Subcontractor Alert – Beware of Subcontracts that incorporate or refer to terms in the Head Contract or other Documents

Following the NSW Court of Appeal’s recent decision Wright v Lend Lease Building Pty Ltd; Intercon Engineering Pty Ltd v Lend Lease Building Pty Ltd [2014] NSWCA 463 (Wright’s case)

In a Nutshell

In Wrights’s case subcontractors signed subcontracts which effectively stated that retention would be released 24 months after Practical Completion was reached under the Head Contract. The subcontractors did not see or read the Head Contract before signing the Subcontracts and the end result was that they have been left waiting for over 5 years for release of their retention as completion under the Head Contract has been delayed.

Wright’s case serves as a warning to subcontractors that care must be taken where a subcontract refers to or incorporates terms or obligations under another document be it:

  • a Head Contract,
  • Site Lease, or
  • Development Consent Approval.

And that a contractor should closely review, consider and price the effect of the terms in the subcontract.

Lessons Learned and Action to Take

Subcontractors should ensure that they have reviewed, taken advice on and priced the effect of key provisions of a subcontract. This may include the need to review the head contract, site lease or development consent if these documents are referred to in the subcontract.

Once identified these risks may be managed by:

  1. Making appropriate amendments to subcontracts to shift risks from subcontractors; or
  2. Understanding the risks in a subcontract so that subcontractors can make appropriate commercial and tender pricing decisions.

Subcontracts Back-to-Back with Head Contracts

It is not unusual for key definitions and provisions in head contracts to be incorporated into the terms of subcontracts, often referred to as “back-to-back” clauses.

With pressures upon builders and subcontractors to secure new work and maintain relationships with large head contractors or principals it is also common for subcontractors not to review the wording of a Head Contract or other relevant documents referred to in the Subcontract prior to execution of a subcontract.

In Wright’s Case the Court held that it is no excuse for a subcontractor to later argue, ‘But I didn’t have the head contract when I signed the subcontract’ and thereby seek to unwind the effect of the head contract on the subcontract.

In Wright’s case the Court of Appeal relied upon the recent decision of Mainteck Services Pty Limited v Stein Heurtney SA [2014] NSWCA 184, in reiterating that to supply, omit or correct words in a contract two things must occur:

  1. The literal meaning of the contractual words must be absurd; and
  2. It must be self-evident what the objective intention is to be taken to have been.

Accordingly, the Court will enforce subcontracts pursuant to the objective intention of the parties based on a literal reading of the subcontract and its clauses. It is not relevant to the Court that an individual subcontractor didn’t appreciate the consequence of a subcontract provision.  Rather, the Court will consider what a reasonable business person would understand the provision in a subcontract to mean (Electricity General Corporation v Woodside Energy Ltd [2014] HCA 7).

The NSW Court of Appeal in Wright’s case accepted the findings of the primary judge in the NSW Supreme Court, his Honour Justice Ball, that the commercial purpose of the retention money arrangement under the subcontracts was to avoid the head contractor releasing subcontractor guarantees or retention amounts before the expiration of the defects liability under the head contract.

Effectively, the failure in the first instance by the subcontractors to review the terms of the head contract appears to have resulted in the subcontractors executing subcontracts without appreciating that retention monies would be held until the expiry of the defect liability period under the head contract which at the time of the judgment had still not expired some 5 years after completion of the subcontracts.

 

***The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.

 

Prepared by Bannermans Lawyers

23 January 2015

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For more information on this topic or any legal enquiries please contact your Construction Team.

 
 

 

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