Dennis Brand outlines issue of who is liable for works carried out by nominated subcontractors and suppliers.
As a general principle, a company cannot subcontract any part of their scope of works without the employer's consent unless the contract expressly states otherwise. This applies equally to a subcontractor, which cannot sub-subcontract part of its works without the contractor's consent and subject to the contractual terms agreed. A nominated subcontractor involves the selection and appointment of a subcontractor (or supplier), which allows the employer and its professional team full involvement in the selection process.
The employer uses this method to sublet sections of work to an individual company at an early stage in the project, using the subcontractor's expertise for design and co-ordination.
This in turn gives the subcontractor certain security regarding payment and information throughout the contract.
Reasons for the use of nominated subcontracts include:
- The employer chooses (often on professional advice) the company or firm to be nominated.
- The employer is able to choose a subcontractor without the decision having to be based on price.
- The timing of the involvement and appointment of the subcontractor is wholly the employer's decision.
- If the employer requires, the subcontractor will be made a fully involved part of the contracting team, utilising its design expertise and contract knowledge.
- Contractual liability is established early, providing a clear line of responsibility to the employer.
- By introducing direct formal links between the subcontractor, consulting engineer and employer, time is saved. This can help reduce administration and result in quicker decisions concerning price, design, programme and variations.
Principal features of nominated subcontracts include:
- Provisions for extensions of time (EOT) that reserve the engineer the power to fix revised period(s) for completion of subcontract works.
- The subcontractor may use the contractor's name in arbitration proceedings subject to the provision of indemnity and security as may be reasonably required by the contractor.
- A requirement that the architect must certify in writing the subcontractor's failure to complete its works within the stipulated time before the contractor may claim reimbursement of any loss suffered due to the delay.
- Provisions for the reimbursement of loss or expense, which reserve the engineer the power to ascertain the subcontractor's entitlement.
- Provision for the architect to certify the practical completion of the subcontract works.
- Provision for a quantity surveyor to value all of the variations required or sanctioned for the works.
- Provision for payment, which reserves the engineer the power to determine the value of work included in Interim Certificates.
- Provision for termination of the subcontractor's employment if it defaults, which must be exercised only if the engineer instructs.
The International Federation of Consulting Engineers' (FIDIC) Red Book 4th Edition defines nominated subcontractors in Clause 59 as: "All specialists, merchants, tradesmen and others executing any work or supplying goods, materials, plant or services for which provisional sums are included in the contract, who may have been nominated, selected or approved by the employer or engineer. Plus all persons to whom by virtue of the contract terms that a company is required to subcontract shall, in the execution of this work or the supply of such goods or services, be deemed to be subcontractors and will be referred to as nominated subcontractors."
Red Book 4th Edition recognises that the failure of nominated subcontractors to perform can have serious consequences for both the contractor and the employer. Therefore, it is important to ensure that the contractor approves the appointment of the subcontractor and is prepared to collaborate with them.
Clause 59.2 of the Red Book 4th Edition states that the contractor shall not be required by the employer or engineer, or be under any obligation to employ any nominated subcontractor against whom they may raise reasonable objection, or who declines to enter into a subcontract with them. This provides:
- That in respect of the work, goods, materials, plant or services the nominated subcontractor will undertake towards the contractor, such obligations and liabilities as will enable the contractor to discharge its own obligations and liabilities towards the employer...and will save indemnify the contractor from and against the same and from all claims.
- That the nominated subcontractor will save harmless and indemnify the contractor from and against any negligence by the nominated subcontractor...and from and against any misuse by them...of any temporary works provided by the contractor for the purposes of the contract and from all claims as aforesaid.
To summarise, Clause 59.2 provides that a contractor need not employ any nominated subcontractor against whom they have a reasonable objection or who refuses to enter into a subcontract:
- Which is back-to-back with the main contract; and
- Which indemnifies the contractor in respect of the nominated subcontractor's breaches, negligence of their workers and the misuse of temporary works.
The contractor can object to the nomination if they have reasonable grounds for doing so. What is reasonable must take account of the importance of the timing of the nomination. However, where the nominated subcontractor has been appointed prior to the contractor winning the work, the right to object may be limited provided that appointment was notified to the contractor beforehand and no objection was made.
Given the level of authority of employers in the matter of the appointment of nominated subcontractors, these rights are of immense importance to contractors generally. They are even more important for contractors operating in the UAE, therefore companies should not feel reluctant to exercise those rights.