As a contractor, choosing the right subcontractor to carry out one or more parts of the works may be difficult. Getting the employer's subsequent acceptance of the subcontractor and ensuring a proper risk allocation may be even more of a challenge.

Contractual restrictions when choosing the subcontractor

More often than not, contractors operating abroad will subcontract specific parts of the works. The reasons for this vary; the works in question may require expert knowledge limited to certain subcontractors, local subcontractors may be able to carry out some of the works at a low cost, etc.

While the employer and contractor may have similar interests in choosing subcontractors that will be able to carry out part of the works within the expected time, quality, and cost, we often see that contractors are contractually required to obtain the employer’s prior approval before engaging a subcontractor – or replacing a subcontractor.

In some cases, the contractor may already have provided an exhaustive list of the expected subcontractors before signing the contract as part of the tender process, allowing the parties to consider the choice of subcontractors early on and clarify any potential issues.

However, often the contractor may choose (or replace) the subcontractors after signing the contract. If the employer subsequently refuses to approve one or more subcontractors, disputes and questions may arise, such as:

  • Are the objections from the employer justified under the contract?
  • Which party will be responsible for a potential delay/suspension of the works if the parties cannot agree on a subcontractor?
  • How do the Parties effectively solve a disagreement?

A clear, swift, and concise dispute resolution mechanism will be of the essence.

Drafting the contract and subcontract

Once the subcontractor has been chosen, the question of risk allocation arises as the contractor will be liable to the employer for the subcontractor’s errors and omissions.

While it may be tempting to simply copy the terms and conditions from the main contract into the subcontract by reference, it may not always be a feasible strategy.

Simply adding references to the terms and conditions of the main contract instead of explicitly drafting the clauses of the subcontract may result in interpretation issues and uncertainty as to whether some of the clauses are enforceable.

In a Danish case decided by the Danish Building and Construction Tribunal on 18th September 2019, the arbitration court held that the main contractor could not rely on wording setting out that the offer from the subcontractor was “given under the same conditions as we have towards the client.” As a result, the main contractor was restricted from claiming liquidated damages as imposed by the client.

Furthermore, under English law, “pay when paid” clauses (specifying that the subcontractor shall only be entitled to receive payment once the main contractor has been paid) may be severely restricted by the 1996 Housing Grants, Construction and Regeneration Act rendering the clause unenforceable.

As evident, some clauses may require careful drafting, such as the implementation of the contractual deadline and liquidated damages of the main contract, which may differ from the ones intended for the subcontract. If directly copied into the subcontract, the clauses may cause problems.

Do you need help avoiding the pitfalls?

If you wish to know more about how we can help you with your contracts or gain insight into our experience, please contact Steffen Hebsgaard Muff.