A main contractor is often in a difficult position during project disputes, caught in the middle between its liabilities to the employer and its ability to recover those losses from its subcontractors. But, what happens when the main contractor's liability to the employer hasn't yet been determined, or may not exist? A recent case from Australia offers some insight.
Where one party breaches its contract with another, damages are commonly assessed on the basis that the wronged party should, so far as can be achieved with money, be put in the position it would have been in had the contract been performed. This will be straightforward in many claims brought by main contractors against their subcontractors, as the subcontractor's breach is likely to result in a breach of the main contract, and the main contractor's financial losses can readily be measured by reference to its liability to the employer.
The situation is more complicated, however, where the main contractor's liability to the employer is uncertain. This would be the case where the subcontractor's work is clearly defective or culpably delayed, but the employer's corresponding claim with respect to those defects or delays has yet to be determined, perhaps because:
- the employer has not yet brought its claim;
- the employer's claim is the subject of a separate dispute resolution procedure, which has not concluded; or
- the employer has succeeded in establishing the main contractor's liability, but damages have yet to be determined.
How can the main contractor claim its loss against the subcontractor? And how should that loss be measured? These are the questions that faced the claimant's main contractor in Cubic Metre Pty Ltd v C & E Critharis Constructions Pty Ltd  NSWSC 479.
Cubic Metre v Critharis
The main contractor had been engaged to build a waterfront residence in the Sydney suburb of Watsons Bay. The boundary of the property was to include a sea wall; this required sandstone cladding, which the subcontractor agreed to provide. In breach of that agreement, the subcontractor provided sandstone that was unsuitable for its intended purpose. This was not discovered until quite some time after the sea wall had been installed, when the employer notified the main contractor that it had begun to deteriorate, but did not actually make a claim against the main contractor. In the meantime, each of the subcontractor's invoices had been paid in full by the employer, as had the invoices for other work in relation to the sea wall.
The main contractor then made a claim against the subcontractor in respect of the defective cladding. While this claim was brought within the relevant limitation period, it was common ground that the employer's potential claim against the main contractor had, by that point, expired. The main contractor therefore had no contractual liability to rectify the sea wall, but argued that it had a moral responsibility to do so, which justified its claim against the subcontractor.
However, as the employer had not required the main contractor to rectify the sea wall, and the main contractor had not demonstrated that there was any prospect of it undertaking the rectification works or being held liable to compensate the employer for the defects, the court held that the main contractor had failed to prove that its losses should be measured by reference to the cost of rectification, or proven them on any other basis. In other words, the main contractor's claim failed.
As with any claim for damages, when bringing a claim against a subcontractor, it is incumbent upon the main contractor to prove its loss. If it is clear that the main contractor's liability will never be enforced, such that the loss will never crystallise, then the loss is not truly contingent and recovery will be denied to avoid giving the main contractor a windfall. It is therefore essential that the main contractor demonstrate, at the very least, that there is some prospect of loss being incurred. In Cubic Metre, the main contractor's failure to do so was fatal to its claim.
Where the main contractor succeeds in demonstrating some prospect of loss, such that its losses are truly contingent, assessment can still be difficult. A number of approaches have been taken by English law in this regard, including:
- Postponing a determination until the loss ceases to be contingent. This may be feasible where it is known that a determination of the employer's claim against the main contractor is imminent.
- Ordering that the subcontractor indemnify the main contractor against the main contractor's recoverable losses. Once those losses crystallise, the main contractor may then rely upon the ordered indemnity to seek compensation for its losses.
Both of these measures take a ‘wait and see' approach. Another option for the court would be to estimate the main contractor's likely loss, which may reflect the probability of the employer successfully making a claim against the main contractor. For example, if a subcontractor is responsible for defects that will cost £100,000 to rectify, and it is determined that there is a 50% chance of the employer claiming against the contractor for those defects, the main contractor may be awarded damages in the amount of £50,000 to compensate it for its contingent loss.
In summary, there is no conceptual difficulty with a main contractor making a claim (or deduction) against a subcontractor where the employer has not made a corresponding claim against the main contractor. Such difficulties arise as practical problems of assessment of damages, to which the courts are inclined to adopt practical solutions. However, in order for such a claim to have prospects of success, a main contractor should collate evidence of:
- the employer's intentions, and the probability of the employer making a claim against the main contractor; and
- if relevant, the connecting factors between such a claim by the employer, and the loss that the main contractor seeks to recover from the subcontractor.