Blog Author: Alexandra Reid
The main JCT contracts specify that where this is ‘considered appropriate’ the contractor should engage its sub-contractors using the relevant version of the JCT sub-contract which sits beneath the main contract in question.
JCT contracts are therefore drafted in such a way that ‘back to back’ obligations are ensured. So what can this mean for contractors?
A short answer is that the JCT has satisfied itself that its own sub-contracts have been carefully drafted to ensure that their key contractual terms – such as works obligations, payment provisions, termination clauses and relevant events granting the contractor/sub-contractor an extension of time – all sit neatly back to back with the main contract i.e. the terms do not conflict in any way.
But clients and contractors are not always willing to follow JCT’s advice. More often than not, they have spent years perfecting their own bespoke form of sub-contract, so that the contract maximises the client/contractor’s protection by (a) shifting the risk allocation to the subcontractor; and (b) containing all of the key terms that the client/contractor, as an organisation, has decided it must have in its contracts.
Bespoke sub-contracts – are they the be all and end all?
If drafted properly and adapted as necessary to take into consideration the main contract in question, bespoke contracts can be an optimum solution since they contain all the perfect clauses the company has carefully selected but also, by transposing the key contractual terms, adequately protect the contractor as against its liabilities to the employer under the main contract.
However, the problem with bespoke subcontracts is that without careful review and consideration to the project in question they could at best leave the contractor exposed to the employer if it hasn’t agreed comparable obligations with its sub-contractors and at worst make absolutely no sense at all because the terminology, and thus obligations, between the two contracts are completely different. Contractors, and equally employers under development agreements in respect of their liabilities to owners/developers, often end up promising obligations under a main contract in order to win work only to find that they cannot guarantee the same from their sub-contractors. These mistakes can have severe financial penalties on the contractor or employer up the chain. For example, the contractor may have agreed in the main contract to provide the employer with collateral warranties from all of the sub-contractors it appoints and indeed agree not to be paid until it does so. However, it may not have placed similar financial penalties in its bespoke sub-contracts against its subcontractors for not providing the warranty. The contractor unwittingly finds itself out of pocket.
What about bespoke amendments to the JCT standard forms?
Problems ensue as well when standard forms are amended at one level of the supply chain but not another. Clients frequently spend considerable time amending their main JCT contracts but then do not insist that their contractors do the same at the sub-contractor level. For example, the employer may have narrowed the number of relevant events entitling the contractor to an extension of time but, conversely, the contractor may not have done the same as against its sub-contractors.
The effect of this is that the contractor may expose itself to having to pay delay damages under the main contract for delay beyond the agreed completion date because the contractor cannot claim for a relevant event. Conversely, it will not be entitled to claim delay damages from its sub-contractor under the sub-contract because the relevant event has not been restricted and, therefore, the completion date has validly been extended.
Thus an equally imperfect situation arises because the main JCT contract is amended but the subcontract is not.
The question then that we are often asked is, if amending contracts (incorrectly) has such profound implications, are the parties better off, therefore, not to amend them at all?
Potentially, depending on the facts in question, the answer to this is yes, particularly looked at from the perspective of the contractor, or, potentially indeed, the project at large. From the employer’s perspective, it is of little concern if the contractor negotiates itself a bad deal with its sub-contractors as long the employer has protected itself under the main contract (this is particularly the case in a design and build scenario and so long as the contractor is of good financial standing itself). However, for the perspective of the contractor and potentially the project at large, if the main contract is severely restricted but the sub-contract is not at all, this could put the contractor and project under considerable financial and commercial risk; potentially, to the extent that, at best, the project becomes less or even unprofitable, and, at worst, if the contractor’s financial standing is imperfect, it may significantly impact upon the contractor’s ability to complete the works.
Therefore, whatever form of contract is chosen the advice is clear: proper consideration should be taken to amending all standard forms of contract – if you amend a provision in one contract, you must make changes to the other; no contract can be considered in isolation if you want to avoid the financial penalties of failing to do so.
For further information e-mail Alexandra Reid, Senior Associate, Winckworth Sherwood: email@example.com or visit Web: www.wslaw.co.uk
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