Get More TLC: #24: It’s tricky

Cheques are a little like subcontracting.  Subcontracts are used throughout the modern global economy. On a construction project they enable a contractor to buy in expertise. The contractor stays legally responsible for carrying out all its scope of works, and will try and safeguard its position by mirroring key obligations, processes, and quality requirements from the main contract in the subcontract. This is known as making sure the main contract and subcontract are “back-to-back”. 

When reviewing a subcontract I came across a tricky legal conundrum. The subcontract said (edited for simplicity):

The subcontractor will observe and comply with the terms of the main contract that relate and apply to the subcontract works… The subcontractor indemnifies the contractor for acts and omissions which involve the contractor in any liability to the employer under the main contract

There were many inconsistencies between the subcontract and the main contract – with no attempt to make them back-to-back. One way around the inconsistencies is to slap in a subcontractor indemnity and hope it all works out. This is not unusual, but it is definitely not best practice. 

To give you a flavour of the issues in this subcontract, let’s delve into just one area:

• The subcontract included no obligation on the subcontractor to provide warranties.
• The main contract included a requirement on the main contractor to get warranties from its subcontractors. 
• If the main contractor does not get those subcontractor warranties, the employer could refuse to pay as they are a condition precedent to payment (ie no warranties, no money) or the employer could choose to withhold agreed damages for failing to provide them.
• The main contractor has no express right to withhold payment or damages from its subcontractor because of the lack of warranties.
• The subcontractor indemnifies the main contractor for acts and omissions (eg failing to provide warranties) which involve liability to the employer.

What do you think? Does the subcontractor have to provide warranties? If the subcontractor doesn’t provide warranties can it have its payments withheld or any sums deducted? Answers please.