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27 AUG 2017

SUB-CONTRACTS: BACK TO BACK OR BACK TO FRONT?

When subcontracting make sub-contractor's contract back to back with your own. 

When subcontracting your obligations to own sub-consultants, the advice is to make their contract back to back with your own. 

This means mirroring the obligations and other relevant terms in your contract with your client in the sub-contract, so that your sub-contractor owes you the same duties as you owe to your client. The idea is that in the event of a claim, there is no gap between the claim the client brings against you, and the claim which you are entitled to bring against your sub-contractor.
 
Ideally the sub-contract should therefore be specifically drafted, and the relevant obligations in your contract identified and transferred to the sub-contract. However it is not necessarily a straightforward “copy and paste” exercise, as some provisions may require alteration to reflect the different circumstances of a sub-contract, a different client and potentially a more limited scope of services. 
 
The reality of construction projects however often means that the participants do not have the luxury of the time needed to draft the sub-contract in this way. The legal exercise itself does come with a financial cost, and if the sub-contracted element is a straightforward and distinct sub-set of the whole, the cost may be unattractive.
 
As such it is not unusual for sub-contracts to take a different and briefer approach, with clauses stating that the terms of the employing firm’s appointment are incorporated into the sub-contract.
 
The dangers of this matter of fact shortcut were recently illustrated in the case of Dawnus Construction Holdings v Amey LG Ltd (2017).
 
The facts of the case were these. Amey appointed Dawnus as sub-contractor in relation to a highway works project. At the end of the project Dawnus brought a claim against Amey in relation to various matters and seeking additional sums (up to £1m).
 
Amey’s contract contained dispute resolution clauses, and these stated that before litigation could be commenced, a dispute must be adjudicated, and a notice of dissatisfaction with the adjudicator’s decision sent to the other party within 4 weeks of the decision. 
 
The question was whether these were also contained in Dawnus’ sub-contract, and it was a critical question as Dawnus had not sent such a notice, and was out of time to do so.
 
On the face of it, the sub-contract also contained dispute resolution clauses. However these simply stated that adjudication was an option, and an adjudicator’s decision was binding unless and until the matter was finally resolved by litigation.
 
However the sub-contract also contained a “back to back” clause which stated that the terms of Amey’s contract applied as if they were repeated in the sub-contract.
 
The court decided that the parties’ intention was that the contracts should be back to back, and as such the dispute resolution provisions in Amey’s contract took precedence. Dawnus’ £1m claim failed accordingly.
 
The decision illustrates the consequences which can flow from generalised “back to back” clauses, and that the explicit terms in the sub-contract may not be reliable as a result. This can create unpleasant surprises for either side in practice.
 
If you cannot have the sub-contract specifically drafted, there is an alternative approach as follows. Please note that this approach is intended to supplement a sub-contract containing obligations of the sub-contractor to perform specified services, and is not standalone. 
 
  • Give a copy of your appointment to your sub-contractor and refer to this provision of information in the sub-contract
  • Insert a clause into the sub-contract stating that the sub-contractor will use reasonable skill and care not to put you in breach of your obligations under your appointment
 
This approach has the attraction that it does not inadvertently incorporate the terms of your appointment inappropriately. It is also drafted in terms which do not conflict with professional indemnity insurance cover, which would be the case with more sweeping indemnities. As such it should be acceptable to your sub-contractor, and insurance should not be raised as an objection. 
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James  Burgoyne

James Burgoyne

Director - Claims & Technical

Jim joined Brunel in 2009 and heads up the Technical and Claims Department. As well as representing Brunel on the ACE PII panel, he writes occasional pieces for us on insurance, risk and associated topics.

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