CONSTRUCTION NEWSLETTER

(number 65)

NOMINATED SUBCONTRACTORS
JULY 2014 | TOKYO | DUBAI
International construction contracts often contain provisions
which oblige the main contractor to engage a subcontractor
NEWSLETTERS
that has been pre-selected or is subsequently nominated by
Please email us if you wish to
or on behalf of the client. Such an arrangement allows the
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client to have part of the works carried out by a specialist regular newsletters covering the
contractor, rather than the main contractor, and they are following topics.
normally used where the client is responsible for the design • Dispute avoidance
of the works. • Energy, mining and
infrastructure
• IP & TMT
In this month's article, we will look at the legal issues that
• Corporate/M&A
can arise from such contractual provisions and consider • Latin America*
what can be done by the main contractor to mitigate the risks • Competition*
that can arise from their operation. • Employment*
* ad-hoc newsletters
∨ What is a nominated subcontractor?

∨ Why nominate in advance? RELATED LINKS

> Herbert Smith Freehills
∨ The main contractor's liability
> Our construction and
∨ Case law engineering disputes
practice
∨ Managing the risk > Our construction and
engineering expertise
∨ Contacts > Our Tokyo office
> Our Dubai office
What is a nominated subcontractor?
Main contracts commonly provide for certain subcontractors to be chosen by the client to carry out particular work, usually
identified as "prime cost" work to which the main contractor will be entitled to add his profit margin and attendance costs (such
as material handling, scaffolding and rubbish clearance etc). They are usually called "nominated" subcontractors.

Frequently, the scope of work, terms and price of the services to be provided by the nominated subcontractor are pre-negotiated
by the client and, as such, are imposed on the main contractor. However, there is no direct contractual relationship between the
client and the subcontractor.

Sometimes the client will have signed an agreement with the nominated subcontractor which is transferred to the main
contractor. Or the client may simply oblige the contractor to use a particular subcontractor to execute particular works.

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Why nominate in advance? INDEX OF PREVIOUS
NEWSLETTERS
Historically, nominated subcontractors or suppliers were selected by the client prior
to the appointment of the main contractor for a number of reasons, such as where June 2014
the works involve items with a long delivery time, where design and manufacturing Fitness for purpose obligations
times cannot wait for the main contractor to be appointed (e.g. specialist plant), or take precedence over
specification
where the client has based part of its design on the services provided by the
specialist contractor (e.g. a cladding system). May 2014
A significant new case on the
Nominating in advance also allows the client to secure a favourable price, which FIDIC form
will benefit the client, as the main contractor is usually only entitled to charge the
April 2014
agreed prime cost, plus a profit mark up and attendance costs.
Asia Quarterly Edition: Recent
developments in Singapore
The main contractor's liability March 2014
English law is clear that a main contractor is liable to the client for any default by Dealing with contractual
ambiguities through an order of
his domestic/named subcontractors in performing the main contract work, subject
precedence clause
of course to any term in the main contract saying otherwise. This is the case
whether the subcontractor is 'domestic' (i.e. freely chosen by the main contractor), February 2014
or 'named' (i.e. chosen from a list of candidates prepared by the client). English High Court affirms basis
upon which it will prevent a call
There is nothing controversial in that arrangement because it reflects the fact that being made under an on-demand
bond
the main contractor is merely securing through others the performance of his own
obligations under the main contract. January 2014
Asia Quarterly Edition: An
However, the legal position with nominated subcontractors is less straightforward. introduction to delay analysis
The fact of and the circumstances surrounding nomination of a subcontractor and techniques – Part II
the words used in the main contract can sometimes result in the main contractor December 2013
not being liable for the nominated subcontractor's defaults. Much will depend on
How to terminate contracts
what the main contractor has agreed with the client in the main contract. The effectively
terms of the main contract should be the starting point of any analysis. This cannot
November 2013
be stressed enough. Any provisions describing the responsibility of the main
Navigating the Qatar major
contractor for the defaults of any nominated subcontractor will obviously be projects market
relevant. Also relevant to the analysis will be whether the main contractor has
October 2013
assumed responsibility for the overall design of the works.
Asia Quarterly Edition: An
Introduction to delay analysis
Case law techniques – Part I

There is a reasonable amount of English case law on nominated subcontractors September 2013
and the main contractor's liability for their defaults. However it should be Completion
approached with caution. Much of the case law amounts to a somewhat pedantic August 2013
analysis of the meaning of words used in the older standard form construction Rights of Retention
contracts. It will therefore be of limited assistance to someone trying to interpret July 2013
the meaning of a main contract where those words are not present.
Asia Quarterly Edition: Target
However, from the case law and leading construction law texts we know that, cost contracts
unless the terms of the main contract or the surrounding circumstances indicate a
contrary intention:

• Nomination: Where the main contract provides the client with a right to nominate, English law will imply a term into the
main contract that:

– the nomination will be done by the client in good time so as to enable the main contractor to carry out its
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obligations as to time and to work economically and expeditiously; and

– the client or their consultant will nominate a supplier or consultant willing to enter into a subcontract in a form
2
consistent with the obligations of the main contract. In other words, the main contractor cannot be compelled to
enter into a subcontract which does not adequately protect its rights against the subcontractor.

1
Hudson's Building & Engineering Contracts, 12th Edition, 3-163.
2
Leslie v Metropolitan Asylums District Managers (1901) 1 L.G.R. 862.

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•
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Materials : The main contractor will be liable to the client for latent defects in materials or goods supplied by nominated
suppliers or used by nominated subcontractors because English law will imply into the main contract a term that the
materials or goods to be supplied by the nominated subcontractor will be of good quality. However, such an implied term
may be excluded in circumstances where subcontract terms imposed on the main contractor limit the contractor's right of
recourse against the subcontractor for such defects.

• Fitness for purpose: The main contractor will not be liable to the client where the materials or goods selected are of good
quality but are not fit for their intended purpose. A client who directs the main contractor to use a nominated subcontractor
or supplier cannot be said to be relying on the main contractor’s skill and judgment in selecting the materials or goods to be
4
supplied and in those circumstances the term will not be implied.
5
• Design :

– Where a main contractor accepts design obligations in the main contract in respect of the works to be performed
by the nominated subcontractor, they will be liable to the client for the nominated subcontractor's negligent
design.

– Where the main contract documents do not include any obligation on the part of the main contractor to perform
any design works at all, a main contractor will not acquire design liability merely because they are instructed to
enter into a subcontract with a nominated subcontractor who is going to do some design work on behalf of the
client. In those circumstances, the main contractor's liability if any, for design by a nominated subcontractor
would only arise as an implied term of the main contract. Whether a judge or arbitrator would find it necessary to
imply such a term into the main contract will depend on the facts and circumstances of each case.

• Replacement: If a nominated subcontractor becomes insolvent or refuses to complete the subcontract work and has its
contract terminated then:

– The main contractor is not entitled to an extension of time for the delays caused by the original nominated sub-
6
contractor (either prior to termination or due to the termination).

– Where the main contract terms provide that the main contract work is reserved exclusively for the performance by
the nominated subcontractor, who subsequently goes into insolvency and refuses to complete the subcontract
work, the main contractor may have no right or duty to carry out that work for the client, and may be entitled to
7
additional payment in the event that they are instructed to complete that work.

– The main contractor may object to the nomination of a replacement sub-contractor if the date for completion of
that replacement subcontract is later than the main contract date for completion, or the main contractor may insist
8
upon an extension of time for that extended period.

Managing the risk

Most of the standard form contracts expressly provide that the main contractor is strictly liable for its subcontractors, including
any nominated subcontractors. For example, all of the FIDIC forms provide in sub-clause 4.4 that the Contractor is responsible
for the acts or defaults of any subcontractors as if they were the acts or defaults of the contractor. This has two consequences:

• first, the main contractor assumes strict liability for all subcontractors, including any nominated subcontractors selected by
or on behalf of the client; and

• second, the assumption of liability prevents the main contractor from making any claim (for example, for an extension of
time or additional cost) arising out of an act or omission of its subcontractors.

In these circumstances a prudent contractor will carry out the following:

• They will inform themselves of the liabilities that they are taking on. Accordingly, before accepting the client's
nomination, the main contractor should review the client's nomination and investigate its performance, its previous history of
building to programme and its financial standing. It may also investigate the viability of the contract price with the
nominated subcontractor to gauge whether the tendered work can actually be carried out profitably. The terms under which
the subcontractor is to perform the works should also be reviewed very carefully to check that they allow the main
contractor to meet its obligations under the main contract.

3
Keating on Construction Contracts, 9th Edition, 13-044.
4
IBA v EMI and BICC (1980) 14 B.L.R. 1, HL.
5
Keating on Construction Contracts, 9th Edition, 13-048.
6
Percy Bilton v Greater London Council [1982] 1 W.L.R. 794, HL.
7
Bickerton v N.W. Metropolitan Regional Hospital Board [1970] 1 W.L.R. 607, HL.
8
Fairclough v Rhuddlan Borough Council (1985) 30 B.L.R. 26.

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• If they are not happy, object to the nomination. All of the FIDIC contracts state that the contractor is not under any
obligation to employ a nominated subcontractor against whom the contractor raises a reasonable objection.

Too often contractors are reluctant to object to the client's nomination, but not doing so will waive the right to claim later that the
nomination was inappropriate, or that the subcontract terms imposed are unfair.

Contacts

Peter Godwin Head of Dispute Emma Kratochvilova Partner

Resolution, Asia Gaikokuho Jimu Bengoshi
Managing partner, Tokyo Tokyo
Gaikokuho Jimu Bengoshi
T +81 3 5412 5468
T +81 3 5412 5444 emma.kratochvilova@hsf.com
peter.godwin@hsf.com

David Gilmore Partner Dominic Roughton Partner

Gaikokuho Jimu Bengoshi Gaikokuho Jimu Bengoshi
Tokyo Tokyo

T +81 3 5412 5415 T +81 3 5412 5432

david.gilmore@hsf.com dominic.roughton@hsf.com

Richard Ashmore Senior Associate

Dubai

T +971 4 428 6300

richard.ashmore@hsf.com

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Should you wish to discuss any of the issues outlined in this newsletter, or any other legal issues that may be relevant to your
business, please do not hesitate to contact us.
© Herbert Smith Freehills LLP 2014
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not
constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should
always be sought separately before taking any action based on the information provided herein.

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