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Flowing your obligations down the line

Please note: whilst this article is phrased as if advising contractors in relation to sub-contractors, it applies equally to sub-contractor and sub-subcontractors, and consultants and sub-consultants.

For contractors a lot of the “good” work out there is with experienced employers. There is a lot to be said for working with people who know what they’re doing. However, an obvious downside is that they usually have better (i.e., more onerous for you) contracts!

Later this month, we will be presenting to Constructing Excellence Gloucestershire Club about contractual “nasties” that parties try to impose on others. Here, I advise about what to do with those “nasties” if you want to insulate yourself (to a degree) by passing them down the line. Better still, ensure that adequate procedures are in place to mitigate them yourself if they cannot be dispensed with.

When you sub-contract some of your works or services, remember to sub-contract the legal obligations too. This may sound simple but, in reality, mistakes are often made that can be costly.

A classic example is collateral warranties – if you sign up to an obligation to provide and procure collateral warranties within 21 days of a request from your employer, you need to make sure there is a contractual obligation on your own sub-contractors to provide you with warranties on demand (and preferably within 7-14 days!).

Many of the “big boys” have onerous main contracts that they require contractors to sign up to. When contractors take on sub-contractors they therefore need to flow down those obligations. The simplest way to do this is to ensure that your own standard sub-contract terms contain a provision that incorporates any main contract disclosed to your subbies and requires that subcontractor to indemnify you against any losses you may suffer if he (the subcontractor) puts you in breach of the main contract.

Simples? Well – it is if you can get the subcontractor to sign up! I know that many sub-contractors reading this won’t be very happy at my suggestion. However, my suggestion is merely the best way for the sake of legal completeness: I am not suggesting it is necessarily commercially reasonable – that is something to be assessed on a project by project basis.

I mentioned collateral warranties earlier. Please do remember that warranties simply give the beneficiary an option to sue the warrantor. That doesn’t mean that they won’t sue you as well or instead! When we are advising a potential claimant, we will advise them to go after the person who is contractually liable and has the deepest pockets. If you are a contractor with a healthy balance sheet, why would the employer go to your considerable smaller sub-contractor if you were on the hook for the same obligations? And if they are successful against you, can you flow the entire claim down to your sub-contractor? Only if your contracts are truly back-to-back.

The key thing to remember is that if you sub-contract work, you need to sub-contract obligations in clear and express terms. If you fail (or are commercially unable) to do so, then you are contractually at risk.

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These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.


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