Case Study

Contract Type JCT 63/77 *

”Project is for a “Hospital Extension *
* Time for Completion 10 October 1980

* This case concerns the nomination of a heating sub-contractor

to provide a hot water supply and a steam installation for sterilizers.
Tender was made, and the lowest price received was GBP *
238,146 from "Heating Systems Limited" for a design and
installation job

PC provided in the Contract GBP150,000

The second lowest tender was GBP30,000 higher than the

.Tender from Heating Systems Limited

Architect instructed the Contractor to enter into

.negotiation with Heating Systems Limited
 Contractor to Architect dated 7 August
1979

Contractor has been unable to reach agreement *

with Heating System Limited for the following
:reasons

Expected delay of the Project Completion Date from - 1

October 1980 to the end of December 1980 due to dates of 10
completion given by Heating System Limited

Unsatisfactory Financial Position of Heating System limited, and their - 2

.refusal to submit Performance Bond
Refusal of Heating System Limited to indemnify the Contractor -3
:against the following
 Refusal of Heating System Limited to indemnify the - 3
:Contractor against the following

A) Royalty and Patent Rights

B) Injury to Persons and Property

.C) Liquidated Damages

 Urgent Conference between the Architect and QS
on 11 August 1979

.A) The former pointed out that this Tender is substantially in excess of the PC

B) If to go elsewhere will inevitably involve greater cost and time

C) QS Commented on the GBP30,000 difference between the Tender from

Heating Systems Limited and the next Tender which in his opinion could be due
to either a mistake in the Tender or unduly cutting the Tender to get
the job
D) Architect noted that he had had the drawing checked in his office and
found it OK, though he has no Qualified Heating Engineer
E) QS checked the price list and found it OK
Meeting between the Architect, QS and Contractor on 12
August 1979

Royalty and Patent Rights are of no importance -1

Injury to Persons and Property is a matter of Contractor liability under - 2

the statue of the Common Law

Regarding the Liquidated Damages, QS stated that the sub- -3

contractor would be liable to actual damages as could be
proved
Above all
For the main concern which is the bad financial position of the
Heating Systems Limited. The QS did his investigation, but the
information he could get from the bank was vague

The Contractor therefore agreed to proceed with reluctance

 Contractor to Architect dated 14 August 1979

The Contractor officially accepted the nomination of the

Heating System Limited as subcontractor under the following
:conditions
Request Extension of Time until 31 December 1980 -1
Contractor relieved himself from the responsibility of future breach by the -2
nominated subcontractor to Royalties & Patent Rights
and Injury to persons and Property

Reserves his right to claim any consequential loss and expenses that -3
may occur in the event of the sub-contractor's default
:Conclusions

A) The Architect waived the Employer rights of Patent Rights

.indemnification without obtaining prior approval from the Employer

B) QS should have warned both the Architect and the Contractor of the
.difficulties of proofing un-liquidated damages
C) Both the Architect and the QS did not perform their obligation towards the
Employer being his Advisors as they should have . Architect being afraid to
report time delay and extra cost was a main barrier to report the full
situation to Hospital Authority. QS Should have warned the Architect of the
. risks he was running and made a positive recommendation

D) The Architect had no authority to instruct the Contractor for what was
. apparently a valid objection under Clause 27(a) "Indemnity

E) Contractor agreed to accept when he could and should have refused.

Contractor should have taken his well founded rejection to nomination of
. Heating System Limited to Hospital Authority
According to FIDIC fourth Edition 1987 Sub-clause
59.2 "Nominated Sub-contractors; Objection to
"Nomination

The Contractor shall not be required by the Employer or the"

Engineer, or be deemed to be under any obligation, to employ
any nominated Sub-contractor against whom the Contractor may
raise reasonable objection, or who declines to enter into a sub-
"…contract with the Contractor
:Heating Systems Limited behaviour

March 1980: Nominated S/C started internal pipe works to enable the
.Contractor to get his finishes work on the way
June 1980: Architect included GBP12,500 in the Contractor Certificate in
.respect of works done by the nominated S/C

.July 1980: Employer paid GBP12,500 directly to the S/C

Contractor protested on the grounds that he has contra-accounts
against Heating Systems Limited for huts and other facilities provided to
.S/C
.August 1980: Job closed down for summer holidays
When job reopened, S/C did not return. All his unfixed
.plants and equipments have been removed
.Enquiries revealed that a Liquidator had been appointed
The Architect is of course now obliged to report that to the
Hospital Authority, and that would necessarily require to let another
S/C to complete the works. Which means additional cost and
.time delay
Architect was inclined to feel that the Contractor should
.arrange for the work to be completed
But the Contractor drew his attention that in so doing he would
be held entitled to be paid additional cost, with
: reference to the case of
Bickerton v NW Metropolitan Hospital Board ( 1970, 1 All ER
1039, Abrahamson p 199)
Another Contract for completing the work was arranged, but new S/C *
refused to accept responsibilities for original design and
insisted on making some amendments. (time consumed)
New S/C was not let until end of October 1980 and was due on 27 March *
.1981, but was not actually finished until 16 April 1981

TOTAL DELAY OF 28 WEEKS BEYOND original Completion of the

.Contract 10 October 1980

The Contractor presented a Claim of a total of GBP39,867 in respect of his

own costs and expenses and those of certain sub-contractors whose works
have been affected by the default of Heating Systems Limited. But claim
was settled to entitle the Contractor to only GBP26,312.60
:Points of Principle

The acceptance of the foregoing claims should not have arisen under JCT
80 or ICE5; in which leaves the liability for extra costs on the shoulders on
.the main contractor

Architects, Engineers, and QS must be careful to take note of legitimate

objections by contractors to nominations. If they act negligently by
misapplying the provisions of the contract, they will personally be liable to
the extent that the Employer will not be able to recover the said costs from
.the contractor

In brief nomination to subcontract is to be avoided if is at all possible.

Instead, it is better to specify in the contract what is required, and
stipulate that qualified labor is to be used for installation