Nominated Sub-contractors - What’s in a name?

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There seems to be a revival in the use of pre-selected sub-contractors by architects and employers. Has there in fact been a nomination? Due to complexities in the contractual arrangements the use of nominated sub-contractors has generally been avoided in the past. The law in this area is still something of a grey area relying largely on “implied terms”, but as informal “nomination” seems to be back in favour, a reminder of the key advantages and disadvantages will hopefully prove useful.

Employer

The obvious reason for an employer to nominate a specialist sub-contractor is control over the choice of and performance required from the sub-contractor.

The employer or his architect:

  • Chooses the sub-contractor
  • Negotiates the terms of the sub-contract
  • Agrees the price and scope of works

Nevertheless, the employer has no direct contractual relationship with the sub-contractor as the sub-contract itself is still placed by the contractor. This option may leave the unsuspecting employer with no remedy against the sub-contractor for default, and the risk of there being no recourse against the contractor either.  

Keep in Mind

 

  • Normally the contractor is not liable if the work or materials are not fit for their purpose.
  • Any guarantee provided by the nominated supplier or sub-contractor benefits the contractor but not the employer.
  • A delay by the employer in nominating or re-nominating a replacement may give the contractor a claim for extra time and money.

However, in the absence of express terms to the contrary the fortunate employer may be able to place liability for the sub-contractor’s default on the contractor, who had no choice in the appointment; an outcome which many would regard as unfair.

Main Contractor

In the absence of express terms, the advantages of the “nomination” system from the contractor’s point of view, other than being relieved of the process of selection and negotiation, are hard to see.  

The contractor is often faced with the following:

  • Little description of the sub-contract work other than the inclusion of a prime cost sum in the price
  • Only knowing the true nature of the sub-contract work and its effect on programming and completion at the time the nomination occurs, which is often late on in the contractor’s work, certainly after the terms of the main contract have been agreed
  • Liability for design of work and materials
  • Liability for defects in goods and materials supplied
  • Liability for latent defects
  • Liability for delay in performance by the sub-contractor or for its withdrawal from the job

Risks

The difficulty in any given situation is that the liability will depend upon the particular circumstances of the case. Neither the employer nor the contractor has any certainty as to the outcome.

To establish whether terms can be implied or whether they are excluded, the court will look at:

  • The express terms of the main contract (the terms of the sub-contract are not generally implied into the main contract by implication)
  • The circumstances of the nomination

 Implied Terms

Points to consider include:

  • Has the contractor’s liability for delay been excluded?
  • What is the standard for inspection of goods and materials that is required of the contractor?
  • Has liability for latent defects been excluded?
  • Does the contractor have any liability for the selection of component parts of materials?
  • Has the employer relied on the contractor’s skill and judgment in the selection of the sub-contractor/supplier or its work or materials?
  • What responsibility for design or drawings does the contractor have?

Test

The test therefore is not the name or label given to the sub-contractor as “domestic” or “nominated”. It depends on the circumstances of the appointment. A contractor faced with liquidated damages for delay by a sub-contractor, or a claim for defective work or materials should consider whether that sub-contractor was in fact nominated.

The difficulty with this is that there is little case law to assist in deciding whether a sub-contractor referred to either as “domestic” or “nominated” does in fact hold that status.

The issue was considered in St. Modwen Developments Ltd -v- Bowmer & Kirkland Ltd (1996) where the contract referred to domestic sub-contractors but in fact the architect obtained quotes from specialists and the contractor was instructed to place an order with a specialist chosen by the employer’s design team. The judge therefore treated them as nominated sub-contractors.

The general guidelines have been considered to be:

  • Did the contractor have complete choice over which sub-contractor to appoint?
  • Was the contractor asked to choose from a list of at least three proposed sub-contractors?

If the answer to either is yes, the sub-contractor is probably domestic.

In the recent Scottish case of Mowlem -v- Inverclyde Council (1 October 2003) the employer put forward more than three names as domestic sub-contractor for the   cladding works. However, only one, Structal (UK) Limited, was actually able to provide both design and installation so only Structal put in a tender. Mowlem advised Inverclyde of this and put in its bid including Structal’s price. Subsequently Structal withdrew its bid.

The contract administrator then held discussions with Nelson Tectonics about supplying and installing a Schuco curtain walling system instead. The agreed price was given to Mowlem who adjusted its tender sum which was accepted by the employer’s quantity surveyor. An architect’s instruction was issued removing reference to “Structal (UK) Limited’s   systems”. Before the sub-contract was signed Nelson Tectonics went into receivership.

The dispute went to arbitration and the arbitrator concluded that Structal had been a nominated sub-contractor.   Similarly he said the process of accepting the revised tender amount constituted nomination of Nelson.

Inverclyde appealed to the court. The court disagreed and found that neither Structal nor Nelson were nominated. It found the fact that Structal was the only sub-contractor capable of doing the design and installation using the Structal system was insufficient to make it a nominated sub-contractor.

It further found that the employer had not required Mowlem to enter into a sub-contract with Nelson Tectonics and Mowlem was free to propose an alternative sub-contractor.

This decision illustrates the ongoing uncertainties associated with assuming that specified sub-contractors are nominated.

Risk Management

Practical advice to a contractor faced with an employer who wishes to use nominated sub-contractors is to:

  • use standard forms of contract (e.g. JCT98 main and sub-contracts) designed to deal expressly with nominated sub-contractors; or
  • include express terms to cover issues of liability.

Similarly, an employer who wishes to use a nominated sub-contractor should obtain a collateral warranty from that sub-contractor, so that it has a line of recourse against the sub-contractor where the employer retains responsibility for delay or defects caused by that sub-contractor.

 

Jane Ryland

Partner

January 2004