Sharp practices

Most contracts submitted to the ECA’s commercial, contracts and legal department are drafted on behalf of main contractors and are heavily weighted in their favour. The message to subcontractors is clear: read the small print and seek advice if required.

Even if commercial pressures dictate that you take on a project with unfavourable contract conditions, always try to negotiate for better terms. Contractors will occasionally withdraw onerous conditions under pressure.

Once the terms are settled you must adhere to the duties and conditions agreed. Give particular attention to the payment application procedures. The subcontractor often holds the key to start the payment mechanism. If this is not handled correctly the process could stall, delaying payment. For example, if it is stated that the subcontractor’s payment application must be submitted five days before the main contract valuation date, then precise valuation dates must be established and applications submitted on time.

Do not agree to payment terms that depend upon the issue of the Main Contract Interim Certificate. This is an old weapon of main contractors and is tantamount to the outlawed “pay when paid” procedure. The danger is that, in the event that an Interim Certificate is not issued on the main contract (for reasons beyond the subcontractor’s control), the subcontract payment will not be triggered.

Often all the subcontract conditions are not made available up front. A page of 20 or so clauses may contain a sentence such as: “the main contract and our full subcontract conditions may be inspected at our offices on request.” Get hold of all the conditions before signing up.

Some contracts specifically exclude payment for materials on site. The burden to the subcontractor of financing a stockpile of materials and equipment is often aggravated by a further condition, which passes ownership of the subcontractor’s materials to the contractor. Should the contractor become insolvent there would be no doubt as to the ownership of the materials and the subcontractor would be at risk.

There are two conditions often introduced in relation to set-off; both are onerous to subcontractors. In standard forms, withholding monies is restricted to sums due on the subcontract. The more onerous conditions provide for monies to be withheld from sums due to the subcontractor from any other contract with the same contractor.

A typical condition may also state: “set-off may also include provisions for future costs and risks as well as costs incurred.” This allows the contractor to deduct sums for imaginary future claims in addition to genuine liabilities.

It could be costly to assume that insurance liabilities remain constant from contract to contract. In addition to subcontractors being liable for their own plant and materials, some conditions require that they be covered for “any loss from whatever cause.” This implies that damage by the contractor or others to the subcontractor’s plant and materials must also be covered. There are also provisions made for the subcontractor to insure the subcontract works. This is contrary to the requirements of standard forms and must be notified to your insurers before work commences.

Beware of a clause that includes: “the contractor may issue directions to omit the execution of work including that in respect of which there is a Provisional Sum.” The contractor is seeking the subcontractor’s agreement here that Provisional Sums can be omitted. The option at a future date may be to give Provisional Sum work to another firm. Under general law covering contracts, to omit work and sublet it to others in this manner would be a breach of contract and you should be entitled to loss of profit.

As always the provision to withhold retention provides a commercial opportunity for main contractors. It is not unusual for an unwary subcontractor to accept 15% retention or the final release to be 12 months beyond expiry of the defects liability period ie two years from practical completion.

Retention conditions may include the following: “the subcontractor agrees that the full legal and beneficial ownership in the retention shall remain vested in the contractor until such time as the final payment is made to the subcontractor.” This flies in the face of the assumption that retention is held in trust and cancels out any provision for release of the first moiety at Practical Completion.