Subcontracting in Construction Project: Legal Issues
Anika Mardiah Chowdhury
A contractor can be defined as an individual or organization that is hired to perform work for another individual on a contractual basis. In other words, “Contractor” means the General Contractor or the General Contractor’s authorized representative. There have many categories of contractors from them subcontractor is responsible for doing a specific portion of a contract. A subcontractor can be defined as a person who will award a portion of an existing contract by the principal and works under the general contractor. Furthermore, subcontracts are specialized in one specific area or people with specialized skills which makes them good at product and service delivery for the area of expertise.
The main contractor on a project is often a general contractor or a builder that manages the entire project and handles interactions with the client. On the other hand, a subcontractor is not an employee of the contractor rather an independent business that gets payment upon work. In the agreement of contractor-subcontractor, the roles and responsibilities of both must mention. To avoid any kind of legal dispute the most important step is to include the necessary provisions and legal requirements in the contract. When any party fails to fully address accountability or violates any provision of the contract then it causes a legal dispute.
In the contract, there have to follow some guidelines,
Firstly, the details of the work of a subcontractor must be included in the agreement. For example-
- A clear description of the work and which materials are needed for it.
- The expected date work to start as well as the completion date.
Secondly, in terms of dispute resolution, the contractor and subcontractor shall resolve themselves. Also, it must include in the contract how they will tackle such disputes. For example, they can include-
- Binding arbitration, which will require them to resolve disputes in front of an arbitrator rather than going to court and the arbitrator’s decision is final.
- Non – binding arbitration which gives a subcontractor the chance to appeal an arbitrator’s decision in court if not satisfied with the decision.
Thirdly, both of the parties shall be abiding by laws and regulations. Therefore, it is important to include a governing law in the contract term which will abide by both. Thus, the agreement should be made under the governing laws of the state they work in.
Fourthly, the terms of terminating a subcontractor and contractor agreement should also be included in the contract. For example, they can choose-
- No right to terminate which means the agreement will only end once the work or project is completed.
- The contractor only has the option to terminate and,
- Subcontractor only has the option to terminate which, when signed gives only the subcontractor a right to terminate the agreement.
Fifthly, a subcontractor and contractor agreement must be appropriately mentioned about the insurance policy. Also, shall include the insurance requirements of the work they are committed to completing or including the correct coverage details.
Not only the above requirements rather there are some other clauses and terms which can add by the contractor and subcontractor for the smooth running of their project or work.
Now if we see the contractor and subcontractor responsibilities and liabilities from an international perspective this contractor and subcontractor can be term as a back-to-back contract. In back-to-back contract rights and duties are closely mirrored with the main contract towards the main contract. These back-to-back contracts are commonly seen in construction, mining, and others sector. Some issues may come to play in the back-to-back contract.
Firstly, in terms of receiving payment, a sub-contractor is dependent or linked with the main contractor from the employer. Therefore, if the subcontractor completes his work may still not be entitled to receive its payment until the main contractor has received his payment.
In terms of payment the United States Court of Appeals in the Sixth Circuit case of Thos. J. Dyer Co. vs. Bishop International Engineering Co. 303 F.2d 655 (6th Cir. 1962) and Supreme Court of Florida in the case of Peacock Construction Co. vs. Modern Air Conditioning 353 So.2d 840 (1977) have distinguished two terms as a ‘Pay-when-Paid’ and a ‘Pay-if-Paid’ clause and have stated that both the clauses determine the liability of the main-contractor distinctly. Here pay-when-paid means the sub-contractor shall be paid within thirty days of receipt of the payment by the main contractor from the employer. And pay-if-paid clause means the sub-contractor shall be paid if and only if the payments would be received by the main contractor from the employer.
Secondly, in terms of contractual deadlines which will be stipulated by the main contractor and timely which the subcontractor needs to comply.
It is to be mention that all contractual terms and condition of the main contract is not always applicable to sub-contract. As the High Court of Singapore in the case of Hi-Amp Engineering Ltd v Technic Delta Electrical Engineering  1 SLR 751 and GIB Automation Pte Ltd v Deluge Fire Protection (SEA) Pte Ltd  SGHC 48 has held that the relevant provisions, which contains the common phrase that all terms and conditions of the main contract shall apply mutatis mutandis to the sub-contact are ambiguous and not precise enough to incorporate the terms of the main contract as part of the sub-contract. For a contract to be back-to-back in nature there has to be specific incorporation of the clauses of the main contract in the sub-contract either by reference to the main contract or reproduction of the contents of the main contract.
Lastly, it can be saying that whether nationally or internationally for the protection of rights a contract agreement is required for ensuring they do not work under unfair, also protect them from taking unfair risks. Also, the responsibilities of the contractor and sub-contractor were fixed in the contract clause for which there always have less chance of conflict or dispute.