In international construction projects, the Employer (and certainly the Contractor) may suffer the consequences of a wrong selection of the Subcontractor and this may have an impact on the timing for completion or on the quality of works executed.
Despite the fact that the liabilities for any default of the Subcontractor are generally borne only by the Contractor, the Employer may want to take all the necessary steps to minimize any such risk and this is the reason why in mid-big size projects (especially in EPC projects) the Employer might maintain a certain control in the selection process of Subcontractors.
In this respect, the main contract can provide various alternatives in respect of the subcontractor selection procedure.
Very broadly, FIDIC Red Book and FIDIC Yellow Books do not require the Employer consent for suppliers of materials or for Subcontractors already named in the contract (unless otherwise provided in the Particular Conditions) while the consent is required for other proposed Subcontractors (but the consent cannot be unreasonably withheld or delayed).
However, all the FIDIC Books (including the FIDIC Silver Book) provide the right of the Employer to nominate a Subcontractor under Sub-clause 13 [Variations and Adjustments] which involves the full power of the Employer to instruct the Contractor to appoint a specific Subcontractor balanced however with the right of the Contractor to refuse that specific Subcontractor on the basis of reasonable objections.
It is clear therefore that all such circumstances, the interest of the Employer and of the Contractor may conflict and each of them should find the right way to mitigate their potential risks.
Suggestion for the Employer
The Employer will usually seek to exclude expressly any responsibility in the selection process by inserting a specific wording so that:
"the engagement of any of the listed Subcontractor will not imply any direct relation between the Employer and the Subcontractor and will not diminish in any manner the liability of the Contractor for any failure of the Subcontractor to perform its obligations."
As mentioned above, Sub-clause 4.4 of the FIDIC Silver Book provides that
"The Contractor shall be responsible for the acts or defaults of any Subcontractors, his agents or employees as if they were the acts or defaults of the Contractor."
As said before, this will also apply in the case the Subcontractor has been selected by the Employer so the Contractor should pay specific attention in such a case.
Suggestion for the Contractor
On the other hand, the Contractor needs to consider carefully the skills, expertise and track records of the Subcontractor especially in the case the Subcontractor has been nominated by the Employer. Therefore, the Contractor will need to ensure to have a full 'power' over the Subcontractor and may need to consider to have a provision in the main contract so that:
"the Contractor shall reserve the right to replace at any time the Subcontractor in the case of failure by the latter to properly and timely perform its obligations under the Subcontract."
Sub-clause 4.5 of the FIDIC Silver Book provides that, upon certain conditions, the Contractor has the right to object to Subcontractor nominated by the Employer:
"The Contractor shall not be under any obligation to employ a nominated Subcontractor against whom the Contractor raises reasonable objection [...] with supporting particulars."
Some indications of the reasons why the Contractor may reject to appoint a nominated Subcontractor are listed under Sub-clause 5.2 of the Red Book but it is always preferable to specify in the Particular Conditions or in ad hoc contracts what rights the Contractor have in such respect.
In the case where the main contract does not provide for a list of potential Subcontractor but instead that the Contractor will have the right to subcontract part of the works the risk of disputes increases.
It is obvious that the interest of both parties is to have any such dispute resolved at the earliest convenience and this because either the Employer or the Contractor will at the end suffer the financial consequence of any delay in appointing the Subcontractor. It is, therefore, advisable that the main contract provides for a procedure on how to solve quickly and efficiently any potential dispute in that connection.
Suggestion for the Employer
The Employer will be interested in having details of the proposed Subcontractor so that it will have the concrete opportunity to evaluate the proposed Subcontractor in terms of technical capabilities and financial standing as well as its track record. The Employer will usually also provide a list of requirements that the Subcontractor need to fulfil for its appointment.
The Employer's need is to have the appointment of a Subcontractor in a way that the works will not be delayed/disrupted. In case of dispute, the Employer may consider inserting in the contract a provision such as that
"in case of objections in respect of the appointment of the designated Subcontractor, the Contractor shall propose a new Subcontractor within X days and, if the Employer shall have no objections in respect of the new proposed Subcontractor the latter shall be appointed. Any dispute in respect of the reasonableness of the Employer's objections shall be submitted to the [dispute resolution method] only after the Subcontractor has been appointed."
An additional clause shall deal with which party shall bear the costs arising out of the dispute resolution body decision in respect of the objections raised by the Employer.
Suggestion for the Contractor
The Contractor, on the other hand, will be interested in obtaining an immediate settlement of the objections raised by the Employer on a certain Subcontractor and this mainly because the Contractor will incur additional time and expenses in finding a proposing a new Subcontractor.
The Contractor may, therefore, be interested in providing in the main contract that:
"any objection raised by the Employer in respect of the appointment of the Subcontractor will immediately be referred to the [dispute resolution body] and no Subcontractor will be appointed until the dispute is resolved."
The subcontract is a fundamental part of any major international contract. Specific attention should be given in the case the subcontract is selected or can be selected by the Employer as well as to any local legislation which requires the appointment of local Subcontractor.
The parties should include also a detailed selection procedure for the appointment of Subcontractor bearing in mind that in many jurisdictions there is no direct legal relation between the Employer and the Subcontractor and therefore that any subcontractor underperformance is borne by the Contractor only.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.