If your client requires you to procure goods or services from a particular named sub-contractor or supplier, then common sense might suggest that your client should be responsible if that sub-contractor or supplier performs poorly. Unfortunately, this is a situation where the legal reality is very different.
In this article we explain the general rule relevant to this issue, the reason for this common misconception, and practical tips to manage the risks involved in using sub-contractors and suppliers that you have not chosen to work with.
Why do Employers want to specify which sub-contractors or suppliers are to be used?
There are numerous reasons why Employers sometimes wish to require goods or services from particular sub-contractors or suppliers, such as:
- Specifying exactly what they want
- Obtaining specialist design input at an early stage of the project
- Opportunity for direct negotiations and ongoing relationships with sub-contractors or suppliers
- Procuring complex or specialist items, particularly where they are on long lead times
The general rule
The general rule is that a Contractor is liable to the Employer for any default (breach) caused by its sub-contractors or suppliers, unless the Contract says otherwise. This applies whether the sub-contractor is a ‘domestic sub-contractor’ which is freely chosen by the Contractor or a ‘named sub-contractor’ specified by the Employer.
The same principle applies to the relationship between Contractors and Sub-Contractors i.e. a Sub-Contractor is liable to the Contractor for the defaults by the Sub-Contractor’s own sub-sub-contractors and suppliers, even if they were specified by the Contractor.
The reason for the common misconception: Nominated Sub-Contractor v Named Sub-Contractor
This is one of those situations where words with a similar meaning can have very different outcomes. Nominated sub-contractors are selected by the Employer. The Employer negotiates the terms of the sub-contracts with the sub-contractors and instructs the Contractor to employ them.
It was common for the Employer to take the risk of delay caused by a nominated sub-contractor. This was achieved by including wording to that effect in the contract between the Employer and Contractor, so amending the general principle explained above. If they caused delay, the Contractor was entitled to an extension of time. The rationale was that this was fair because the Contractor had less control over their selection.
This has led to the common misconception that Contractors are not responsible for delays caused by sub-contractors or suppliers that they are required to use.
However, this principle will only apply where the relevant contract specifically says so and in the UK the practice of nominating sub-contractors has fallen out of favour and is now very rare. The JCT no longer includes provisions for nominated sub-contractors.
Named Sub-Contractors
Naming sub-contractors, which simply means that the relevant Sub-Contractor is named in the contract, is much more common. This allows the Employer to influence the selection of sub-contractors but leaves responsibility for their performance with the Contractor. Effectively the named sub-contractor becomes a domestic sub-contractor.
Sometimes there are specific contractual provisions regarding named sub-contractors. For example, the JCT Intermediate Contract 2016 allows appointment of named sub-contractors under its clause 3.7 and Schedule 2, and the JCT Design and Build Contract 2016 includes procedures for named sub-contractors where its Supplemental Provisions 1 applies (although note that the other Contract Documents might effectively require particular sub-contractors or suppliers to be used, even if Supplemental Provision 1 does not apply).
Both of those contracts provide that if the Contractor is unable to enter into a sub-contract with a named sub-contractor then the Architect/CA can change the particulars to remove an impediment to executing the sub-contract, omit the work, or omit the work and substitute a provisional sum.
Those contracts also make it clear that the Contractor remains responsible for the work, even where it is carried out by a named sub-contractor, i.e. the general rule still applies.
Named Suppliers
Named suppliers are effectively the same as named sub-contractors. Between the Employer and the Contractor, the Contractor is responsible for defaults by named suppliers.
Practical tips
There are some practical steps you can take to minimise your exposure to this issue:
- Amend the contract to allocate the contractual risk. JCT contracts can be amended so that the grounds for extension of time (Relevant Events) and additional money for delay (Relevant Matters) to include default and other problems caused by suppliers or sub-contractors specified by the Employer.
- Make sure that the specification allows for the engagement of suitable alternative sub-contractors or suppliers where appropriate or feasible.
- Do your due diligence. Are the sub-contractors/suppliers solvent? Are they reasonable to deal with? Do they have a good reputation of performing quality work on time? Are they aware that you are required to use them, and will they use that information to their advantage? Is their price competitive and does it allow you to earn a margin on it?
- Manage the situation – engage with the sub-contractors and suppliers comprehensively and early, so that you can fix a price, obtain clarity on lead times, understand what information is required and when, and then keep in touch as the date for their work approaches.
- Make sure you enter into contracts with the named sub-contractors that are back-to-back with your obligations so that your potential liability can be passed on if required.
How can CCC help?
CCC have decades of experience assisting parties in resolving all manner of construction claims, issues and disputes, including:
- Contract reviews and setting contracts up
- Liquidated damages clauses
- Delay claims
- Extension of time notices
- Extension of time claims
- Adjudication and Arbitration
Contact us for a free initial consultation.
