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Module B Subcontracts
The Main Contractor remains responsible to the Employer for all
aspect of the sub-contract. The Main Contractor is still responsible fortime, quality and paying the subbie in accordance with the contract
between the two parties. This is regardless of any issue that could
arise between the Main Contractor and the employer.
Privity of Contract
There is no direct link between the Employer and the subbie by virtue
of the Main Contractor not being an agent of the Employer. The
Employers obligations are in respect of the Main Contract. This also
means that Employer cannot sue the subbie in event of the work
being defective. The Employer is only obliged to pay the Main
Contractor and the Sub Contractor cannot sue the Employer for
subcontract money.
The employer may wish to influence the choice of subbie or seek to
use a specific subbie. The Main Contractor may only be prepared to
undertake certain subcontract work on particular items or by limiting
the main Contractor risk or payment obligation.
The Contractor is liable to the employer for any default of the subbie.
Personal or Vicarious Performance.
In Davis v Collins Lord Green said:
it is to be inferred that it is a matter of indifference whether
the work should be performed by the contracting party or by
some subbie whom he employs.
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Further issues arise that include the incorporation of the main
contract terms into the sub-contract, often carried out with limited
success, or indeed complete failure. Terms are often incorporated by
reference and the battle of the forms is encountered when attemptingto work out terms of the Contract between the Main Contract and the
Sub-contract.
Relationship between Main Contractor and Sub-contractor
There is a distinction if often made between those sub-contractors
which are domestic and those that are nominated.
Domestic Subcontractor
One that is selected and employed by the Main Contractor, for whom
the Main Contractor is solely and entirely responsible.
Nominated Subcontractor
One selected by the employer, but employed by the Main Contractor.
If the Subbie is nominated by the Employer, the Employer usually
retains some liability.
Named Subcontractor.
Employer names one or more preferred subbies. The Main Contractor
may add further subbies. The cumulative list used for tendering and
the subbie will be selected by the Main Contractor. The subbie is then
treated as a domestic subbie of the Main Contractor, who becomes
solely responsible thus avoiding employer liable while giving the
Employer some element of involvement.
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The Contract between the Sub Contractor and the Main Contractor is
considered objectively by reference to express terms or implied terms
and in isolation to the Main Contractor.
Incorporation of Contract Terms
Sub Contracts are more usually formed (if formed at all) by way of
exchange of letters , or more frequently by Main Contractor issuing a
purchase order or similar document. This seeks to incorporate the
terms of the Contract. This is an acceptable method to incorporate
the terms of the Sub Contract.
In Modern Buildings Wales v Linner the Court of Appeal
considered the expression and held that it was:
fully in accordance with the appropriate form for the
nominated Sub Contractor (RIBA 1965 Edition)
Held: That these words were sufficient to incorporate the Green Form
including the arbitration agreement and the court granted a stay on
the proceedings on this basis.
This case is authority for the proposition that parties do not need to
make an express nor a specific reference to the arbitration clause
when the arbitration clause is included in a standard set of contract
clauses. Simple reference to the Standard Terms will incorporate the
arbitration clause as well as the rest of the terms.
TW Thomas v Portrea Steamship
In this case it was held that the arbitration clause could only be
incorporated in a charted party by a specific reference to the
arbitration clause itself.
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Aughton v MF Kent Services
Held: An arbitration agreement did not satisfy the statutoryrequirement for a written arbitration agreement set out in the
Arbitration Act 1950 and was not incorporated. This was
distinguished from the building contracts by stating that building
contracts it was not necessary to specifically refer to the arbitration
clause in order to incorporate it and the general words might be
adequate.
Megaw J. adopted a more restricted approach stating that an express
and specific reference to the arbitration clause would always be
necessary to incorporate the clause into the contract between the
parties.
Extrudaworks v Whitemountain Quarries
Held: The requirement for an express reference to arbitration in the
primary agreement between the parties was rejected. The Main
Contractor counteroffer stated that:
The subcontract will be in the FCEC form of Sub Contract and
the main conditions are G/C Works 1 (Edn 3) lump sum with
quantities.
Held: By Carswell J. that an arbitration clause would be incorporated
into a building sub contract even without specific reference to the
clause. The judge applied the officious bystander test and concluded
that if such a person had been asked whether the parties considered
that the arbitration clause should apply, then the answer would have
been yes. Also:
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1. Both parties were familiar with the FCEC
2. Both knew that it contained an arbitration clause
3. Both understood the contract and knew of the arbitration
clauce
Therefore, both parties intended it to be incorporated into the
arbitration clause when referring to the FCEC form of contract.
Ben Barratt v Henry Boot
Reference to another document which contained an arbitration clause
was not sufficient to incorporate the arbitration clause.
The letter of intent between the parties said that the works would be
carried out in accordance with Works Contract/2 JCT form. The letter
of intent was found to be a contract.
Lloyd QC found that the different approaches of the judges in
Aughton v MF Kent were unreasonable. He placed greater
emphasis on the House of Lords decision in Thomas v Portrea and
also in Brenner Vulcan v India Shipping. In this case, Diplock said
that the Arbitration Clause was a self contained contract. Lloyd
appears to distinguish Modern Builiding possibly on the basis that
the arbitration clause, being a separate contract, needs to be
specifically mentioned on the face of the letter of intent in order to be
incorporated.
Arbitration Act 1996
s. 5. It is an important requirement that an arbitration clause must be
in writing.
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s. 5(2) an agreement is in writing if it is made in writing (whether
signed or not by the parties) or is made in an exchange of
communications or is evidenced in writing.
s. 5(3) where parties agree other than in writing by reference to terms
which are in writing, they make an agreement in writing.
s. 5(4) an agreement can be evidenced in writing if recorded by one
of the parties or by a 3rd party with the parties agreement.
RJT Consulting Engineers v DM Engineering
Held by the Court of Appeal that:
All the terms of the construction contract had to be evidenced
in writing. It is not sufficient for merely the material terms,
such as the identity of the parties, the nature of the work and
price, to be recorded in writing. Further, even if they were
wrong, the documents relied upon in this particular case were
described as wholly insufficient. Does this contradict what is
set out in the Arbitration Act?
Incorporation of Main Contract Terms
If the Main Contract is directly incorporated, then the entire Sub
Contract, including the words of the Main Contract, must be
construed as being between the Main Contractor and the Sub
Contractor.
Geary, Walker and Co. v W. Lawrence
The parties agreed that the terms of payment for the workshall be
exactly the same as those set forth in Cl. 30 of the Main Contract.
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This meant that 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 Contract.
The Court of Appeal held that the terms of the Main Contract in
respect of the payment were applicable, and also that retention
should be withheld. Payments would be in some proportion as the
proportion of the Sub Contract is to the Main Contract. Therefore a
pro-rata of the amount of retention by reference to the Main
Contractor payment mechanism.
Brightside Kilpatrick v Mitchell Construction
Plaintiffs were nominated Sub Contractors. The issue was whether
the action should be stayed for arbitration.
The Main Contractor, Mitchell Construction became insolvent, but the
employer, Bracknel Corp, entered into a new contract with Mitchell
Construction (1973). The contract contained the words the
conditions applicable to the Sub Contract with you shall be those
embodied in the RIBA as above agreement reference to JCT 63 (July
1971 revision).
There were also references to both the FASS Green Form and Yellow
Form.
A dispute arose and the defendant claimed set off for delay and that
there should be a stay in the litigation pursuant to s.4 of the
Arbtitration Act 1950 because the true contract between the parties
contained an arbitration clause.
The Court of Appeal said that regardless of the words in the RIBA
conditions, the JCT form between the building owner and the Main
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Contractor was wholly inappropriate to contract with in respect of
Sub Contractors.
Words should be construed such that the sub-contract should beconsistent with the terms of the Main Contract referring specifically to
the Sub Contractor. Cl. 27 dealt with the Main Contractor and Sub
Contractor. Cl. 8(a) required that a certificate in writing from an
architect as a condition precedent to any claim by the Main
Contractor against the Sub Contractor in respect of damages for
delay to the works. No such cert had been issued and so the
defendant Mitchell Construction (1973) had no right to have their
claim heard in arbitration. The Court refused the stay and also
dismissed an appeal with costs against Mitchell.
The Court places great emphasis on he architects independent
certifying role, when greater attention should be give to that fact that
the architect is employed by the employer and the contractor is very
much at the mercy of the architect when the architect is in such an
important certifying role. Argued that the Court should be very slow
to remove any claim to compensation that the cub-contract would
have in that situation.
Delay
In Martin Grant v Sir Lindsay Parkinson and Co, the subbie
argued that that a term should be implied into the contract to the
effect that the subbie should be able to organise its work in an
efficient and profitable manner.
The judge, Lawton L.J. referred to the tender. Clause 2 of the sub-
contract stated that the Sub Contractor was to provide all their own
material and labour.:
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at such time or times and in such manner as the Contractor
shall direct or requires and onserve and perform the terms and
conditions of the Principal Contract so far as the same are
applicable to the subject manner of the Contract
Clause 3 required the Contractor to proceed with the said works
expeditiously and punctually to the requirements of the Contractor
The Court held that these words meant that if the main contract was
extended the the subbies contract would also be extended and the
subbie would have to carry out such portions of the works and at such
times as might be required by the Contractor. There was a clear risk
that if the main contract was delayed, then the sub-contract would be
delayed also. There was no need for any implied term as the
requirements had been expressed in the contract. The risk and the
associated costs had been apportioned in the contract and the risk of
out of sequence and uneconomic working lay with the subcontractor.
Dispute Resolution
As the main contract and the subcontract are 2 separate contracts,
the dispute resolution mechanism in both may be different.
Given that the Main Contractor finds himself between the employer
and the Sub Contractor, the Main Contractor may seek to include an
arbitration clause within the sub-contract.
The advantage is that disputes under the main contract and the sub-
contract will be dealt with by way of arbitration, the disadvantage is
that arbitration is a private process there could be two separate
arbitrations about the same subject. This could arise in the situation
where the Sub Contractor may bring a claim in arbitration against the
Main Contractor, who may then seek to pass on that claim by way of
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arbitration to the employer. It is possible that different awards may
be given such that a Sub Contractor may be successful in its claim,
whilst the Main Contractor may not.
MJ Gleeson Group v Wyatt of Snetterton concerns clause 18(2)
of the FCEC standard Form of subcontract for the ICE Conditions.
DoT was the Client, Gleeson was the Main Contractor and they
engaged Wyatt as a Sub Contractor. In June 1992, Sub Contractor
wished to refer the matter to arbitration. On 6th August 1992, the
Main Contractor gave notice that required the dispute with the Sub
Contractor to be dealt with at the same time as a dispute with the
Main Contractor. This was done under Cl. 18(2). This allows for a
dispute in connection with the Main Contract which the Contractor is
of the opinion that the dispute touches or concerns the Sub Contract,
the Contractor may require that this dispute under the Sub Contract
be dealt with jointly with the dispute under the Main Contract. The
Sub Contractor will be bound in the same way as the Main Contractor
by any decision made.
At the arbitration with the Sub Contractor, the Main Contractor
argued that the appointment of the arbitrator to hear that case was
invalid. The Court of Appeal held that the Main Contractor had a right
to serve the notice under 18(2) and this notice was valid. Therefore
the Sub Contractor was bound to deal with the arbitration with the
Main Contractor in a tri-partite manner as set out in Cl. 18(2). It is
important to note that the clause only operates if there is a dispute
between the employer and the contractor, which concerns issues in
respect of the Sub Contract.
Interaction between the Main Contractor and the Sub
Contract terms.
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The interaction of these two contracts was considered in 2 cases:
Mooney v Henry Boot Construction Ltd and Balfour Beatty v
Kelston Sparkes. These concerned appeals from a point of law inrespect of arbitrators awards. Main Contractors had reached a
settlement with the Employer, but the Sub Contractors were unable
to reach a settlement with the Main Contractor. The Sub Contractors
received arbitration awards pursuant to the Sub Contract. The
arbitrators ordered the Main Contractors to pass on a proportion of
the settlements recovered.
In Mooney Lloyd QC decided that the Main Contractor was probably
not due anything under the Main Contractor but was entitled to keep
the windfall without passing anything on to the Sub Contractor.
In Balfour Beatty, Recorder Crowther QC came to the conclusion
that were an Engineer under a Main Contract gave instructions as a
result of unforeseen ground conditions, the Sub Contractor was
entitled to a fair proportion of any amount recovered.
Cl. 10(2) of the FCEC Blue Form provides that if there is any sum due
because of any unforeseen ground conditions, the Sub Contractor is
required to help the Main Contractor in his claim. If the Main
Contractor is successful in his claim, then the Main Contractor shall
pass on to the Sub Contractor such proportion if any thereof as may
in all circumstances be fair and reasonable.
The Court of Appeal concluded that:
1. Cl. 10(2) is not merely procedural but gives the Sub Contractor
a substantive right in recovery.
2. It operates in respect of what the Main Contractor actually
recovers in respect of claimable benefits.
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3. A claimable benefit is one which is made in good faith.
4. Cl. 10(2) only operates with regards to Cl. 12 (dealing with
unforeseen ground conditions). It does not go as far as
requiring the Main Contractor to hand over a portion of thesettlement.
In Mooney the Court of Appeal came to the conclusion that the Sub
Contract required the Main Contractor to pass on a fair and
reasonable proportion of the sum recovered for the unforeseen
ground conditions. It was not acceptable to argue that the Main
Contractor should be able to keep the entire settlement on the basis
that there was no legal ground for a payment to the Main Contractor.
In Balfour Beatty, the court considered that where a Main
Contractor encounters unforeseen ground conditions, an engineer
may or may not issue a variation. The Contractor would be entitled
to payment regardless, provided that the Contractor can show that
the ground conditions were unforeseen.
The automatic sharing will only operate where the Engineer does not
issue a variation.
These cases also suggest that the contractual mechanisms which
attempt to pass on benefits between the contracts may simply serve
to lead to complex arguments about the interaction of the provisions.
Name borrowing is a procedure which allows the nominated Sub
Contractor to commence arbitration proceedings against the
employwe, by borrowing the Main Contractors name.
In the case ofNorthern Regional Health Authority v Derek
Crouch Construction Ltd concerned an appeal from an arbitrators
award. The issue was whether the court had the jurisdiction to open
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SL Timber Systems v Carillion Construction is authority for the
proposition that a withholding notice is only needed for sums that are
due under the contract. Therefore, it could be argued that awithholding notice isnt due un respect of an abatement, because an
abatement can never be due under a contract.
In Rupert Morgan Building Services v David Jarvis & Harriett
Jervis, the Jervis withheld payment of part of an interim cert but
failed to issue a withholding notice. Jervis asserted that it was still
open to them to proves that the items of work that made up the claim
were not done, were duplicated or represented snagging work for
which payment had already been made. Morgan contended that by
virtue of section 111(1) of the UK Act, Jervis could not withhold
payment.
The Court of Appeal considered the situation and considered the
narrow interpretation and the wide interpretation. The narrow
one, as set out by Jervis, was to that effect that id work had not been
done, there can be no sum due under the contract and section
111(1) does not apply. The wider construction was that work not
done cannot affect the due date but that section 111(1) applies and
in absence of the withholding notice, the certified sum must be paid.
The Court of Appeal preferred the wider construction. The Court
found that the parliamentary aim of section 111(1) was to not simply
safeguard quick payment to the contractor is so ordered in an
adjudication decision. The main idea of this section is to safeguard
the cash flow position of the contractor.
Under the wider construction, the rights to retain money or to set
off do not serve as a defence against enforcement. The wider
interpretation falls nicely into the pay now, argue later policy of the
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Act. However, the payer is at the potential disadvantage that there is
a risk of insolvency of the contractor. It may be possible to obtain a
stay of execution if the receiving party is in serious financial difficulty
and the paying party has to take immediate steps to resolve thecounterclaim.
This approach by the Court of Appeal was applied by the TCC in the
case ofAlstom Signalling v Jarvis Facilities. Lloyd QC states that
notwithstanding the absence of a withholding notice , the paying
party may still establish later what was truly due to be paid by the
use of the appropriate contractual procedures or proceedings.
Therefore, where an amount has been certified a withholding notice
will be required in respect of any set off or abatement.
Pay when paid and Pay if paid Clauses
As you go further from the employer down the contractual chain, then
complaints about the ability to receive payment increases. This has
manifested itself in the Sub Contractors ability to be paid, protecting
themselves against insolvency of those in the chain above them, pay
when paid and pay if paid clauses, the ability to recover retention
and exceptionally lengthy payment periods.
In Smite & Smith Glass v Winston Architectural Cladding
Systems, the Sub Contractor, Winston, was to provide curtain walling
for a commercial property. They sub-sub-contracted the glazing work
to Smith. The Main Contractor went into receivership in December
1989. Winston then purported to terminate the employment of Smith
and he sought to recover the $100,000 for the work done. Winston
denied liability, but said that in any event, it would not be able to pay
Smith until it had been paid itself. It relied upon the payment clause
which stated:
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Payment will be made within 5 working days of receipt of the
clients chequeand we will endeavour (this is not to be considered a
guarantee) to payclaims made with 5 days after payment to us of
monies claimed on behalf of the Sub Contractor
Smith argued that there was a distinction between a clause that said
that payment arises only ifpaid and a clause that simply defines a
time for payment, a pay when paid clause.
The judge considered that this clause could do more than identify the
time when the payment was to be made. If the parties intended that
there be a payment by a third party to one of the contracting parties
befor that party paid the other, then a clear condition precedent to
payment would need to be spelled out in clear and precise terms
and accepted by both parties.
S.113 of the HGCRA prohibits conditional payment provisions. It
states:
A provision making payment under a construction contract
conditional on the payer receiving payment from a third person
is ineffective, unless that third person or any other person
payment by whom is under the contract (directly or indirectly) a
condition of payment by that third person, is insolvent
In Midland Expressway v Carillion Construction, Mr Jackson QC
considered the operation of s 113. The four defendant contractors
worked together in a joint venture known as CAMBBA. A concession
was granted in February 1992 for MEL to design, construct and
operate the Birmingham Northern Relief Road.
The defendants contended that a dispute had arisen in connection
with a payment. They wished to refer the dispute to adjudication.
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MEL contended that on a true interpretation of the contract, the
Adjudicator did not have any jurisdiction. The proper dispute was
between the Secretary of State and MEL and CAMBBA, where MELwere simply a conduit between CAMBBA and the Secretary of State.
Further, cl. 7.1.3(a) stated that the contractor would only be entitled
to payment if it followed that conditions precedent set out in the
design and construct contract. Cl. 7.1.4 required a determination of
the price adjustment to the Concession Agreement, and further that
the money had been certified and paid to MEL under the Concession
Agreement.
Jackson noted that the parties had conceded that the design and
construct contract was a construction contract under the HGCRA.
CAMMBAs request for payment had been refused and as a result
there was a dispute which could be referred to adjudication. The
condition precedent requiring a resolution under a separate contract
for payment before making payment under the D&B contract was
contrary to s.113 of the HGCRA. The pay when paid provision was
ineffective. CAMBBA was entitled to proceed with the adjudication.
Employer and Main Contractor Relationship
A variety of control mechanisms may be used by the employer or his
agent sin a main contract in order to attempt to control the extent of
sub contracting. This include:
- Prohibition Clauses
- Approval procedures
Prohibition
Cl. 19.2.2 of the JCT Standard Form of Building Contract states:
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The Contractor shall not without the written consent of the
Architect (which consent shall not be unreasonably delayed or
withheld) sub-let any portion of the Works. The Contractor shallremain wholly responsible for carrying out and completing the
Worknotwithstanding the sub-letting of any portion of the
Works.
This clause allows the employer some level of control and also an
opportunity to identify which elements of the work are being sub-
contracted and to whom. It may be reasonable for the Employer to
withhold consent where the Architect and/or architect/employer has
had a bad experience with the Sub Contractor, or given the nature or
circumstances or nature of the works it is unreasonable to sub-let a
part of it. Note that the clause does not expressly prohibit sub-
contracting.
Or other approved
In Leedsford Ltd v Bradford City Council it was held that the Main
Contractor was not entitled to extra payment when the Employer
refused permission to obtain cheaper stone form a supplier other than
the one specified.
The contract stated that the Main Contractor had to get the stone
from X supplier or other approved. The Court of Appeal held that
the words or other approved provided the Main Contractor with no
additional rights. The Architect did not have to act reasonably and
neither did they have to give reasons for withholding consent.
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Another way of considering this is that on the construction of the
terms the Main Contractor was taken to have allowed for supplying
the stone from the particular company within this price. Arguably this
would include not only paying for and ensuring the delivery of thestone, but also ensuring that the stone could be delivered at the right
time to meet the completion date.
The employer may still be liable to the Main Contractor for delay or
re-nomination caused by the failure of the specified Sub Contractor.
Liability of Sub Contractor to Employers
There may also be instances where despite the general rule that in
the absence of a contract a party cannot bring a claim for economic
lost in tort, there are of course exceptions.
Collateral Warranties
A collateral warranty is a direct contract between the Sub Contractor
and the Employer. The term is often used in the construction industry
to refer to the documents that the Sub Contractor are frequently
requird to provide in favour of employers.
A collateral warranty can also be formed in an informal way, maybe in
correspondence or orally. The usual requirements for a contract must
be satisfied in this instance also.
The case ofShanklin Pier v Detel Products Ltd. In this case the
claimant owned a pier and wanted to get it repainted. Detel Products
warranted to Shanklin that the paint would be suitable for the
repainting and would also give rust protection for 7-10 years.
Shanklin relied on this warranty when egaging the contractor. They
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also instructed the contractor to place an order for this paint rather
than the bituminous paint that was originally specified.
The paint failed and Shanklin sought to recover damages from theDetel, who was not the main contractor. This is on the basis that the
Main Contractor could not have been said to have warranted those
materials because it was the Sub Contractor that warranted the
goods to the Employer and the Main Contractor as a matter of fact
made no comments.
Negligence
A Sub Contractor might have a duty of care to the employer or further
occupiers. This liability most likely extends to physical damage to the
building if that actual physical damage gives rise to some danger to
the safety and health of the occupants and lawful visitors. However,
it appears that there is no liability from the Sub Contractor to the
Employer in respect of defects as the loss to the Employer is
considered unrecoverable pure economic loss.
Liability of Sub Contractor to an Employer is not hat straightforward
and the following needs to be considered:
- Special Reliance Junior Books v Veitchi Company
- Negligent mis-statement
- Concurrent liability in contract and tort
- Negligent selection by the Main Contractor
o Non-delegable duty
o Strict Liability and statute
- Assignment Linden Gardens and Panatown
- The Third Party (Contracts) Act 1990
- The Defective Premises Act 1972
- Duty to warn
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- Civil Liability (Contribution) Act 1978
Specialist Sub Contractor ExceptionJunior Books
In this case, a contractor was engaged to construct a factory for the
building owner. The defendant Sub Contractor were engaged to lay a
specialist composite floor. The floor was defective and began to crack
almost immediately. However, there was no danger to the health and
safety of the occupants, nor any danger to other property of the
building owner. Regardless, the floor needed replacement because of
the defects. There was no direct contract between the employer and
the Sub Contractor, but the building owner sought to have the costs
of replacement and loss of profit while the floor was being re-laid from
the Sub Contractor, and succeeded in the House of Lords.
The House of Lords categorised the owners loss as pure economic
loss, but considered that the building owner had a valid cause of
action. This is on the basis that there was a sufficiently close
relationship between the parties so that the Sub Contractor owed a
duty of care to the building owner to avoid causing the building owner
consequential loss in respect of the defects. One of the key factors
appears to be that the building owner had nominated the defendants
as Sub Contractors. The building owner had selected them because
of their particular expertise and the relationship was so close that it
almost created Privity of contract, but of course it did not.
The leading speech was given by Lord Roskill and based it on the test
of Lord Wilberforces infamous 2 stage test for establishing a duty of
care in the Anns v Merton LBC. This approach was overruled in
Murphy v Brentwood DC. Not only does this cast doubt on the
reliability of Junior Books, but this has been distinguished in a number
of subsequent court cases. The predecessor of Southern Water
Authority was unsuccessful in taking action against a Sub Contractor
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in the case ofSouthern Water Authority v Carey. In that case the
Water Authoritys predecessor hand entered into a contract for the
construction of a sewage works. The works in question, were carried
out by Sub Contractors, and under the Main Contract the MainContractors were to make good any defects arising within 12 months
of completion.
A further express term of the contract stated that this liability was in
respect of defective materials, workmanship or design, but not that
the work itself was fit for a particular purpose.
The work was defective and the entire sewerage scheme failed. The
authority sued the Sub Contractor in negligence. The High Court
decided that the Sub Contractor was not liable in tort as a result of
the terms of the Main Contractor. They negatived a duty of care
which might otherwise have existed. The Court therefore considered
that the terms of the Main Contractor established the scope of the
risk which the plaintiff had chosen to accept, and a result this in turn
limited the tortuous duty that the Sub Contractor might otherwise
have owed to the plaintiff.
Negligent Mis-statement
The problem of irrecoverability for economic loss in tort has in some
instances been superseded by the House of Lords decisionHedley
Byrne v Heller & Partners. In this case, it was said in obiter that a
person suffering financial economic loss as a result of relying upon a
false statement made negligently has in particular circumstances a
valid claim in negligence against the maker of the statement. The
Lords differed in their formulation of these circumstances, but
nonetheless the approach has been followed and developed in
subsequent cases.
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Notice has to be taken of the Misrepresentation Act 1967, ss 2(1)
and (2) which mean that a Sub Contractor may therefore be liable to
the employer by virtue of the dr4awings and/or specification or other
documents produced by the Sub Contractor, if those documents havebeen produced negligently.
Concurrent Liability in Contract and Tort
In Henderson & Others v Merrett Syndicates Ltd, Lord Goff
referred to the traditional procurement approach, where a building
owner entered into a contract with the Main Contractor, who in turn
then employed Sub Contractors and suppliers. Goff said that if the
work or materials do not in the result conformto the required
standard, it will not ordinarily be open to the owner of the building to
sue the Sub Contractor or the supplier directly under the Hedly Byrne
principle. There is no assumption of responsibility by the Sub
Contractor or supplier direct to the owner, the parties having
structure their relationship that is inconsistent with any assumption of
responsibility.
The house of Lords had found that concurrent liability in contract and
in tort could exist under a Hedley Byrne principal, they did not believe
that the principle extended to the position where a chain of contracts
existed between parties. The chain on contracts means that the
parties have structured their relationship such that liability flows up
and down the contractual claim and predisposes the notion that one
can leap across the Main Contractor in order to bring an action
direct against the Sub Contractor on the Hedley Byrne principal.
This was considered in Simaan Contracting v Pilkington Glass
No. (2). This case considered the liability of nominated suppliers
direct to the building owner. Bingham LJ considered that:
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I do not, however, see any basis on which hthe Defendants
could be daid to have assumed direct responsibility for the
quality of the goods to the Plaintiff; such a responsibility is, I
think, inconsistent with the structure of the contract the partieshave chosen to make.
Negligent Selection of a Sub Contractor
General Principle
A contractor owing a duty of care to an employer can discharge that
duty by delegating its duty to an independent contractor or Sub
Contractor.
In D&F Estates & Others v Church Commissioners for England
& Others, this case considered the tortious liability of a Main
Contractor to an occupier for problems with plastering. The
plastering had been carried out by a Sub Contractor. Lord Bridge
affirmed the principle of discharge by delegation to an independent
Sub Contractor. The Main Contractor had discharged his duty of care
by the careful selection of an appropriate Sub Contractor. There are
exceptions to this.
1. If the Main Contractor is careless in its choice of Sub Contractor
then the Main Contractor may become liable for the Sub
Contractors default.
2. Some of the duties of the Main Contractor are non-delegable.
This can occur where the work being carried out by the Sub
Contractor is particularly dangerous, for example, an inspection
in respect of checking for gas leaks.
3. The Main Contractor may be unable to escape liability in
respect of strict liability or absolute liability or liability
pursuant to a statute. Taking even extreme care would not
avoid liability.
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Assignment, Linden Gardens and Panatown
Burden
The burden on a Contractor is an obligation to complete the
work. The burden on the Employer is to pay for the work to be
carried out.
Benefit
The benefit for the Contactor is to get paid for the work and the
benefit for the Employer is to receive a completed building.
Fundamental principle of assignment is that a burden cannot be
assigned without the consent of the other party.
A party can assign their rights under the contract, unless there is an
express provision to the contrary. Cl. 19.1 of the JCT 1998 states that
neither the employer nor the contractor shall, without the written
consent of the other, assign the contract.
Linden Gardens v Lenesta Sludge Disposals
The court held that Cl. 19.1 did prohibit assignment without consent.
In this case, a subsequent owner was seeking to take action against
the builder without consent. The subsequent owner thought that the
building contract had been assigned to them and that they would be
able to take action against the contractor pursuant to the contract for
the defective works. However, assignment had been prohibited by
the contract and it had not been assigned to the subsequent owner.
It initially appeared that they would be unable to sue under the
contract.
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The House of Lords considered that there was an exception to the
general rule that only the original employer could sue. The plaintiffcould recover provided:
1. The loss was foreseeable and that the Contractors originail
breach would cause loss to the later owners.
2. The contract must prevent an assignment
3. A 3rd party must have no other cause of action (as in a collateral
warranty)
4. Substantial damges had been incurred by and will be for the
benefit of the 3rd party subsequent owner.
This was further considered in the Court of Appeal in the case of
Darlington Borough Council v Wiltshier Northern. In this case
there was no prohibition on assignment and the claimant authority
had no initial proprietary interest in the property. The authority could
sue the Contractor directly as the Lender could recover substantial
damages for the benefit of the authority. This was because the rights
had passed to them by way of assignment.
In Alfred McAlpine v Panatown Ltd, the court held that the
principle in Linden Gardens was not applicable where the Plaintiff
had a contractual right to sue the defendant.
Contracts (Right of Third Parties) Act 1999
Privity of Contract menas that a contract cannot confer rights nor
impose obligations arising under it to any person except the parties
to it. This means:
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- A party cannot be subject to a burden by a contract to which
they are not party.
- A person who is not party to a contract cannot claim the benefit
of that contract.
The 1999 Act seeks to provide that a 3rd party can obtain benefits
under a contract, but only in certain circumstances:
1. The Contract expressly provides that a 3rd party can enforce the
contract.
2. A term of the contract purports to confer a benefit on a 3rd
party unless on the proper construction of the contract it
appears that the parties did not intend the term to be
enforceable by the 3rd party.
The 2nd part is a rebuttable presumption of a benefit. If the contract
is silent then one looks to the intent of the parties to see whether, on
the proper construction of the contract, they intended the 3rd party to
benefit.
Defective Premises Act 1972
This act imposes certain duties on those undertaking work for, or in
connection with, dwellings. A contract is not required. The act
provides a direct claim against the person who owes a duty to see
that the work is carried out in a workmanlike or, as the case may be,
a professional manner, with proper materials and so that as regards
that work, the dwelling will be fit for habitation when completed.
A specialist Sub Contractor may have a duty to warn, for example,
where a design is defective, and the specialist nature of the work is
such that a Sub Contractor does or ought to recognise the defect.
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Civil Liability (Contribution) Act 1978
This act provides that a person is liable in repsoect of the same
damage to recover a contribution, regardless of the legal basis ofliability, from another person. The legal basis of the claim doesnt
matter, be it in tort, breach of contract, etc. The main thing is that it
must be the same damage.
Employers Liability to Sub Contractor
Direct Payment
JCT 1998 provides for direct payment from the Employer to the Sub
Contractor in certain circumstances. These circumstances are
expressly set out in the contract. There is no implied right to
payment. This is of benefit to the Employer because it may lose more
money if the Main Contractor goes bust and they have to employ a
new Main Contractor and the replacement of a specialist Sub
Contractor especially may be very expensive and may be in the
Employers interest to keep the Sub Contractor working while the Main
Contractor is replaced.
Instructions
The Employer has no right to direct the Sub Contractor to carry out
any specific work. The architect has no implied authority to contract
on behalf of the employer and therefore no power to direct the Sub
Contractor.
If the Employer instructs the Sub Contractor to carry out work, there
may be separate contract formed.
Nominated Sub Contractors and Suppliers
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Part 2 of the JCT 1998 deals with nominated Sub Contractors and
nominated Suppliers. Cl. 35 deals with nominated Sub Contractors
and cl. 36 deals with nominated suppliers. Cl. 58 and 59 of the ICE 7
th
Edn deals with provisional sums and nominated Sub Contractors. In
this context, it is common practice for the architect to select and then
negotiate with a Sub Contractor and then settle the terms with that
Sub Contractor before even consulting with a Main Contractor.
This allows the architect to select a Sub Contractor for specialist
works which may require a long lead in time and also make sure that
they secure a manufacturing or fabrication slot well in advance. This
may also happen in advance of any discussions with a Main
Contractor.
The Main Contractor is then contractually obliged to use that Sub
Contractor, although in some circumstances there may be a right to
raise reasonable objections.
Given that the contract is then in fact between the Main Contractor
and the Sub Contractor, and not the employer, the procedure for
appointing nominates Sub Contractors is intricate.
These procedures are rarely used. The preference is for employees
and their advisers to insist on the contractor engaging an employer
selected Sub Contractor as the Main Contractors domestic Sub
Contractor. The perceived advantage is that the risk with these Sub
Contractors lies with the Main Contractor as opposed to the risk for
the nominated Sub Contractor which shares the risk between the
Main Contractor and the Employer.
Description and Design
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The House of Lords considered whether a Main Contractor might be
liable to the employer in respect of latent defects in materials
delivered by a nominated supplier in Gloucestshire Co Co v
Richardson. They held that the Main Contractors liability to theemployer was limited to the extent of the nominates suppliers
liability to the Main Contractor by operation of the terms of the
nominated Sub Contract.
The rationale for this decision was that the Main Contractor had been
directed to enter into the contract by the Employer, and therefore the
scope of the rights and obligations of that contract were agreed with
the Employer. This must apply to domesticated Sub Contractors, the
key factor being that the Employers insistence that a specific Sub
Contractor be engaged by the Main Contractor. It is the substance of
the instructions and the terms of the contract not the name tag of
domestic or nominated that governs the liability of the Employer
and the Main Contractor in respect of the actions of the Sub
Contractor.
The Employer may include the full details of the nominated Sub
Contractors work in the Main Contract and, it could be argued, this
may impose a design obligation on the Main Contractor. In IBA v EMI
& BICC it was held that where a Main Contractor had accepted
design obligations in the Main Contractor, he was then liable for the
Sub Contractors negligent design.
Design Liability
Sinclair v Woods of Winchester Ltd
This concerned an application to seek permission to appeal 2
questions of law arising out of an arbitrators award.
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Sinclair, the Employer, had engaged an architect and the builder
Woods. Penguin Pools was the nominated Sub Contractor. Judge set
out 4 basic ingredients for an application to succeed.
1. The indentification of a true question of law i.e. not a
complaint about the arbitrators findings as fact dressed up as a
point of law. It is not possible for a party to seek permission on
the findings of fact no matter how wrong they might seem to
be.
2. Which point of law substantially affects the rights of parties.
3. On which point of law the arbitrator is obviously wrong, or if it is
a point of general/public performance where the decision was
at least open to serious doubt.
4. Where it is just and proper for the Court to determine.
The judge also quoted Vascroft v Seaboard Plc where the court
said should read an arbitral award as a whole in a fair and
reasonable way. The Court should not engage in minute textual
analysis
In regards to the first point, regarding concurrent causes of damage
to flat roofs, this application failed. The points raised were a matter
of causation; what was the aoperative cause of the problem with the
flat roofs. The design of flat roofs meant that they were doomed to
failure. Questions of causation were mixed with questions of fact and
law. The judge said that there were no formal tests for causation and
that the courts relied on commonsense.
The second allegation also failed. This was in regards to the liability
for defective specialist design. The question was:
If a Main Contractor Sub Contracts works to nominated Sub
Contractor, then a nominated Sub Contractor carries out design
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works as well, is the Main Contractor, without more, liable to
the employer for that design work? The Judge said that the
answer to that question was no. [Important point here is
that its a nominated Sub Contractor]
In these circumstances, the design work carried out by the specialist
Sub Contractor is usually, and ought to be, subject of a direct
warranty from the specialist Sub Contractor to the Employer. If the
carrying out of the work on site is Sub Contracted by the Main
Contractor to the nominated Sub Contractor, but the extent to which
the Main Contractor is liable even for the defects in the workmanship
of the nominate Sub Contractor, will depend on the terms of the
contract.
In this case, the Main Contract did not include any obligation on the
part of the Defendants to perform any design work at all. A Main
Contractor cannto acquire design liability merely because he is
instructed to enter into a Sub Contract with the nominated Sub
Contractor who is going to do some design work on behalf of the
employer.
Implied Terms
The usual terms in respect of satisfactory quality, completion within a
reasonable tome and to a reasonable price may be implied. In
practice, these terms may be exceeded by express terms in the
contract.
Generally, if an Employer relies on the Contractor for selecting certain
materials then there will be an implied term that those goods will be
reasonably fit for their purpose. If the Employer has directed the
Main Contractor to use a nominated Sub Contractor or supplier, it
cannot be said that the Employer had in fact relied on the
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Contractors skill, so the fitness for purpose obligation cannot be
implied.
Keating found that this will mean that the Employer will not have aremedy in respect of any elements that have been nominated if it
turns out that they are a good quality but unfit for their purpose.
Problems with the Nomination Process
In Bickerton v North West Metropolitan Regional Hospital
Board was about a case where the nominated Sub Contractor was
insolvent and went into liquidation before starting work on site. The
liquidator did not affirm the contract and the Main Contractor asked
for a variation order for a new nominated Sub Contractor. The
Employer refused, but asked the Main Contractor to complete the
works, which he agreed to do without prejudice to his contractual
rights. The Main Contractor brought a claim for the additional costs
and the Court of Appeal held that the Employer had been bound to
make a 2nd nomination and as they had failed to do so, then the Main
Contractors claim was valid.
The House of Lords dismissed the appeal. If the original nominated
Sub Contractor dropped out there was an implied duty on the
Employer to make an further nomination and if they failed to do that
then the Contractors claim was valid.
Delays in Nomination
It would appear from the judgement in Bickerton that if there is a
delay in the nomination process, that the contractor may well have a
valid claim for the extra time and money against the Employer. A
claim for damages for breach of contract may arise from an express
or implied term of the contract.
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Percy Bilton v Greater London Council. The nominated Sub
Contractor went into liquidation during works, the architect knew of
the need to re-nominate but there was a delay. Main Contractorrequested an extension of time because the replacement nominated
Sub Contractor could not complete the work in time.
The House of Lord made the distinction between the time lost by the
original nominated Sub Contractor and the replacement. The original
Sub Contractor delay was not covered by the contract and the Main
Contractor was not entitled to any delay for this. However, the delay
in re-nominating for several months was covered by Cl. 23(f) which
has delay by reason of the contractor not having received in due
time necessary instructionsfrom the architect. The Contractor
was awarded further time in respect of the replacement Sub
Contractors delay.
The result was that the Main Contractor was liable for liquidated
damages for his failure to complete as a result of the inability to
obtain an extension in time in respect of the original Sub Contractors
liquidation. The original Sub Contractor had informed the Main
Contractor that they would be removing labour from the site. The
contract provided that the Sub Contract could be determined if the
Sub Contractor suspended works for 10 days or more. The Main
Contractor accepted the repudiatory breach before the 10 days
elapsed. If they hadnt, then they would have been entitled to an
extension of time under Cl. 23(g), Sub Contractor delays.
The contract analysis is set out in the judgement.
1. The general rule is that the Main Contractor must complete the
work by the date of completion. If he does not, he is liable for
liquidated damages.
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2. The exception for liquidated damages is if the employer
prevents the Main Contractor from completing his work.
3. The general rules may be amended by the express terms of the
contract.4. Clause 23 amended the general rules.
5. Withdrawal of the nominated Sub Contractor was not the fault
of the employer nor covered by the provisions of Cl. 23. Cl.
23(g) related to nominated Sub Contractor delay, but
withdrawal from site of the nominated Sub Contractor is not
delay.
6. Therefore, the nominated Sub Contractor withdrawal falls under
the general rules and the Main Contractor takes the risk.
7. However, the delay by the Employer in re-nominating is an
express term in Cl. 23(f) and the Main Contractor was entitled
to an extension of time.
In Rhuddlan Borough v Fairclough Building, the contractor
entered into a contract for the construction of a leisure complex. The
contract was based on the JCT Contract 1963 with Quantities. The
nominated Sub Contractor, Gunit, had carried out a large amount of
work, but then became insolvent an so stopped work repudiating the
contract. Gunite were 8 weeks late on the completion date at that
stage.
The architect was asked to re-nominate in Sept 1977 and architect re-
nominated on 24 February 1978. There were also defects in Gunites
work, but the replacement nominated Sub Contractor had not been
instructed to carry out remedial works. The Contractor objected to:
1. The time taken to re-nominate
2. The time required for the new contractor to complete (which
would effectively have led to an overrun of the date for
completion)
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3. And a separate instruction for the Main Contractor to carry out
the remedial work to Gunites work.
The Court of Appeal upheld the decision of the High Court that theArchitects instruction in respect of the 2nd nominate Sub Contractor
was invalid in that the Sub Contractor could not complete the work
within the time allowed under the Main Contract. The Main
Contractor was therefore entitled to refuse the nomination, following
Percy Bilton v GLC. In the Court of Appeal, it had been argued that
the Employer would need to vary the terms of the Main Contract if it
was impossible to find a Sub Contractor that could complete the work
within the existing timescale.
The Court of Appeal considered that in such circumstances there had
been an implied term that if the nomination were accepted by the
Main Contractor then an appropriate extension of time would also be
granted.
The instruction was also invalid because it did not include the
remedial work. This is following Bickerton. The Employer could not
charge the Contractor for the costs of the remedial work when the
Employer was obliged to re-nominate and the re-nominated Sub
Contractor should have been obliged to carry out the work.