters the position of some items. 

As you would expect, it often proves cheaper in the long run to understand what you are signing up to in the first place. In the case at hand, it is likely that if Dawnus had known the provisions of the main contract applied, they would have served the notices of dissatisfaction and ultimately there would have been no need for this case.

The alternative to this is having Quigg Golden mitigate the potential impact of a battle that was already lost when the contract was signed. 

On the other hand, this case acts as a comfort that where a clause seeking to make two contracts run back to back and is clear in that regard, the courts will seek to stand over them and will not go out of their way to not apply them.

In that regard, this case proves the value of having such a clause properly drafted to ensure your subcontract has your back and you are not left between a rock and a hard place. 

Stefan Berry is a junior associate at Quigg Golden

Comments

Compared with Canada in respect of contract law and main contracts and subcontracts the UK is in the "dark ages". The Canadian Construction Association has a range of standard forms of contracts that are used throughout the industry. Very few contractors and subcontractors operate without using these standard forms of contract. But then the Canadian Construction Industry have a very strong industry association those membership includes contractors, subcontractors, suppliers and service providers. The British industry should take a serious look at the Canadian model if ever they are going to sort out the messy system they current have.

Roger Ward FCIOB PQS(F), 12 September 2017

I have encountered back-to-back clauses in my work and then requested a copy of the main or head-contract only for this to be refused on grounds of commercial sensitivity or for my request to be ignored. Whilst I can understand why main contractors like the comfort of back-to-back clauses with this comes responsibilities such as being willing to share the contract with all subcontractors invited to price the works and ensuring that the contract administration process gives all parties time to make decisions well within deadlines rather than just head contractor. I would suggest that what is at question here is as much a question of law as a question of culture and practice.

Paul Akhurst MCIOB, CFM, 18 September 2017

Roger, the UK construction industry has a plethora of standard forms of contracts (at last count over 140 from different publishers). Roughly 80% of projects operate under these standard forms of contract. Often it is the messy end of the remaining 20% that end up before the court, so you only see that slice of life.
Paul, the issue is not whether main contracts like the comfort of 'back-to-back contracts' (which of course they do) but why they aren't prepared to accept the risks of the works they have agreed to and feel the need to pass those risks entirely down to their subcontractors. If a main contractor does not want to accept risk, then perhaps change industry?!

Sarah Fox, 2 October 2017

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