Lecture 3: LAW RELATING

TO PAYMENT

Group Members: Chian Chee Yong Hong Kok Hang

CONSTRUCTION LAW [QSB 4414]LECTURER: SR. EDDIE LIM

DATE: 23TH SEPT 2014

Construction industry requires a wide rage of skills and mater ials which may not be available from a single construction company.

Contractor

Sub- Contractors

Suppliers

THEREFORE,

Tankertanker Design

Tankertanker Design

Tankertanker Design

… and also increasingly sophisticated engineer ing installation and system

M&E installation

Fire Protection System

Tankertanker Design

Tankertanker Design

Tankertanker Design

Main contractors are now confined more to:•Site Management•Planning•Organization•Procuring the necessary subcontract•Securing performance bond•Purchasing insurance & etc.So,

•40% to 50% of Main Con works are placed with Specialist Sub-contractors

•20% to 30% are placed with Trade Sub-contractors

Tankertanker Design

Tankertanker Design

Tankertanker Design

Tankertanker Design

Tankertanker Design

Tankertanker Design

LAW BETWEEN:

1

2

3

4

The Main Contractor and Sub-contractor

The Employer and Sub-contractor

Employer and Nominated Sub-contractors

Payments to Sub-contractors

1. The Main Contractor and Sub-contractorISSUE: Problems ar ise where the terms which the main contractor are required to observe under the main contract turn out to be inconsistent with his obligations to the subcontractor under the subcontract.

Case:Chandler Brothers Ltd v Boswell

(1936)

Tankertanker Design

Tankertanker Design

Tankertanker Design

Case:Chandler Brothers Ltd v Boswell (1936)

Summary•An engineer was empowered under the terms of the main contract to order the main contractor to remove a subcontractor .•The main contract in that case provided that, if a sub-contractor was guilty of delay, the employer could instruct the main contractor to dismiss that sub-contractor . •The sub-contract expressly covered many of the matters in the main contract, but did not specifically give the main contractor a power of dismissal for delay. •At the end, the main contractor chose to remove the subcontractor and committed a breach of the subcontract.Court Decision:It was held by the Court of Appeal that the main contractor was guilty of a breach of the sub-contract. The sub-contractor’s undertaking to carry out the work in accordance with the terms of the main contract was not enough to incorporate the power of dismissal for delay.

Tankertanker Design

Tankertanker Design

Tankertanker Design

To avoid Inconsistencies:A subcontract may be drafted to expressly incorporate certain terms of the main contract. Where the term which is purported to have been incorporated does not conflict with the other express terms of the subcontract, the court is usually disposed to rule in favour of its incorporation.

•The terms are stated in Preliminary Bill

Tankertanker Design

Tankertanker Design

Tankertanker Design

Case:Geary, Walker & Co Ltd v W Lawrence & Son Ltd (1906)Summary

•The subcontract contains a provision stipulating that the terms of payment for the works… shall be exactly the same as those set forth in clause 30 of the [main]… contract.” The amount of retention under the main contract would exceed the sum payable to the sub-contractor under the sub-contract by the end of the project. Court Decision:The Court of Appeal decided that the terms of the main contactor in respect of the payment were applicable, and also that retention should be withheld. However, the payments would be in the same proportion as the proportion of the sub-contract sum to the main contract sum. There was, therefore by implication, a pro-rata of the amount of retention by reference to the main contract payment mechanism.

Tankertanker Design

Tankertanker Design

Tankertanker Design

ISSUE: A different situation may be encountered where the structure of the main contract is of a different contractual character from that of the subcontract.

Eg: where a fixed pr ice subcontract (without quantities) attempts to incorporate the entire set of provisions relating to valuation and var iations in a main contract which is structured on a re-measurement basis.

Case:Kian Hong Holdings v Ohbayashi Gumi

(1984)

Tankertanker Design

Tankertanker Design

Tankertanker Design

Case:Kian Hong Holdings v Ohbayashi Gumi (1984)Summary

•The main contractors were employed by a statutory author ity to undertake reclamation works. The dispute between the parties concerned the correct method of measur ing, for payment purpose, the quantity of granite aggregates used. •It was agreed that the subcontract was a measure and value contract where the granite aggregate will be measured before been discharged into the sea. Whereas the main contract was a lump sum contract under which the works were paid on the basis of design volume measurement on design drawings dur ing tender . •There was also an express provision in the subcontract which provides for the incorporation of the terms of the main contract into the subcontract and another clause which provides that in the event of a conflict between the terms of the main contract and those of the subcontract, then the subcontract should prevail. Court Decision:The Court of Appeal held that the subcontractor should be paid based on their subcontract conditions, i.e. pay on a unit pr ice on the quantity actually discharged into the sea.

2. The Employer and Sub-contractorISSUE: •The subcontract between a main contractor and sub-contractor cannot give r ise to any pr ivity of contract between the main contractor and employer. •When the employer or architect instructs the contractor to appoint a sub-contractor on specific terms, the actual and final terms of the sub-contract may be revised and amended during the final negotiation between the Main contractor and nominated sub-contractor .

Case:Davis & Co Shipfitters Ltd v William Old

(1969)

Tankertanker Design

Tankertanker Design

Tankertanker Design

Case:Davis & Co Shipfitters Ltd v William Old (1969)

Summary•The project’s architect informed a sub-contractor that his tender was accepted and the contract will be concluded with the main contractor . •Before concluding the sub-contract, the main contractor inserted a new condition to pay when paid clause. •The sub-contractor started work. •The question before the court was whether the new clause forms part of the sub-contract.

Court Decision:The court held that the architect did not finalise the contract with the sub-contractor . The terms and contract are those between the main contractor and sub-contractor and which the sub-contractor is presumed to have accepted by star ting work without protest. Thus main contractor is entitled to rely on the 'pay when paid' clause.

Tankertanker Design

Tankertanker Design

Tankertanker Design• Due to absence of pr ivity of contract between employer and

sub-contractor is that neither party has direct recourse in contract against each other, eg. sub-contractor cannot sue employer directly for non-payment.

• Therefore if the employer is concern over the delivery capability of a particular sub-contractor, he may provide in the main contract express terms which permit him to directly monitor the sub-contract while preserving the main contractor 's accountability for any sub-contractor 's default, eg. defective workmanship and delays.

Tankertanker Design

Tankertanker Design

Tankertanker DesignIF employer wish to have direct route of recourse against a sub-

contractor HOW?

Employer may demand a collateral warranty

from the subcontractor .

Tankertanker Design

Tankertanker Design

Tankertanker Design

Collateral Warranty ?• The mechanism of this warranty is to require the sub-contractor to

assure the employer of the quality of the sub-contract works and their timely completion.

• This warranty is given to the employer in consideration of the employer instructing the main contractor to award the sub-contract to the particular sub-contractor .

• In the event of default, the employer can proceed against the sub-contractor for loss or damage caused by breach of this warranty.

Case:Shanklin Pier Lt v Detel Products (1951)

Tankertanker Design

Tankertanker Design

Tankertanker Design

Case:Shanklin Pier Lt v Detel Products (1951)

Summary•A contractor was engaged to repair and paint a pier with bituminous paint. •The defendants were paint supplier and had warranted to the employer that their paint would provide a life of seven to ten years.•Relying on this warranty, the employer instructed the contractor to use the defendant paint. •The paint system failed.

Court Decision:The court held that the employer were entitled to recover from the defendant in respect of the warranty referred to, notwithstanding that the contract of sale of the paint was between the contractor and the defendant.

Tankertanker Design

Tankertanker Design

Tankertanker Design

HOWEVER….

• Collateral agreement can be a two-edged sword. • Though it give protection to the employer , it also

provides the subcontractor with a contractual basis to proceed against the employer if the employer fails to arrange for the sub-contractor to be engaged on terms prescr ibed in the warranty.

3. Employer and Nominated Sub-contractorsThe rationale behind nomination are: a)Employer retains r ights to select sub-contractors for specialist inputs or capabilities. b)Employer exercise a degree of control of construction works considered to be particular ly important, eg. granite supplied by a supplier with whom the architect/employer has successfully worked with in the past. c)Nomination can be used to reduce lead time elements in the overall construction per iod, eg. structural steel frames. d)A llows Architect/consultants more time for design details to be developed for specialist works while the main contractor 's tender can be called.

Tankertanker Design

Tankertanker Design

Tankertanker Design• Since there is no pr ivity of contract between the employer and sub-contractor , the employer cannot proceed directly against a sub-contractor in the event of a default by the sub-contractor . The employer can sue the main contractor , who may then be entitled to be indemnified and proceed against the sub-contractor . This creates a 'chain of liability’

• To avoid any difficulty, an employer may require the nominated sub-contractor to execute a collateral warranty in consideration of their being nominated for the sub-contract works.

Tankertanker Design

Tankertanker Design

Tankertanker Design

IF Main Contractor wants to OBJECT to the Nomination

HOW???

12/02/14

PAM 2006 clause 27.3 which 'state that the contractor shall not be required to enter into a sub-contract with any Nominated Sub-Contractor against whom the contractor has made a reasonable objection based on available known facts and documented evidence that the financial standing, solvency or technical competence of the nominated sub-contractor is ......'

Case:Bickerton (TA) & Sons Ltd v North West

Metropolian Regional Hospital Board (1969)

Tankertanker Design

Tankertanker Design

Tankertanker Design

12/02/14

Case:Bickerton (TA) & Sons Ltd v North West Metropolian Regional Hospital Board (1969)

Summary•The nomination procedure is dealt with by vir tue of the main contract and also a separate nominated sub-contract which is relatively complex and of course reliant upon the drafting of the provisions.

Court Decision:Judge said that the contractor could object to the nomination based on technical competency and financial standing of the prospective sub-contractor but not on the sub-contractor 's pr ice and specifications.

4. Payments to Sub-contractorsIn General Pr inciple, •Subcontractors are paid for their work by the main contractor and their r ights to payment is independent of any conditions or dealings between the main contractor and the employer . •In the absence of any express provisions to the contrary in the subcontract, therefore, the subcontractor is entitled to payment for their work done regardless as to whether the main contractor had himself been paid by the employer . •These pr inciples apply to both domestic subcontractors and nominated subcontractors.

Tankertanker Design

Tankertanker Design

Tankertanker Design

HOW TO PROTECT THEM?

• Provisions for direct payment to nominated subcontractors are stipulated in most standard form of contract. – These provisions are for the protection of nominated

subcontractors’ r ight to payment are backed by provisions which entitle the employer to pay an aggr ieved nominated subcontractor directly and deduct the amount paid from sums otherwise due to the main contractor .

• Under most contract, the employer cannot be compelled to exercise this r ight. The exercise of this r ight to pay the nominated subcontractor directly is clear ly discretionary.

QUESTION NO. 1Explain the differences between “Pay if Paid” and “Pay When Paid” Clauses in Construction Contracts.

Answer NO. 1

"pay when paid" clause - (i.e., that the pr ime contractor will pay the subcontractor within X days of receiving payment from the owner) Is simply a timing mechanism and generally will not excuse the pr ime contractor from having a payment obligation to the subcontractor , regardless of whether the owner has paid the pr ime contractor .

"pay if paid" clause - (i.e. that the pr ime contractor only incurs an obligation to pay the subcontractor if, and only if, it is first paid by the owner) May constitute a condition precedent that excuses the pr ime contractor from having a payment obligation to the subcontractor if the owner does not pay the pr ime contractor .

Tankertanker Design

Tankertanker Design

Tankertanker Design

QUESTION NO. 2Under Construction Industry Payment & Adjudication Act (CIPAA), clauses regarding conditional payment such as “pay when paid” and “pay if paid” are prohibited. Why?

Tankertanker Design

Tankertanker Design

Tankertanker Design

Answer NO. 2

Such conditional payments are unfair to sub-contractors. The sub-contractor may not be paid due to non payment from employer caused by the main contractor . For example, If main contractor causes the delay and employer set off Liquidated damages against payment due, then main contractor may not be paid for that month. Hence, Sub-contractor may not receive payment although such delay is not his fault.

Thank You