Imagine you are the contracts manager for a main contractor. You are expected to engage multiple subcontractors for your project and need to decide the form of contract to be used. Contract form or template agreement sets out the terms and conditions between the contracting parties. How do you decide? Your choice of contract form will be dependent on the type of subcontractor that you are looking to engage. In general there are at least two types of subcontractor namely ‘nominated subcontractor’ and ‘domestic subcontractor’. 

In case of nominated subcontractor, the choice of contract form is made by the Employer and its consultants which you are required to adopt and follow. In this regard you do not have the freedom to choose. In case of domestic subcontractor, whilst you have the freedom to choose the contract form to be used, the options available can be tricky to assess. This article examines this subject in greater detail. It should also be noted that this subject should also be of great interest not just to main contractors but also to subcontractors in the construction industry since this directly affects their contractual rights and obligations. In order to appreciate the context and options available for subcontract form, one needs to first have a general understanding of the differences between domestic subcontract and nominated subcontract.

Nominated Subcontractor and Domestic Subcontractor – General Differences

Both types of subcontractor enters into direct contract with the main contractor and are also paid by the main contractor for subcontract works done. It is an arrangement for the main contractor to outsource part of its construction works. As regards nominated subcontractors these are procured, negotiated and selected directly by the Employer and thereafter the Employer instructs the main contractor, through its agent to enter into a subcontract with its subcontractor of choice. The main contractor usually conforms with such instruction albeit with some limited room for objections. This nomination process can be tricky because the Employer is effectively walking on a tightrope. On one hand, the Employer wishes to get the best commercial deal out of its subcontractor of choice but on the other hand it had to ensure that conditions of this deal contractually syncs with the main contractor’s requirements. It is indeed a delicate balance but commonly practised in the construction industry. 

As regards domestic subcontractor, the choice of subcontractor, nature of the deal, scope of works being outsourced including any associated terms and conditions is primarily up to the main contractor and its ability to negotiate. The term ‘domestic’ provides a connotation that this is an internal matter for the main contractor which is subject to its purview. 

Key Matters in Subcontract Form of Contract – Back to Back Arrangement

When the Employer arrange to instruct its main contractor to enter into a subcontract with certain nominated subcontractor, it can be tricky. This is because one is directing its counter party to enter into a separate contract with an identified third party. The primary concern is whether the commercial deal negotiated with the nominated subcontractor contain any discrepancies or inconsistencies with the main contract. To the extent that the Employer proposes or even endorses a subcontract with conflicting terms to the main contract, does that change the main contract terms or influences the way it is interpreted?  This can be illustrated via two examples. Firstly, imagine the nominated subcontract terms included a more relaxed deadline where its subcontract period would arguably extend the main contract completion date. Could the main contractor upon acceptance of the subcontract terms argue that the nomination is effectively an extension to its main contract completion date or a tacit extension of time? Secondly, assume the main contractor is instructed to enter into a nominated subcontract in respect of subcontract works that involves selection of natural stones such as granite and marbles. Such selection will be carried out by the Architect as opposed to the main contractor given that it is a subject of building aesthetic. In this regard, the main contractor has limited role to play in so far as the choice of natural stones are concerned and would almost defer entirely to the Architect’s design preferences. If dispute arises between the nominated subcontractor and the Architect as regards rejection of works done resulting in delay and disruption to the project, to what extent should the main contractor bear the brunt of these ramifications? Do the subcontract terms offer any protection to the main contractor? After all, the main contractor had limited say in the selection and negotiation of the subcontractor in issue.

Although there could be further examples of issues that may arise in addition to the two hypothetical scenarios cited above, the point is clear – the choice of subcontract form should as far as possible be structured on a ‘back to back’ basis with the main contract form. The tricky aspect of this back to back arrangement is that the permutation of issues that could potentially arise may be so wide ranging and broad that makes it challenging to mitigate. It is almost impossible to mitigate the risks by providing an exhaustive list of issues that incorporates a back to back arrangement. The Employer rightly or wrongly takes the position that the main contractor ought to shoulder these subcontract risks as it had been financially remunerated to do so.

A back to back arrangement means that the subcontractor shall in general assume all obligations and responsibilities of the main contractor under the main contract, in so far as the subcontract works are concerned. In other words, if the subcontractor breaches its obligations under the subcontract terms which implicates the main contractor, then the main contractor can seek reimbursement from the subcontractor for any such corresponding damages. By way of example, if the subcontractor delays its subcontract works resulting in an overall delay to the project, the main contractor is accordingly entitled to recover any compensation from the subcontractor.

Even under the arrangement of domestic subcontract, the issue of back to back continues to be important and relevant. Whether the choice of subcontractor is nominated or otherwise, the main contractor has every reason to ensure that it is not unfairly “punished” under the main contract due to default of its subcontractor. In addition to that, it would be advisable to make certain that the provisions of main contract are administratively in sync with the subcontract on key matters such as interim progress payment, durations of defects liability period etc. 

In any given project undertaken by the main contractor, it is almost certain that it will be engaging nominated subcontractors as well as domestic subcontractors simultaneously. As a matter of industry practice, most main contractors would outsource a significant portion of the project works to subcontractors so as to keep its own fixed overhead expenditures low to ensure it is financially sustainable. Therefore, any discussion of nominated subcontract form would have a better context when contrasted with domestic subcontract form.

Nominated Subcontract Form

As mentioned earlier, if the Employer and its consultants sets aside prime cost sums in the main contract, nominated subcontractors will be engaged to carry out these works. Accordingly nominated subcontract forms will be used for these engagements as instructed by the Employer. Every major standard forms of contract used in the industry would have its corresponding nominated subcontract form. By way of example in Singapore, the major types standard forms used such as the SIA contract, the PSSCOC and the REDAS would prescribe its respective nominated subcontract form to be used in conjunction with the main contract form. These nominated subcontract forms are drafted with the intention of being contractually in sync with the corresponding provisions under the main contract form. By having the nominated subcontract form operating on a back to back basis with its main contract form, it reduces the likelihood of any objections from the main contractor when an instruction for nomination is issued.

Certain standard forms are drafted to be more prescriptive, detail and elaborate in its provisions of contract. These provisions include very structured condition precedents, timelines and requirement of written notices. These are in general requirements imposed by the Employer on the main contractor in case the latter decides to make any claims for additional time or additional monies. Such main contract forms are usually accompanied by nominated subcontract forms that are equally detail, and usually for good reasons. The extensions of time provision under Clause 14 of the PSSCOC main contract (Eight Edition July 2020) is an example that includes a fairly detail and elaborate mechanism that the main contractor had to comply with. Consequently the corresponding extensions of time provision under its nominated subcontract (Fifth Edition December 2008) found in Clause 24 is drafted in sync with the main contract. The following paragraph illustrates how both Clause 14 of the main contract and Clause 24 of the subcontract are administratively in sync with one another.

In general, under Clause 14.3(1) of the PSSCOC Main Contract the main contractor shall within 60 days of the occurrence of an excusable delaying event to notify the Superintending Officer (SO) of its intention to apply for extension of time. Such notice is a mandatory requirement and shall include contract references as well as reasons for such delay. Upon receipt of such notice, the SO may under Clause 14.3(2) require the main contractor to provide further details concerning the alleged delay within 14 days or such other period deemed necessary. Whilst the notification requirements and associated timelines above may appear straightforward in theory, its application in reality can be tricky for several reasons. Firstly, there could be a time lag between the occurrence of the event and the realisation that the event indeed will have a delaying effect. By way of example, the delaying event could be caused by other contractor engaged by the Employer that has no contractual relationship with the main contractor such as bad workmanship that adversely affects the next trade of works. In such a case the main contractor may only learn about this issue after the works are handed over by the other contractor that is in default. Assuming the next trade of work is performed by a subcontractor, it may take further time before the issue is escalated to the main contractor that will enable the latter to fulfil its obligation under Clause 14.3(1). Secondly, it should be noted that there could be hundreds if not thousands of issues, non compliances events, variation instruction occurring simultaneously for a large construction project at any given time. One’s ability to deal with a delaying event as it occurs could be compromised when confronted with these overwhelming issues.

The wordings of Clause 24 of the nominated subcontract form of the PSSCOC addresses the above issues in some ways, if the delaying event occurs within the scope of the nominated subcontract works. Firstly whilst the main contractor is the party that grants any extension of time to the nominated subcontractor, it is done with the consent of the SO.  Therefore, there will be consistency between the treatments at main contract and subcontract especially if it shares the same underlying delaying event. Secondly, Clause 24(3) of subcontract form stipulates that when the nominated subcontractor makes an application of extension of time with the main contractor, a copy of such application shall be issued to the SO. This is to enable the main contractor to comply with the corresponding 60 days requirement stipulated under Clause 14.3(1) of the main contract mentioned above. This effectively streamlines any communications and notifications between main contract and subcontract to avoid unnecessary confusion and miscommunication. It bears repeating that these timelines and notifications are condition precedents which mean that failure of strict adherence can result in denial of having contract period from being extended, causing liability to liquidated damages. Therefore having a back to back provision is not merely to enable ease of contract administration but also can have significant contractual ramifications. Finally under Clause 24(4) of the nominated subcontract, the main contractor could impose the same requirements of requesting for further details on the nominated subcontractor assuming the SO exercises his rights under Clause 14.3(2).

It is important to note that the above illustration merely cited the example of extension of time mechanism. In reality, there are multiple contractual mechanisms that are in need of back to back provision including on issues pertaining to valuation of variations, loss and expense claims, arbitration agreement etc.

Domestic Subcontract Form

Given the illustration above on the necessity of having back to back provisions between main contract and subcontract, what happens if the main contractor uses a bespoke in-house subcontract form to engage its domestic subcontractors? It is not uncommon for main contractor to have its very own bespoke subcontract form used for all its project regardless of the type of standard form being used for its main contract with the Employer. One may notice that it may contain a frequently used phrase of ‘mutatis mutandis’ or its equivalent in such bespoke form. This phrase in general means that when reading the bespoke form, one should interpret it in conjunction with the main contract form on the basis that there should be changes made to areas where change is required. One can argue that such phrase can be vague and grey whilst others who favour the use of such phrase will look at it as a way of enjoying great flexibility in its interpretation. 

Under situation where the main contract form is drafted in a manner that is less detail and less prescriptive, the use of mutatis mutandis may be sufficient. However under Clause 14 of the main contract PSSCOC form, it is highly unlikely that such phrase will give the main contractor sufficient coverage. Using the very same hypothetical example above of a delaying event caused by other contractor hired by the Employer affecting the scope of certain nominated subcontract works, the main contractor may have limited recourse against its subcontractor. In specific terms, if the main contractor is unable to to fulfil its 60 days notice requirement, the mere phrase of mutatis mutandis offers limited recourse to the main contractor as compared to the corresponding Clause 24 of nominated subcontract form.

If the main contractor simultaneously adopts nominated subcontract form for its nominated subcontractor and domestic subcontract form for its domestic subcontractor, this give rise to two different subcontract regimes to be administered in parallel under a single project. Such dichotomy can be an administrative burden to say the least. This conundrum give rise to the question of whether the main contractor should adopt nominated subcontract form for all its subcontract engagement. In other words, can the nominated subcontract form be used for domestic subcontractor? If yes, does the nominated subcontract form require any amendments prior to its use for domestic subcontract engagements? This will be explore further in the next section of this article.

Some may argue that the different contract form used for domestic subcontractor is a risk that can be managed quite effectively by the main contractor because of the business relationship. Unlike nominated subcontractor, the engagement of domestic subcontractor is subject to discretion of the main contractor. In large part, these relationships are developed over time which promotes trust and good will. These elements can arguably be of help in case parties encounter difficult issues on site that involves claim where pure rights and obligations are not the only factors of consideration.


Amendments to Nominated Subcontract Form for Domestic Subcontractor

If the main contractor is in favour of using an amended version of nominated subcontract form for the purposes of its domestic subcontract, the following could be useful points of considerations. In general, the scope of amendment to the nominated subcontract form shall pertain to provisions that are unique to nominate subcontract arrangement. By way of example certain payment concessions could be made by the Employer as part of commercial negotiations with the nominated subcontractor during the stage of procurement. Such payment concession may include direct payment by the Employer to the nominated subcontractor in case it fails to receive any payment from the main contractor. This concern is not uncommon especially if the nominated subcontractor lacks any working experience with the main contractor and the demands of cashflow is significant in the subcontract works concerned. Therefore these provisions should be deleted as it lacks relevance. 

Another point of consideration for the main contractor is whether the domestic subcontractor should take instructions directly from the Employer or its consultants. Certain main contractors prefer a direct control over its domestic subcontractor for fear that the main contractor could lose its leverage, especially if the instruction concerned a contentious works where parties dispute whether there is entitlement to additional payment or additional time. Other main contractors take the opposite position that if the Employer or its agent’s instructions are deemed the main contractor’s instruction, it avoids communication bottle neck and facilitates progress of works. In reality there is no absolute right or wrong and is dependent on the nature of the domestic subcontract works. If the main contractor allows direct instructions from the Employer and its agents, it should simultaneously safeguard its interest to make certain that any compliance with such instruction shall not be deemed as automatic entitlement to additional payment or additional time. This is particularly important if the construction works are under an extremely fast pace and the contractual paper work may lag behind the actual works done.


Conclusion

The choice of contract form for subcontract works is not merely an administrative decision. Proper deliberation and an informed decision making process sets the risk allocation philosophy of the organisation. Whilst the Employer may have less desire to interfere and impose its preferences on domestic subcontract arrangements, it ultimately affects the construction project as a whole particularly as it pertains to rights and obligations of all parties involved.

Koon Tak Hong Consulting Private Limited