In Construction, the Employer may nominate a Subcontractor to carry out some Works. In such instance, the Employer would negotiate price with the appointed Subcontractor and direct the Main contractor to appoint the Subcontractor. In some other instance, a Subcontractor may be appointed by the Employer submitting a list of Subcontractors to the Main contractor to choose one of them. The law allows the Main contractor to appoint a Subcontractor to carry out some or all of the construction Works in which the Employer contracts the Main contractor.
Where the Main contractor appoints a Subcontractor to carry out all the Works in the main contract, the Subcontractor in fact steps into the shoes of the Main contractor in the main contract. It is therefore pertinent for the Main contractor to protect itself from liability which may arise from the Subcontractor's default by tying the Subcontractor to the Main contractor's obligations under the main contract and incorporating the terms in the main contract and contract documents to the Subcontract Agreement. In essence the main contractor is made the Subcontractor's supervisor over the Works. This is achieved by the inclusion of these fundamental provisions in the Subcontract Agreement;
- Scope of Work
The Subcontractor must contract that it is familiar with the terms of the Works in the main contract between the Employer and Main contractor, the location of the Works and the Conditions in which the Works is to be performed. The Subcontractor must enter into the Subcontract Agreement based on its independent investigation and not solely on the opinion or representation of the Main contractor. The Subcontractor should be bound to the Main contractor's obligations under the main contract. The documents referred to in the main contract must form part of the Subcontract Agreement.
- Subcontract Price
The Subcontract price must be clearly stated. The subcontract price must be the contract price in the main contract less the retention sum or a lump sum payment. The terms of payment in the Subcontract Agreement must be based on the agreed installment payments in the main contract. If the main contract provides that the Employer retain a certain percentage of the agreed installment as retention sum to be paid upon practical completion, the Main contractor is entitled to hold on to such percentage of the Subcontract price until practical completion. Final payment would be paid to Subcontractor upon completion of the Works in conformity with the contract documents, handover to Employer, payment of invoices of the Subcontractor's subcontractors, remedying of defects and expiration of the defects liability period.
- Completion of Work
The Works must be completed within the time stipulated in the main contract. Hence, the Subcontractor must allow the Main contractor and its representative to inspect progress of the works.
There must be a provision to enable the Main contractor direct the subcontractor to accelerate work in accordance with the schedule of work in the main contract to avoid damages which may arise from such delay. In such an instance, the Subcontractor is not entitled to compensation for any additional work which may arise from its delay. If the Main contractor informs the Subcontractor of a variation of the work, this will not affect the validity of the Subcontractor. The parties would agree on appropriate additions or deductions for the change in the Works.
The Subcontractor must maintain an insurance cover to protect both the Subcontractor and Main contractor against any damages, loss of property or material, injury to any worker, third party liabilities arising from the Subcontractor's Work, Plant or Machinery.
- Claim or Lien
Where a claim or lien is brought against the Works, the Subcontractor shall satisfy or defend such claim, lien or judgment within a reasonable time failing which the Main contractor may do so and seek reimbursement from the Subcontractor. Subcontractor shall also indemnify the Main contractor in relation to any claims whatsoever arising from Subcontractor's obligation under the Subcontract Agreement.
Subcontractor shall promptly remedy damages to the satisfaction of the Main contractor failing which the Main contractor shall remedy the damage and deduct the cost from the amount due to Subcontractor unless such cost are recoverable under the applicable insurance policy maintained the Subcontractor.
Subcontractor shall be liable for any loss or damage to any Work or to any equipment and materials on the job site caused by it, its agents, or employees.
- Dispute Resolution
Technically, the dispute resolution mechanism in the main contract cannot be incorporated by reference into the Subcontract Agreement. This is because arbitration proceeding is strictly between parties who agree to it. The dispute resolution mechanism in the main contract is binding on the Employer and Main contractor only. It is therefore important for the Subcontract Agreement to have its own dispute resolution clause. Since time is of essence in a construction agreement, the parties should include settlement negotiations and mediation before arbitration.
The Main contractor shall present any timely filed defence by Subcontractor to Employer's action or claims under the appropriate procedure and subject to the other provisions of the Subcontract, pay the Subcontractor proportionate sums paid by Employer to which Subcontractor is entitled.
The Subcontractor shall bear the cost of arbitration proceedings including attorney's fees and all the expenses accruing to the Main contractor in relation to disputes arising from the Works in the main contract.
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.