The art of sub-

contracting: Contractual
issues I wish I knew then

Samuel Cho
Senior Associate

31 August 2015
1. Outline

Why sub-contract?

Different forms of sub-contracting, and pros & cons

Relationship between main contractor and nominated sub-contractor

Relationship between employer and nominated sub-contractor

Relationship between employer and main contractor

Dispute resolution under nominated sub-contract

Case law
2. Why Sub-Contract?

Sub-contractor - engaged by a main contractor to perform a specific task

as part of the main contract between the main contractor and the
employer

Reasons for sub-contracting:

Resources

Specialist advice/ expertise

Required by law

Flexibility

Need to manage, control and select appropriate sub-contractors

3. Different Forms of Sub-Contracting

Domestic sub-contracting

Employed by the main contractor – ‘domestic matter’

Main contractor is fully responsible to the employer for the sub-contractor’s work

Employer does not undertake the risk of sub-contractor’s default

Nominated sub-contracting

Main contracts commonly provide that the employer may choose certain sub-
contractors to carry out ‘prime cost’ work

Nomination - process by which the employer nominates, selects or approves who

will perform a sub-contract or specialist trade role
3. Different Forms of Sub-Contracting (cont.)

Named sub-contracting

Employer names one or more preferred sub-contractors at the

tendering stage

Main contractor selects a sub-contractor to be treated as domestic

sub-contractor
4. Pros and Cons of Different Forms of Sub-
contracting (from Employer’s perspective)

Domestic Sub- Nominated Sub- Named Sub-Contract

Contract Contract

Employer’s liability
Employer can choose its associated with NSC
own specialist does not arise
Employer is not
responsible for sub- contractor and bargain
Pros for the best price, terms
contractor’s default Gives the employer
of its contract, reduced some element of
procurement time
involvement in the
selection process
No implied obligation of
fitness for purpose of
the NSC work for the
main contractor Employer has limited
Employer has no control control over choice of
Cons over the choice of sub- Employer’s liability may sub-contractors
contractors be greater compared to compared to NSC
domestic sub-contract
(depends on contract
terms)
5. Relationship between Main Contractor and
Nominated Sub-Contractor
General rule: main contractor is liable to the employer for any
default by the NSC - may be modified by a construction of the
main contract and the sub-contract

Incorporation of terms

Sub-contract may incorporate terms of main contract – check

consistency. Clear drafting is essential

Risks for main contractor

Engineer negotiates on behalf of main contractor with NSC

Risks imposed by implied terms – patent defects, latent

defects, design of materials – but no implied term for fitness
for purpose (Young & Martin Ltd v McManus Childs Ltd [1969]
1 AC 454 HL)

‘Reasonable’ objection by main contractor

5. Relationship between Main Contractor and
Nominated Sub-Contractor (cont.)

Renomination of NSC

If the original NSC dropped out, there was an implied duty on the
employer to make a further nomination (Bickerton v NW Metropolitan
Regional Hospital Board [1970] 1 WLR 607)

Pay when paid provisions

Termination

Check Main Contract terms for any employer/ engineer approval and
procedure for proper termination
6. Relationship between Employer and Nominated
Sub-Contractor

No privity of contract

Generally no legal relationship between employer and NSC

NSC has no cause of action against employer, vice versa

Main contractor as trustee or agent of employer in exceptional cases

Engineer has no implied authority to contract on behalf of employer in the

absence of express authority

But may have a remedy against the engineer (Vigers, Sons & Co Ltd v
Swindell [1939] 3 All ER 590)
6. Relationship between Employer and Nominated
Sub-Contractor (cont.)

Situations where employer can exercise rights against NSC:

(1) Tort liability - for negligence or negligent advice by a specialist sub-

contractor in respect of personal injury and property damage, special
case for economic loss (Hedley Byrne & Co Ltd v Heller & Partners Ltd
[1964] AC 465)

(2) Name borrowing provisions

(3) Collateral warranty - where NSC warrants the quality of its work
(Shanklin Pier Co Ltd v Detel Products [1951] 2 KB 854)
6. Relationship between Employer and Nominated
Sub-Contractor (cont.)
Direct payment clause

Main contract provide for direct payment by the employer to NSC

Does not give rise to an implied contract for payment as between the
employer and sub-contractor (Yew Sang Hong Ltd v Hong Kong HA
[2008] BLR 563)

Prime cost sums or provisional sums

Main contractor as employer’s agent? – no: Hampton v Glamorgan CC

[1917] AC 13 at 22, HL)
6. Relationship between Employer and Nominated
Sub-Contractor (cont.)

Back-to-back provisions (also consider writing the description of sub-

contract works into the main contract)

Retention of title provisions

Statutory third party rights

Contracts (Rights of Third Parties) Ordinance

7. Relationship between Employer and Main
Contractor
Where engineer negotiates with NSC – main contractor has no cause of
action against the employer in respect of delay /default by NSC

Delay in making nomination - Percy Bilton v Greater London Council [1982] 1

W.L.R. 794 – Consider 2 periods:

(1) Period of time lost by the withdrawal of the first NSC: A delay caused
by the original NSC's withdrawal at the main contractor's risk

(2) Period of time required in respect of the subsequent NSC: A delay in

nominating a replacement subcontractor will be at the employer's risk –
main contractor may have a valid claim for extra time and money against
the employer.

Employer’s obligation to renominate within a reasonable time upon

withdrawal of NSC
8. Dispute Resolution under Nominated Sub-Contract

Name borrowing provisions

Borrowing the main contractor’s name to sue

Tripartite arbitration

Arbitration for three parties – employer, main contractor, sub-contractor

Joinder / consolidation

Same arbitrator(s)
8. Dispute Resolution under Nominated Sub-Contract
(cont.)

Statutory adjudication

Statutory procedures to resolve contractual disputes by an adjudicator

over payment (including loss and expense claims)

Proposed security for payment legislation under consultation in HK

Applies to construction activities whether oral or written contract;

construction activities in Hong Kong or outside Hong Kong but work
products delivered and incorporated into Hong Kong

Quick and rough justice?

8. Dispute Resolution under Nominated Sub-Contract
(cont.) – Statutory adjudication
9. Sinclair v Woods of Winchester Ltd (No. 2) [2007]
109 Con. L.R. 14 (TCC)
Sinclair – employer; Woods – main contractor; Penguin Pools Ltd – NSC

Application to seek leave to appeal on two questions of law arising out of an arbitrator’s
award

Second question concerns liability for defective specialist design - if a main contractor
subcontracts works to a NSC who then carries out design work as well, is the main
contractor, without more, liable to the employer for that design work?

Held:

Extent to which the main contractor is liable for defects in the workmanship of the
NSC will depend on the precise terms of the various contracts. Not liable in this
case.

The main contract documents did not include any obligation on the part of the
Defendants to perform any design work at all - main contractor cannot acquire
design liability merely because he is instructed to enter into a subcontract with a
NSC who is going to do some design work on behalf of the employer.
10. Great Eastern Hotel v John Laing Construction
[2005] 99 Con LR 45

Employer contracts directly with specialist sub-contractor

Breaches by John Laing Construction Limited under a construction

management contract resulted in delays to the completion of the refurbishment
of the great Eastern Hotel in London

Consortium of Conran Hotel Group and Arcadian was awarded £10 million in
damages for loss of profit and additional costs

Held:

John Laing was not responsible for the performance of the sub-contractors
as though they were a traditional main contractor

However, the primary obligation under the contract was to exercise all
reasonable skill, care and diligence of a properly qualified and competent
construction manager
10. Great Eastern Hotel v John Laing Construction
[2005] 99 Con LR 45 (cont.)

Construction manager found liable to an employer – responsible for losses

caused by a failure to properly organise the trade sub-contractors who are
directly employed by the employer

Potential problem
Questions?
Minter Ellison

Samuel Cho
Senior Associate
T +852 2841 6891
M +852 9722 8616
EMAIL samuel.cho@minterellison.com