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Problem #8
You asked, ‘How do we know whether a Sub-Contract is properly drafted for a $550 million Main Contract Project in town?’
The Answer:
Obviously, there are many ways to know whether a Sub-Contract is properly drafted, but the most straight forward way is when such a Sub-Contract is put to the test during the Construction period (after it is being concluded by both parties). Well, whether this Sub-Contract would allow the Sub-Contractor to submit claims outside the budget of the Main Contractor, as additional variation works, when such variation works could not in-turn claim by the Main Contractor against the Employer either in Contract or Law. Don’t you think that by the time you know this, it would be too late, as a Main Contractor, you may need to quickly source for more funds in order to increase your construction budget so that the Sub-Contractor would be paid before he abandons the project and create more headaches for you?
As a Main Contractor, you said, ‘I think it is safe for me to use the same Standard Sub-contract documents to be issued to my Sub-Contractor, as the Main Contract for this project is using the same SIA or FIDIC or ??, similar to what we’ve worked on in the past.’
Well, you may be right, provided that all the Terms and Conditions stated in this Main Contract just issued to you for this project is the same as the past one that you have worked on. It would be advisable for you to make a comparison on a “word by word” basis to ensure that, before you issue your Standard Sub-Contract Documents to your Sub-Contractors, so as to ensure that you would not end up exceeding your construction budget.
However, based on our past experience working with Employers and Main Contractors, we have never seen in the past 12 years any Employer using any “SIA, FIDIC or any other Standard Forms” without making any amendment to them especially when the Main Contract sum is ranging from $50 million to $600 million. We know that because we have also been involved in Main Contract drafting work for the Employer. For a Project Sum of $550 million, it would be common for the Employer to want to have the Main Contract re-drafted even he is using any Standard Form as a starting basis. This means that even with the Standard Form such as the “FIDIC” that he had informed you as the Main Contract, it is likely that around 20% – 80% of the Terms and Conditions have been modified or more added in to cater for the specific Project requirements and also to protect his financial interests.
You as the Main Contractor asked, ‘Then what should I do as the Main Contract varies from project to project?’
Based on what we have stated above, don’t you think that the Standard Sub-Contracts to be drafted and to be used should differ from project to project, as there are more Non-standard Terms & Conditions as compared with the standard ones? Thus, the work of drafting the Sub-Contracts of a project especially of more than $50 million is best to be done by an experienced Contracts Consultant in the Construction Industry who is well-versed in Engineering, Contracts and Law.
For a Main Project sum of $550 million, you know that all the Main Contract documents could be at least 16-25 volumes, each having at least 80-100 mm thick excluding the various Main Contract Drawings issued for you as the Main Contractor for construction. The Contracts Consultant would first need to go through all the Main Contract documents and interpret all of them before she could help you to draft the Standard Sub-Contract Documents to be used specifically for your present project. Obviously, this person that you engage must be a quick reader and fast interpreter of the Contract as the Main Contract Documents obviously drafted in English, contain a lot of legal terms that “look just like English but have their specific legal meanings”.
The Contracts Consultant that you engage would need to incorporate all the terms of the Main Contract into the Sub-Contract as far as the scope of work of the Sub-Contract is concerned, so that you as the Main Contractor would not face an unexpected situation where the Sub-Contractor claims from you for additional work done outside your budget and expectation.
Obviously, a good Contracts Consultant would ensure that the incorporation of the Main Contract Terms and Conditions into the Sub-contract are not loosely expressed in general words but with precise careful consideration of the consequences. Thus, each case must be separately considered to determine the precise purpose and extent to which it is desired to incorporate the term or terms of the Main Contract. It follows from the absence of privity between the Employer and the Sub-contractor. The drafting of the Sub-contract should be done in the “exact” manner to avoid the undesirable consequences such as to rely on interpretation of the Sub-contract terms on a case-by-case basis of informal documentation in an endeavor to ascertain the parties’ objective intentions to be derived from the language used.
In Chandler Bros Ltd v Boswell (1936) 3 All E.R., a Sub-contract contained many provisions in similar terms to those in the Head Contract, but none referring to or incorporating a power of the Engineers in the main contract to require the removal of a Sub-contractor with whom they were dissatisfied. The Sub-contractor was delayed by lack of funds, and the Engineers served a notice under the main contract. It was held by the Court of Appeal: that (a) the parties had the main contract before them when the sub-contract was concluded, and must be taken to have contemplated this possibility, so that no term could be implied in the Sub-contract giving the Main Contractor power to determine the Sub-contract simply upon the Engineer’s notice being given, and (b) a recital that the Sub-contractor had agreed to carry out the work in accordance with the terms of the main contract did not , where other clauses of the main contract were expressly brought into the sub-contract, have the effect of incorporating the clause in question.
Well, there are other case laws that highlight the importance of Main Contract incorporation but I would not elaborate further in order not to confuse you.
You also note that besides the issue of proper incorporation of terms and conditions of the main contract, there are also issues where you also want to incorporate your own terms and conditions as the Main Contractor in order to facilitate the project work on site, and you also need to deal with issues concerning any conflict of terms and conditions, how you are going to clarify them to avoid possible dispute in future with your Sub-contractors.
It is also advisable to brief the Sub-contractors on the various terms of the Sub-contracts before they start to quote and it is best to explain to them the possible onerous terms that are incorporated (due to the need of the Main Contract or others), so that they are prepared for the complexities of the work and would not just abandon the project if they encounter obstacles in one form or another in the future…
So far, we have not seen any Main Contractor could succeed on their own, those who are successful in projects and financially are the ones that are good co-operators with their sub-contractors and their consultants, who have relatively good credit rating and have worked well with everyone in the project team, either within the same company or externally.
With the aforesaid, you understand that drafting the Sub-contracts for any Project is definitely not a layman’s task, you would need a specialist Contracts Consultant to do these works so that you would avoid getting into possible huge financial loss; to have to pay for works that need to be done by the Sub-contractors and yet not incorporated into the Sub-contract. So far, we have done such work at a relatively economical cost and have helped many Main Contractors to complete their works successfully with good cooperation with their Sub-contractors. You could contact us if you need our help.
Drafted by: Er. Goh Cheow Leng Maria
First drafted on 10 September 2008. |
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