Owners and Contractor’s Liability towards Subcontractors


Introduction


Many construction contracts require the contractor to enter into an agreement with a subcontractor for a specialised task of the contractor’s scope of work. The subcontractor can be either selected by the contractor or the employer of the contractor. When the subcontractor is selected and employed solely by the contractor the subcontractor is termed as a domestic subcontractor, however when the subcontractor is selected and employed by the employer, the subcontractor is then termed as a nominated subcontractor. Although the employer has selected the subcontractor, the contractor signs the agreement with the subcontractor and remains responsible for the works done. In simple words, a nominated subcontractor is selected by the employer and imposed on the contractor. However, whether the nominated subcontractors’ defaults and delays place a liability on the employer or the contractor has always been a point of contention.

 

Domestic subcontractors.– The contractor and the employer will shortlist certain number of potential subcontractors for the purpose of issuing the tender but will be finally selected and employed by the contractor. Therefore, the main contractor is solely responsible and liable for that subcontractor. Even though the employer is involved in the selection process of the subcontractor, the contractor is the one that chose the subcontractor for the specialised work and is responsible for the completion of the work without delay.

 

Nominated subcontractors.– The contractor and the employer will shortlist a certain number of potential subcontractors, but it is the employer that negotiates the terms of the contract, selects and employs the subcontractor. However, the contractor is responsible for the completion of the work, the liability of the subcontractor falls in the hands of the employer and the contractor has no cause of action against the employer in respect of any delay or default on the part of the nominated subcontractor.[1]


Development in law


  • Foreign jurisprudence

 

The concept of nominated subcontractors has been more nuanced in English law. As per various authorities, the contractor cannot bear liability of a subcontractor over which it has no control over.

  1. In Young & Marten Ltd. v. McManus Childs Ltd.[2], the Court of Appeal held that the contractor is not liable to the employer for any defects in design, quality of workmanship and materials provided by the subcontractor.
  2. In Gloucestershire County Council v. Richardson[3], the House of Lords held that the main contractor’s liability to the employer was limited to the extent of the nominated supplier’s liability to the main contractor by operation of the terms of the nominated subcontract.
  3. In North West Metropolitan Regional Hospital Board T.A. Bickerton & Son Ltd.[4], the Court held that in the absence of clear language, to make the contractor liable for a nominated subcontractor over whose appointment or activities he has little control is simply unjust.
  4. In Sinclair Woods of Winchester Ltd.,[5] the Court held that the main contractor has no liability for the design under the terms of the main contract, and that he cannot mysteriously acquire that liability merely because he is instructed to enter a subcontract with a nominated subcontractor who is going to do some design work on behalf of the employer.

 

Under JCT Standard Form of Building Contract, 1998, the contractor is entitled to claim an extension of time (EOT) but is not entitled to claim loss and expenses as confirmed in Norwest Holst Construction Ltd. v. Coop. Wholesale Society Ltd.[6] If the subcontractor is nominated, the contractor will be entitled to an extension of time since he had very less control over the subcontractor’s selection and therefore on the performance too (for example under Cl. 25.4.7 of the JCT, 1998). However, things have changed under the JCT 2005 Standard Form nomination which has done away with nomination. Instead the JCT has adopted the “the three persons” scheme which gives the employer the advantage of specifying a competent specialist subcontractor whilst leaving the risk of defective work and delay on the part of the subcontract with the contractor.[7]

Non-performance by the nominated subcontractor, does not entitle the contractor to additional time or expense, according to FIDIC’s Red Book Form of Contract, 1999. Under FIDIC 1999, the employer may appoint the subcontractor, once the subcontractor has accepted the nomination, the employer becomes responsible for the actions of the nominated subcontractor. Therefore, the contractor may not claim for any failures of the nominated subcontractor. The idea that the contractor is liable for the actions of nominated subcontractors is predicated on the fact that the main contractor has the option to object to the employer’s nomination at the outset. The contractor can make a legitimate objection by stating the reasons why the subcontractor chosen by the employer is unsuitable.

 

  • Indian jurisprudence

Indian law does not make a distinction between domestic subcontractors and nominated subcontractors. The Indian courts have adhered to the rules of privity of contract and have held that the relationship between the employer and the contractor is on one hand and the relationship between the contractor and the subcontractor is on the other hand keeping it distinct and separate as was held in Ircon International Ltd. v. Vinay Heavy Equipments[8]. In order to avoid legal battles on the issue of liability of the subcontractor, careful consideration must be given to drafting the terms and conditions of the subcontract.

 


Conclusion


The English law on nominated subcontractor seems to be more nuanced. The relationship between a subcontractor and the contractor depends upon the construction of the subcontract.[9] Much will be influenced by what the main contractor agreed to with the employer in the contract, and the contract’s provisions are always the launching point for determining the contractor’s liabilities. In the absence of any clause which expressly permits the contractor to claim time or cost, the risk of a nominated subcontractor lies with the contractor.[10]

 

Furthermore, because Indian courts have not dealt with the issue of nominated subcontractor defaults and delays, there is very little jurisprudence on the subject. However, based on the approach taken by English Courts, it is best to conclude that the most important factor in determining the contractor’s liability for defects and delays caused by the nominated subcontractor would be influenced by the selection process, negotiation of the terms of the subcontract, the employment and the subcontract.


† Hiroo Advani, Founder and Chairman, Advani Law.

†† Kanika Arora, Partner, Advani Law.

††† Surbhi Ahuja, Associate, Advani Law.

* Ria Garg, Associate, Advani Law.

[1]North West Metropolitan Regional Hospital Board v. T.A. Bickerton & Son Ltd., (1970) 1 WLR 607 at 615 : (1970) 1 ALL ER 1039.

[2](1969) 1 AC 454 : (1968) 3 WLR 630.

[3](1969) 1 AC 480.

[4](1970) 1 WLR 607 : (1970) 1 ALL ER 1039.

[5] 2006 EWHC 3003.

[6]1998 EWHC Technology 339

[7]JCT Standard Form of Building Contract, 2005, Cl. 3.8.

[8](2015) 13 SCC 680

[9]Calder v. H. Kitson Vickers & Sons (Engineers) Ltd., [1987] EWCA Civ J0730-9

[10]Percy Bilton Ltd. v. Greater London Council, (1982) 1 WLR 794.

One comment

  • In the Indian context for non FIDIC based general prevailing contacts in the industry, employers at times choose to nominate sub contractor/s for specialized activity where contractor is not experienced.
    In such cases , terms of sub contracts are jointly negotiated by employer and Contractor in line with the contractual provision of contract . Hence contractor is liable to employer as per the terms of the contract with respect to performance of subcontract / sub contractor.

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