International construction contracts often contain provisions which oblige the main contractor to engage a subcontractor that has been pre-selected or is subsequently nominated by or on behalf of the client. Such an arrangement allows the client to have part of the works carried out by a specialist contractor, rather than the main contractor, and they are normally used where the client is responsible for the design of the works.
In this month's article, we will look at the legal issues that can arise from such contractual provisions and consider what can be done by the main contractor to mitigate the risks that can arise from their operation.
What is a nominated subcontractor?
Main contracts commonly provide for certain subcontractors to be chosen by the client to carry out particular work, usually identified as "prime cost" work to which the main contractor will be entitled to add his profit margin and attendance costs (such as material handling, scaffolding and rubbish clearance etc). They are usually called "nominated" subcontractors.
Frequently, the scope of work, terms and price of the services to be provided by the nominated subcontractor are pre-negotiated by the client and, as such, are imposed on the main contractor. However, there is no direct contractual relationship between the client and the subcontractor.
Sometimes the client will have signed an agreement with the nominated subcontractor which is transferred to the main contractor. Or the client may simply oblige the contractor to use a particular subcontractor to execute particular works.
Why nominate in advance?
Historically, nominated subcontractors or suppliers were selected by the client prior to the appointment of the main contractor for a number of reasons, such as where the works involve items with a long delivery time, where design and manufacturing times cannot wait for the main contractor to be appointed (e.g. specialist plant), or where the client has based part of its design on the services provided by the specialist contractor (e.g. a cladding system).
Nominating in advance also allows the client to secure a favourable price, which will benefit the client, as the main contractor is usually only entitled to charge the agreed prime cost, plus a profit mark up and attendance costs.
The main contractor's liability
English law is clear that a main contractor is liable to the client for any default by his domestic/named subcontractors in performing the main contract work, subject of course to any term in the main contract saying otherwise. This is the case whether the subcontractor is 'domestic' (i.e. freely chosen by the main contractor), or 'named' (i.e. chosen from a list of candidates prepared by the client).
There is nothing controversial in that arrangement because it reflects the fact that the main contractor is merely securing through others the performance of his own obligations under the main contract.
However, the legal position with nominated subcontractors is less straightforward. The fact of and the circumstances surrounding nomination of a subcontractor and the words used in the main contract can sometimes result in the main contractor not being liable for the nominated subcontractor's defaults. Much will depend on what the main contractor has agreed with the client in the main contract. The terms of the main contract should be the starting point of any analysis. This cannot be stressed enough. Any provisions describing the responsibility of the main contractor for the defaults of any nominated subcontractor will obviously be relevant. Also relevant to the analysis will be whether the main contractor has assumed responsibility for the overall design of the works.
There is a reasonable amount of English case law on nominated subcontractors and the main contractor's liability for their defaults. However it should be approached with caution. Much of the case law amounts to a somewhat pedantic analysis of the meaning of words used in the older standard form construction contracts. It will therefore be of limited assistance to someone trying to interpret the meaning of a main contract where those words are not present.
However, from the case law and leading construction law texts we know that, unless the terms of the main contract or the surrounding circumstances indicate a contrary intention:
- Nomination: Where the main contract provides the client with a right to nominate, English law will imply a term into the main contract that:
- the nomination will be done by the client in good time so as to enable the main contractor to carry out its obligations as to time and to work economically and expeditiously;1 and
- the client or their consultant will nominate a supplier or consultant willing to enter into a subcontract in a form consistent with the obligations of the main contract.2 In other words, the main contractor cannot be compelled to enter into a subcontract which does not adequately protect its rights against the subcontractor.
- Materials3: The main contractor will be liable to the client for latent defects in materials or goods supplied by nominated suppliers or used by nominated subcontractors because English law will imply into the main contract a term that the materials or goods to be supplied by the nominated subcontractor will be of good quality. However, such an implied term may be excluded in circumstances where subcontract terms imposed on the main contractor limit the contractor's right of recourse against the subcontractor for such defects.
- Fitness for purpose: The main contractor will not be liable to the client where the materials or goods selected are of good quality but are not fit for their intended purpose. A client who directs the main contractor to use a nominated subcontractor or supplier cannot be said to be relying on the main contractor’s skill and judgment in selecting the materials or goods to be supplied and in those circumstances the term will not be implied.4
- Where a main contractor accepts design obligations in the main contract in respect of the works to be performed by the nominated subcontractor, they will be liable to the client for the nominated subcontractor's negligent design.
- Where the main contract documents do not include any obligation on the part of the main contractor to perform any design works at all, a main contractor will not acquire design liability merely because they are instructed to enter into a subcontract with a nominated subcontractor who is going to do some design work on behalf of the client. In those circumstances, the main contractor's liability if any, for design by a nominated subcontractor would only arise as an implied term of the main contract. Whether a judge or arbitrator would find it necessary to imply such a term into the main contract will depend on the facts and circumstances of each case.
- Replacement: If a nominated subcontractor becomes insolvent or refuses to complete the subcontract work and has its contract terminated then:
- The main contractor is not entitled to an extension of time for the delays caused by the original nominated sub-contractor (either prior to termination or due to the termination).6
- Where the main contract terms provide that the main contract work is reserved exclusively for the performance by the nominated subcontractor, who subsequently goes into insolvency and refuses to complete the subcontract work, the main contractor may have no right or duty to carry out that work for the client, and may be entitled to additional payment in the event that they are instructed to complete that work.7
- The main contractor may object to the nomination of a replacement sub-contractor if the date for completion of that replacement subcontract is later than the main contract date for completion, or the main contractor may insist upon an extension of time for that extended period.8
Managing the risk
Most of the standard form contracts expressly provide that the main contractor is strictly liable for its subcontractors, including any nominated subcontractors. For example, all of the FIDIC forms provide in sub-clause 4.4 that the Contractor is responsible for the acts or defaults of any subcontractors as if they were the acts or defaults of the contractor. This has two consequences:
- first, the main contractor assumes strict liability for all subcontractors, including any nominated subcontractors selected by or on behalf of the client; and
- second, the assumption of liability prevents the main contractor from making any claim (for example, for an extension of time or additional cost) arising out of an act or omission of its subcontractors.
In these circumstances a prudent contractor will carry out the following:
- They will inform themselves of the liabilities that they are taking on. Accordingly, before accepting the client's nomination, the main contractor should review the client's nomination and investigate its performance, its previous history of building to programme and its financial standing. It may also investigate the viability of the contract price with the nominated subcontractor to gauge whether the tendered work can actually be carried out profitably. The terms under which the subcontractor is to perform the works should also be reviewed very carefully to check that they allow the main contractor to meet its obligations under the main contract
- If they are not happy, object to the nomination. All of the FIDIC contracts state that the contractor is not under any obligation to employ a nominated subcontractor against whom the contractor raises a reasonable objection.
Too often contractors are reluctant to object to the client's nomination, but not doing so will waive the right to claim later that the nomination was inappropriate, or that the subcontract terms imposed are unfair