Contractors on major projects were often asked to accept subcontracting clauses that involved an obligation to seek approval before work could be subcontracted. In practice the workload for contractors seeking consent seems to increase where the prescriptive approach is applied. Difficulties can arise where the contractor finds that provisions XY&Z are: not available in the market; or not appropriate for the particular subcontract.
Contractors on major projects were often asked to accept subcontracting clauses that involved an obligation to seek approval before work could be subcontracted. In practice the workload for contractors seeking consent seems to increase where the prescriptive approach is applied. Difficulties can arise where the contractor finds that provisions XY&Z are: not available in the market; or not appropriate for the particular subcontract.
Contractors on major projects were often asked to accept subcontracting clauses that involved an obligation to seek approval before work could be subcontracted. In practice the workload for contractors seeking consent seems to increase where the prescriptive approach is applied. Difficulties can arise where the contractor finds that provisions XY&Z are: not available in the market; or not appropriate for the particular subcontract.
subcontracting clauses and comments on risk management for contractors. Traditional Approach Traditional Approach Traditional Approach Traditional Approach In the past contractors on major projects were often asked to accept subcontracting clauses that involved an obligation to seek approval before work could be subcontracted. The contractor was also required to agree that subcontracting would not relieve the contractor from responsibility. Prescriptive Approach Prescriptive Approach Prescriptive Approach Prescriptive Approach Over time these simple clauses have been replaced by significantly expanded clauses. In some cases the clauses impose an obligation to seek approval to subcontract and dictate the terms which must be included in the subcontracts: The contractor must ensure that any subcontract between the contractor and a subcontractor contains provisions XY&Z and is otherwise on terms acceptable to the principal. Further, some principals require contractors to obtain Warranty Deeds from subcontractors. The requirement to incorporate provisions XY&Z in subcontracts and to obtain Warranty Deeds may be limited to certain material or key subcontracts, being either nominated subcontracts or subcontracts over a certain value. Arguably, both the traditional and prescriptive approaches should ultimately reach the same destination. That is, even where the simple clause is adopted the principal can dictate the terms of the subcontract by withholding consent until satisfied with the terms. However, in practice the workload for contractors seeking consent seems to increase where the prescriptive approach is applied. Risk for Contractors Risk for Contractors Risk for Contractors Risk for Contractors Inevitably the requirement to incorporate provisions XY&Z into some or all of the subcontracts adds to the time and cost involved in negotiating the subcontracts. In normal situations the requirement should not create too many problems, especially in cases where the work to be subcontracted involves ordinary construction related activities to be carried out by Australian contractors. However, difficulties can arise where the contractor finds that provisions XY&Z are: not available in the market; or not appropriate for the particular subcontract. There are a number of reasons why this can happen. For example, the contractor may find that some suppliers are simply not prepared to bid on provisions XY&Z. The best commercially available terms may be the suppliers standard terms of supply and the warranty may be the suppliers standard warranty. This is particularly relevant to suppliers of material and equipment, even for very high value purchase orders. The same applies to suppliers of off-the- shelf information technology, where the terms may be presented on a take it or leave it basis. Dispensations Dispensations Dispensations Dispensations When the contractor finds that it cannot persuade a subcontractor to accept provisions XY&Z or to offer a Warranty Deed, the contractor may need to ask the principal to waive some of the subcontracting requirements. However, contractors should not assume that the answer will be either quick or favourable. The principal is likely to seek advice from its lawyers on the request for a dispensation where: the request involves an important clause in a material contract; or the principal does not have a clear understanding of why the requirement was prescribed in the first place. Whether a dispensation will be granted may depend on a number of factors, including: the state of the relationship between principal and contractor; the reason why clause XY&Z was prescribed as a requirement; whether the contract is a material contract; the scope and value of the subcontract; any recommendation on the subject given by the principals lawyers. There is no guarantee that relief from strict compliance will be granted, particularly where a material subcontract is involved.
Examples of Prescriptive Clauses Examples of Prescriptive Clauses Examples of Prescriptive Clauses Examples of Prescriptive Clauses Each subcontracting clause is different. In some cases, the obligation involves the usual requirement to seek consent before subcontracting and a requirement to incorporate various provisions in the subcontract dealing with, for example, agreement that: the subcontractor must comply with the Construction Industry Training Fund Act 1993 and pay any levies; disruptive subcontract personnel may be removed from site by the contractor or principal; the subcontractor must comply with safety, heritage and environmental laws affecting the project; the subcontractor is required to mitigate costs incurred as a result of any legal challenge to the project or in the event of a native title claim. Such requirements may reflect what would ordinarily have been included by the contractor in standard subcontracts. In other cases, the obligations are highly prescriptive and go beyond what would ordinarily have been included in subcontracts. For example, some Head Contracts require that any subcontract over a certain value should contain provisions in equivalent terms (with necessary amendments) to secure the principals rights under the Head Contract, including provisions which expressly: exclude (where applicable) the relevant State based legislation regarding proportionate liability; deal with intellectual property rights, in particular ownership, licence and escrow requirements; deal with audit and access rights; impose insurance obligations that match the contractors obligations; require the subcontractor to accept assignment or novation of the subcontract; grant the right to terminate for convenience; require the subcontractor to submit to a particular kind of dispute resolution regime and to be bound by the outcome at the top tier. Often where the subcontract is material the subcontractor must provide a Warranty Deed to the principal, in addition to the usual Tripartite Deed dealing with the step in scenario. That is, depending on the terms of the Head Contract, the subcontractor may be required to sign 3 related contracts: Subcontract; Warranty Deed; and Tripartite Deed. Risk Management Risk Management Risk Management Risk Management Identification Identification Identification Identification and Assessment and Assessment and Assessment and Assessment Managing the risk associated with back to back subcontracting obligations starts at bid stage with risk identification. This involves: identification of the obligations that the contractor will be required to pass through to subcontractors; and preparation of a list of potential subcontractors who may be affected by the requirements, including suppliers and service providers. The contractor then needs to assess: the likelihood that some or all subcontractors will reject provisions XY&Z; the likelihood that some of all subcontractors will demand more money to accept provisions XY&Z; the likelihood that it will take longer than usual to negotiate some subcontracts, in particular whether this will affect any key subcontracts or affect the contractors ability to place orders for long lead items; whether it will be possible to use the contractors standard subcontract documents or (if not) whether to allow extra money in the project budget for the cost of preparing the documents; and whether provisions XY&Z are appropriate for the particular subcontract in any event. If time and budget permits (subject to compliance with bid confidentiality requirements) discussions with potential subcontractors may assist. The optimal outcome would be to lock away subcontracts in advance to eliminate the risk of post award problems. In the real world, this is not always possible. Where time is short and the budget is tight, it may be necessary to make an educated guess about what subcontractors in the market will accept. Particular Back to Back Clauses Particular Back to Back Clauses Particular Back to Back Clauses Particular Back to Back Clauses Although this article does not attempt to cover all the different aspects of back to back clauses, some general comments regarding insurance, intellectual property and dispute resolution clauses follow. Insurance Insurance Insurance Insurance Many Head Contracts dictate minimum insurance requirements for both the contractor and its subcontractors. Even if the contractor is willing and able to comply with the insurance requirements, subcontractors may be in a different position. In the optimal situation, the subcontractors can be asked to confirm whether they could comply with the insurance requirements before the contractors bid is submitted. Where time and budget do not permit a detailed investigation, the contractor may need to rely on experience and common sense to assess whether the requirements are likely to cause problems. Some insurance requirements that would cause problems for the contractor may also cause problems for subcontractors. There are a number of provisions that appear on a
regular basis that fall into this category, including requirements to effect: professional indemnity and other policies in joint names; a public liability policy which includes a cross liability clause by which the insurer agrees to waive all rights of subrogation; policies that include provisions requiring the insurer to notify the principal in writing at the same time it gives notices of cancellation or any other notice under the policy. The contractor should be wary if the Head Contract requires subcontractors to effect policies that have a deductible (excess) not exceeding $............. The dollar amount nominated may be significantly lower than the deductible in the subcontractors policies. Where the Head Contract calls for insurance policies to be obtained from insurers licensed or incorporated in Australia this may be a problem for subcontractors who have insurance policies arranged by a foreign parent. Intellectual Property Intellectual Property Intellectual Property Intellectual Property Where the project involves IP deliverables, the contractor should assess whether it will be able to secure agreement on the required terms with the relevant subcontractors. Even if the IP provisions which are to be passed down to subcontractors are carefully drafted, they may not necessarily be appropriate for the range of subcontractors who will be engaged: one size may not fit all. These provisions are potentially relevant to a range of subcontractors, including designers, equipment suppliers and IT suppliers. It should come as no surprise that an equipment supplier or IT supplier will have strong views on the IP clauses and that these clauses may be deal breakers. If the Head Contract imposes an obligation to secure agreement from subcontractors (or sub- subcontractors) to: vest IP ownership rights in the principal; grant the principal the right to modify and develop the IP; grant the principal the right to give third parties access to the IP; provide access to source code; or deposit source code in escrow, then each of these requirements needs to be discussed in detail with the subcontractor and the subcontractor may also need to discuss terms with its own subcontractors. Where a subcontractor is going to be paid to develop any system involving IP, the contractor should carefully investigate what rights (if any) that subcontractor is prepared to offer. If the primary computer system is linked to third party products (such as an accounting package) then the rights on offer from the sub-supplier should also be investigated as these are also likely to be subject to the subcontracting obligations. It may be possible to obtain a copy of the End User Licence Agreement from the sub-supplier to check the terms. Dispute Resolution Dispute Resolution Dispute Resolution Dispute Resolution Some Head Contracts impose an obligation on the contractor to ensure that subcontracts contain a particular kind of dispute resolution regime. Some require the contractor to sign a multi-party dispute resolution deed and to flow this arrangement down to subcontractors. Even if the proposed regime is acceptable to the contractor, it may not be acceptable to subcontractors. Some subcontractors (particularly foreign parties) have mandatory corporate policies on this subject. If the subcontractors corporate policy requires London based arbitration under UNCITRAL, the subcontractor will not be pleased to find they are expected to accept the outcome of an arbitration or expert determination higher up. If a Dispute Resolution Board is to be established at the higher level, consideration needs to be given to whether it is realistic to expect subcontractors will accept the DRBs recommendation. Risk Management Risk Management Risk Management Risk Management - -- - Seeking Seeking Seeking Seeking Amendments to the Draft Contract Amendments to the Draft Contract Amendments to the Draft Contract Amendments to the Draft Contract Although some contractors know that there are going to be problems, they fail to raise concerns at bid stage, fearing that too many non- compliances in the departures table will affect their prospects of success on the bid. If the contractor decides to adopt this approach, it should do so with its eyes open to the possibility that: the principal may not grant dispensations; the dispensations may not be granted promptly; and the amount of work and costs involved in the subcontracting exercise may be higher than usual. Depending on the issue, it may save time and money to put forward a non compliance in the bid and to explain why certain provisions are either not appropriate or not commercially achievable. The contractor may wish to propose that the obligation should be to use reasonable endeavours rather than to ensure that provisions XY&Z are included in the subcontract. The best time to have the discussion is before the contract is signed, rather than seeking dispensations after award. Drafting Shortcuts Drafting Shortcuts Drafting Shortcuts Drafting Shortcuts When faced with an obligation under the Head Contract to secure a back to back outcome downstream, some contractors adopt a drafting shortcut which attempts to flows down obligations from the Head Contract, for example: The subcontractor agrees to be bound to the contractor by the like obligations by which the contractor is bound to the principal under the Head Contract unless otherwise varied in this subcontract and the subcontractor acknowledges that it has been provided with a copy of the Head Contract. There is an obvious problem with this
approach because terms such as equivalent provisions and like obligations are open to a range of interpretations. Nevertheless, some contractors may view this ambiguity as helpful: whether the provision is effective to flow the obligations down to the subcontractor is not necessarily the contractors primary concern. The contractor should note that this kind of clause may not be acceptable to the principal, particularly for material subcontracts. The principal may insist on a cut and paste approach which replicates the full text of clauses from the Head Contract into the subcontract (or a schedule of the subcontract) with appropriate amendments. If so, this has implications for the amount of time required to prepare the subcontract and the negotiations may also be slower than usual.
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