5 THE SUBCONTRACTOR

Relations with the contractor

The subcontractor’s relationship with the contractor is the same as that enjoyed between the contractor and the employer, i.e. based upon the contract the obligations of the employer to the contractor are the same as those owed by the contractor to the subcontractor – access to the site, provision of electricity and water, not to impede performance, and related matters. However, unless the parties agree otherwise, the provisions of the main contract between the contractor and the employer are not automatically a part of the subcontractor’s agreement and this is so even if the subcontractor has agreed to perform pursuant to the terms and conditions of the main contract. Thus, in the Canadian case Smith and Montgomery v Johnson Bros Co Ltd,³ the subcontractor agreed to perform its tunnelling subcontract “according to the dimensions and specifications as set forth in the contract between the City of Hamilton and the [main contractor]” and the issue became whether agreement with this term of the main contract also incorporated all of the main contract’s terms and conditions into the subcontract. The Ontario High Court thought not, and wrote:

“It is, of course well established that plans and specifications, if not contained in a contract itself but referred to therein or annexed thereto, must be construed therewith when identified. Wherever the plans and specifications are referred to for a specific purpose only, however, they become part of the contract for that purpose only and should be treated as irrelevant for all other purposes. The covenant of the plaintiffs to do the tunnelling ‘according to the dimensions and specifications as set forth in the contract between the City of Hamilton and the [Johnson company]’ would undoubtedly require the plaintiffs to dig out a tunnel 10ft 6in by 12ft 6in, in dimensions, and any other provision affecting the physical characteristics of such tunnel no doubt would be applicable to and binding upon the plaintiffs, but I am not prepared to hold that the reference to the specifications as expressed in this context imports into the contract between the plaintiffs and the defendant, so as to make binding upon the plaintiff-subcontractors, who operate in a very small way, such sweeping and extraordinary powers as are exercisable by the city engineer. Only that part of the general specifications is to be read into the contract in question that relates to the specific purpose for which the same were referred to. Counsel have been unable to refer me to any authority in which all the general provisions of specifications forming part of a main contract became part of a subcontract, unless the latter by its terms made very clear the intention of the parties that all terms and provisions of the principal contract were to form part of the agreement between the principal contractor and the subcontractor. The general clauses under which the city engineer ordered a stoppage of the work and a change in the method of procedure are more in the nature of such provisions as one is likely to find in specifications furnished for the guidance of bidders for the original contract. It does not seem to me to be clear from the situation and the circumstances of the parties that it was their intention that, except in the restricted sense already mentioned, the specifications forming part of the original contract should be a part of the subcontract.”

Employer insolvency and payments

The courts’ decisions in this regard generally look to the underlying contract between the contractor and the subcontractor to form the basis for the responsibility of the subcontractor and do not automatically fall back to the main contract. In A Davies & Co (Shopfitters) Ltd v William Old Ltd,⁴ the defendant main contractor’s contract with the employer allowed for the architect to nominate subcontractors. The plaintiff tendered for this work and the architect instructed the defendant to accept, which they did, and then placed an order with the plaintiff using their standard form that contained a “pay when paid” clause. Thereafter, the plaintiffs performed but, unfortunately, the employer became insolvent before paying for all the work. The issue before the court was whether the plaintiffs should be paid for their work or if they were subject to the “pay when paid” clause. The court felt that the underlying contract between the contractor and the subcontractor was formed on the basis of the defendant’s pre-printed conditions, which had been accepted by the plaintiff. Accordingly, the court held that the defendant was required to pay the plaintiff for the work done only to the extent that the contractor itself had been paid.

Indeed, the courts have always had a reluctance to allow a subcontractor to collect payment directly from the employer. Where a subcontractor claimed that orders given by the employer were “extras” to its contract with the main contractor and claimed this amounted to a “collateral” contract, the court in Eccles v Southern⁵ disagreed and found that it had not sufficiently proved that the “extra” work was not included as part of the main contract and, thus, failed in its attempt to circumvent the subcontractor–contractor agreement. However, the issue of payments directly from the employer to the subcontractor is a lingering one. The argument is that such agreements are worthwhile, as they can prevent delay in performance if, for example, the main contractor becomes insolvent and/or otherwise fails to pay the subcontractor promptly. For without such provisions to this effect in the main contract, the employer has no right to direct subcontractor payments. To make matters worse, in Re Holt ex p Gray,⁶ the court found that not only could such payments not be made without an express clause in the main contract, but also that, if the main contractor defaults (and becomes insolvent) and one subcontractor receives payment in full (under a direct payment scheme), this is an unfair preference over other creditors and also over other subcontractors who do not have the benefit of such an arrangement. Where an employer paid a supplier of materials immediately after the contractor had gone bankrupt owing money to the supplier, it was held that the employer must pay the money again to the contractor’s trustee in bankruptcy, so that it would be “available to all the contractor’s creditors” and would still remain liable to the main contractor for the same work.

This concept was further amplified in B Mullen & Sons (Contractors) Ltd v Ross,⁷ where the court took the position that, even if the contract allowed for direct payments from the employer to the subcontractors, this would be invalid as being in conflict with the general principles of insolvency laws.

Delay issues

Delay due to defective work becomes an issue when the subcontractor’s work is defective but is discovered only after apparent completion. So, where the subcontractor performs, hands over to the contractor and then a defect is found, which results in the subcontractor returning to the site to correct the defect, does this amount to a delay that can be claimed by the main contractor? Generally, delay cannot be claimed against a subcontractor if, by the subcontract date, it has reached sufficient completion so that the contractor is able to take over – this, despite any of the work being defective and any extra time taken for the subcontractor to return and fix the defective work, cannot be claimed by the main contractor as a delay.

This situation was faced by the House of Lords in City of Westminster v J Jarvis & Sons Ltd and Peter Lind Ltd.⁸ There, Jarvis was to construct a multi-storey car park with flats, offices, showrooms and ancillary works for the City of Westminster and Lind was the nominated subcontractor for the piling work. Lind completed the work per the completion date and left the site. Weeks later it was discovered that its work had been defective so it came back to the site to correct the defective work causing a delay to the main contract works of some 21½ weeks. As a result, Jarvis sought an extension of time on the main contract. The House of Lords was faced with what was a “delay” in this situation as the subcontractor’s works had apparently been completed by its due date. The House of Lords felt that “delay”, within the meaning of the contract, would occur only if, by the subcontract completion date, the subcontractor was not able to hand over to the main contractor – which was not the case here and after pointing out that:

“… ‘delay’ does not, as the appellant at one time contended, mean ‘sloth’ or ‘dilatoriness’ on the part of the sub-contractor. There are at least two good reasons against this meaning; in the first place, it would put an impossible burden on the architect if he were required to form an opinion that the sub-contractor had not worked as fast or diligently as he might have done, and to measure the extent to which time could have been saved had he done so. This part of the contract would, in practice, become unworkable. And, secondly, it is contractually irrelevant whether the sub-contractor could have worked faster: what matters is whether he has done what he agreed to do in the contractual time. If he has, it does not matter, for the purposes of the contract, whether he achieved his target by leisurely methods; if he has not, it does not matter with what feverish energy he set about his work.”

Lord Wilberforce then wrote:

“… It is only necessary to point to the fact that if the defects in the piles had been discovered before the sub-contract completion date, and work had been at once put in hand to remedy them – thereby producing a similar period of delay in the completion of the main contract, the clause would, it seems, have applied, but it does not do so if the work was ‘complete’ (though defective) on that same date so that the contractor could take over. One must set against this the advantage that, if the sub-contract work is apparently completed and handed over, and some defects appear very much later, but before the contract date, as they might in a large contract, this would not, on the employer’s construction, be a case of delay, though it might be so on the subcontractor’s. But even so the first type of difficulty is a very grave defect and a serious reflection on the clause: indeed, I cannot believe that the professional body, realising how defective this clause is, will allow it to remain in its present form. But in my opinion, though it is never agreeable to have to choose the lesser of two incongruities, we have to do so here and I find the employer’s version qualifies for this not very flattering description.

So finally, how does this construction fit the facts? It is common ground that the subcontractor ‘purported to complete’ the piling works by 20 June 1966, and left the site. We know, too, that ‘further construction work on the site was then carried out by the contractor’. On 13 July 1966, the architect wrote to the contractor a letter in which he said that ‘further to the completion of the [piling] work’ the sub-contractor might request the release of retention money against a guarantee. He did, it is true, go on to record suspicion as to the soundness of the piles and to suggest an increase in the guarantee, but the letter was consistent only with his belief that the sub-contract work was ‘completed’. The sub-contractor had recorded that this was its position on 9 June 1966.

On 16 August 1966, after defects had been revealed, the architect wrote again to the contractor stating that ‘as the piling works … have not been completed to our satisfaction within the period of the sub-contract’ they certified that they ought reasonably to have been completed within that time. This I do not consider alters the view of the matter which all concerned held on 20 June 1966, that the work was completed – though it might turn out to be defective: it is saying no more than that it is now seen to be defective and that the architect was not satisfied with it. The learned judge made no explicit finding but his judgment proceeded on the basis that the sub-contractor had achieved apparent completion, and handed over to the contractor on 20 June 1966. I think that this was correct in fact and in law.”

Whilst defective work by a subcontractor can lead to a delay in the main contract works, leading to a request for an extension of time, the recent case of Carillion Construction Ltd v Emcor Engineering Services Ltd & Another⁹