KCL Mod B SubContracts

8/2/2019 KCL Mod B SubContracts

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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.

KCL Mod B SubContracts

Documents

Transcript of KCL Mod B SubContracts