Subcontracting

Notes

1 [1945] 1 All ER 247.

2 See discussion in Robert Clay, Nicholas Dennys (eds), Hudson’s Building and Engineering Contracts (13th edn, Sweet & Maxwell 2015) para 9–050 ff.

3 (1880) 5 QBD 149.

4 (1991) 28 Con LR 109.

5 See Section B above on ‘Nature of work to be subcontracted: key principles’.

6 A charterparty case, Reardon Smith Line Ltd v Yngvar Hansen Tangen (The ‘Diana Prosperity’) [1976] 1 WLR 989, [1976] 2 Lloyd’s Rep 621, gives an example of the entire construction of a vessel being subcontracted to a different yard.

7 See Socimer International Bank (in liquidation) v Standard Bank London Ltd (No 2) [2008] EWCA Civ 116 at [60]–[66]. Without a clear expression that the Company’s discretion is to be absolute, there will still be a limited restriction to the extent that the Company does not refuse consent arbitrarily, capriciously or in bad faith. It is worth noting that, in certain circumstances, a qualification that the consent will not be unreasonably withheld can be implied: for an example, see Eastleigh BC v Town Quay Developments Ltd [2008] EWHC 1922 (Ch), affirmed in [2009] EWCA Civ 1391.

8 The principles governing the withholding of consent have developed in the context of landlord and tenant disputes. These principles have been recognised in commercial contracts (see, for example, British Gas Trading Ltd v Eastern Electricity Plc & Ors [1996] EWCA Civ 1239; Porton Capital Technology Funds and Others v 3M Holdings Ltd and 3M Company [2011] EWHC 2895 (Comm) and Barclays Bank plc v Unicredit Bank AG and Anor [2013] EWHC 3655 (Comm) (High Court) and [2014] EWCA Civ 302 (Court of Appeal). In short, the test for unreasonableness in withholding consent is objective. There is no need to show that a decision is justified, but simply that a reasonable man in the decision-maker’s position might have reached the same decision. Whilst there is no need for a party to balance the interests of its counterparty, it will not be allowed to refuse consent for reasons that have nothing to do with the contractual relationship or to use the refusal to seek some collateral benefit or renegotiation of the original terms of the contract. A further qualification is that there may be circumstances in which there is a disproportionate detriment to the counterparty in withholding such consent that it would be unreasonable to refuse.

9 Some contracts will expressly include prohibited subcontracting as an event of default permitting termination even where the breach is not serious enough to be repudiatory. See, for example, Thomas Feather & Co (Bradford) v Keighley Corp (1954) 52 LGR 30.

10 The issue is more often with identifying if they are a subcontractor or a supplier. This is discussed in Section E below.

11 For an overview of evolution of the rules of privity of contract, see H G Beale Chitty on Contracts (32nd edn, Sweet & Maxwell 2015) at ch 18 and Hudson’s Building and Engineering Contracts (n 2) at paras 9–060 to 9–065.

12 Even if those terms are referred to (but not incorporated) in the sub-contract. See, for example Chandler Bros Ltd v Boswell [1936] 3 All ER 179; Lewis v Hoare (1881) 44 LT 66 (HL); and Smith and Montgomery v Johnson Bros Co [1954] 1 DLR 392 (a Canadian case in which terms from the main contract were not imported into the sub-contract).

13 One practical consequence of the lack of a contractual relationship between the Company and the Subcontractor would be that the Subcontractor has no direct right to recover from the Company the price of the work and materials the Subcontractor has provided (for example, in the event of the Contractor’s insolvency). The Subcontractor might be fortunate to have arranged a valid assignment of the Contractor’s right to be paid in respect of the subcontracted work. Failing that, the Subcontractor might look to rely on clauses retaining title to goods it had supplied to the Contractor. The Company’s rights against the Subcontractor (for example, in respect of defective performance) will also be limited. We consider some of the issues in Section H below.

14 It is conceivable that a contractor could be entitled to a windfall, for example (i) by claiming liquidated damages from the Subcontractor on the one hand and, on the other, relying on a cleverly drafted force majeure clause to avoid paying liquidated damages under the main contract or (ii) if the delay of the Subcontractor’s work does not delay delivery under the main contract.

15 [1970] 1 WLR 607, [1970] 1 All ER 1039.

16 It is worth noting the distinction between delay caused by the original Subcontractor, for which the Contractor would remain liable, and the delay and extra costs incurred by the Company’s delay in nominating a replacement Subcontractor, which might be recoverable from the Company. See also Percy Bilton Ltd v Greater London Council [1982] 1 WLR 794 and Fairclough Building Ltd v Rhuddlan BC (1985) 30 BLR 26 (CA).

17 Such provisions should be worded carefully if they are to be included. As described in Section I below, a provision that the Contractor will be liable for its Subcontractor’s acts or omissions may interfere with the knock-for-knock regime.

18 [1940] AC 1014 at 1019 (HL).

19 This principle is well established. The formulation given by Collins MR in Tolhurst v Associated Portland Cement Manufacturers (1900) Limited [1902] 2 KB 660 at 668 (CA) is as follows: ‘It is, I think, quite clear that neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor on to those of another without the consent of the contractee. A debtor cannot relieve himself of his liability to his creditor by assigning the burden of the obligation to some-one else; this can only be brought about by the consent of all three, and involves the release of the original debtor’.

20 As between the Company and the Contractor, the issue is which of them should take responsibility for the work of the Contractor’s Subcontractor. If the risk (or some portion of it) rests with Company, then the Company will want to ensure as far as possible that it has some right of recourse directly against the Subcontractor. If the intention of the parties is to transfer the Contractor’s responsibility for certain work to a third party, a tripartite novation agreement would be an appropriate way to do this. The effects would include (i) a reduction in the Contractor’s scope of work by way of release and (ii) creation of a direct contractual relationship between the Company and the Subcontractor.

21 The English court has, on occasion, refused to hold the Contractor liable for its Subcontractor or supplier’s default. The result is that the Company is left seemingly without a remedy. Depending on the circumstances, nominated subcontracting can be said to modify the Contractor’s implied obligations. See e.g. Fairclough Building Ltd v Rhuddlan BC (1985) 30 BLR 26 (CA). However, one must query the application of such cases to EPC contracts where the nature and scope of nominated subcontracting is clearly defined.

22 Note that close attention should be paid to the precise nature of the obligation defined (expressly or impliedly) by the contract. Where there is Company-provided basic design and the Company’s exclusive nominee is to perform the detailed engineering, did the parties really intend that the Contractor would take the risk that the project would be fit for its purpose?

23 Adam Constable, Keating Chambers Keating on Construction Contracts and Marine Engineering Contracts (9th edn, Sweet & Maxwell 2015) notes at 13–047 that, where a Company has not relied on a contractor’s skill and judgment in selecting a nominated subcontractor or supplier, or the work or materials it is to perform or supply, there will not normally be any implied term that such work and materials will be reasonably fit for their purpose. Keating notes that: ‘The practical significance of this principle is great and frequently does not seem to be appreciated.’ Of course, it is possible that the express terms of the contract or the surrounding circumstances indicate that the Contractor does take on a fitness for purpose obligation.

24 [1969] 1 AC 454, [1968] 2 All ER 1169.

25 [1978] IR 114.

26 But compare with the obiter comments of Viscount Dilhorne at the end of his judgment in IBA v EMI (1980) 14 BLR 1, discussed at paras 5.78 ff below.

27 Often a design contractor will have been working with the Company to prepare the design that forms the basis of the tendering process for the main contract.

28 The question is especially important in the context of nominated subcontracting where, as noted above, there is scope for there to be a situation where the Contractor does not take responsibility for certain aspects of its Subcontractor’s work.

29 Of course, it is possible that there will be a separate, well drafted collateral warranty agreement in a similar way to those sometimes given by architects and construction managers in onshore construction projects. In this chapter we consider the scope for less formal agreements.

30 See Carlill v Carbolic Smoke Ball Co Ltd [1893] 1 QB 256.

31 One requirement for a collateral contract is ‘consideration’, for example that the subcontractor will receive something in return for the promise it makes. For this reason, a collateral warranty along these lines will generally only be found if the statement is made by the Subcontractor to the Company prior to conclusion of the main contract. If the Company seeks to rely on a statement made by the Subcontractor after conclusion of the main contract, there may be a remedy in tort for misstatement.

32 [1951] 2 KB 854.

33 See also Wells v Buckland Sand Ltd [1965] 2 QB 170. The force of the collateral warranties that tend to be given in modern construction contracts has been recognised recently by the English courts in e.g. Oakapple Homes (Glossop) Ltd v DTR (2009) Ltd and Ors [2013] EWHC 2394 (TCC); Royal Bank of Scotland plc v Halcrow Waterman Ltd [2013] CSOH 173; How Engineering Services Ltd v Southern Insulation (Medway) Ltd [2010] EWHC 1878 (TCC); Linklaters Business Services v McAlpine Ltd and Ors [2010] EWHC 2931 (TCC); Co-Operative Group Ltd v Birse Developments Ltd and Ors [2014] EWHC 530 (TCC). See also Hudson’s Building and Engineering Contracts (n 2) at 9–062 and 9–072.

34 For further discussion see ch 7 of Chitty on Contracts.

35 For further discussion of negligent misstatements see J F Clerk, A M Dugdale and M A Jones, Clerk & Lindsell on Torts (21st edn, Sweet & Maxwell 2014). See also Hedley Byrne Co Ltd v Heller & Partners Ltd [1964] AC 465, [1963] 1 Lloyd’s Rep 485.

36 Such a duty will generally require a voluntary assumption of responsibility: see Hamble Fisheries Ltd v L Gardner & Sons Ltd (The ‘Rebecca Elaine’) [1999] 2 Lloyd’s Rep 1.

37 A claim for misstatement might succeed even where the statement is made after conclusion of the main contract, unlike the type of claim for a collateral warranty described above. Such a duty was found to exist in Diamante Sociedad de Transportes SA v Todd Oil Burners Ltd (the ‘Diamantis Pateras’) [1966] 1 Lloyd’s Rep 179, although the requisite standard of care was not found to have been breached on the facts.

38 (1980) 14 BLR 1.

39 A detailed consideration of these local laws is beyond the scope of this book.