In the construction industry, the main contractor often hires a subcontractor to complete all or part of a project for a client. You will typically have an agreement with the client, known as the Head Contract. This contract will list many obligations, including that you are liable for the entire scope of the work.
The main contractor usually passes relevant obligations and liabilities to the subcontractor. This practice, called a “back-to-back contract,” is becoming more common when a project needs several contractors to complete it. This article examines back-to-back contracts, explains what they are, and highlights common drafting mistakes.
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How Does a Back-to-Back Contract Work?
It is common for multiple businesses to work on a construction project. However, the client usually engages with only one head contractor who is responsible for delivering the project. From the client’s perspective, the head contractor protects their interests by being solely liable for the entire construction project. This means that if there is a dispute, the client only needs to refer back to the head contractor.
However, a head contractor usually cannot complete the work by themselves – the head contractor may engage several subcontractors with different specialties to assist. In this case, the head contractor should seek back-to-back provisions in its contracts to ensure that they are not directly liable to the client for work completed by a subcontractor. As such, the head contractor will ensure that their construction contract with the subcontractor mirrors their contract with the client. In particular, a head contractor should ensure that their subcontractors receive the following key terms:
- relevant obligations;
- liabilities;
- the rights of the subcontractor; and
- dispute resolution clauses.
Obligations of the head contractor passed down to the subcontractor may include:
- responsibility for maintaining the design for aspects of the project;
- specified date for completion of that part of the project; and
- quality and standard of work.
A subcontractor should receive certain rights from the head contractor, including:
- entitlements for an extension of time to complete the work;
- rights when a variation of the work is needed; and
- suitable compensation against the head contractor if the head contractor breaches a term of the subcontract.
It is also common for a head contract to require that the head contractor seek the client’s consent before engaging a subcontractor.
Key Issues
It can be challenging to ensure that the head contract and the subcontract set out all of the obligations and entitlements required to protect the relevant parties fully. Issues arise where the subcontract needs to complement the head contract effectively. Simply citing the same contractual terms between the client and the head contractor may not make sense for some provisions or leave out other important issues that apply solely to the relationship between the head contractor and the subcontractor.
Matters that arise in a subcontract, but not the head contract, could include the:
- head contractor’s obligation to pay the subcontractor even if the client has not paid the head contractor; or
- subcontractor’s liability to the head contractor for their delay of work, which also delays the obligations outlined in the head contract.
A head contractor must ensure the subcontract includes all relevant clauses from the head contract and those clauses that apply solely to the relationship between the head contractor and subcontractor.
Continue reading this article below the formIn the Event of a Dispute
In the case of dispute resolution clauses, not properly drafting the subcontract can significantly impact the outcome of a dispute between the contracting parties.
If the subcontractor has a dispute against the client, the subcontractor should make clear the extent to which the head contractor must pursue a claim. Finally, if the dispute resolution process involves mediation or arbitration, the decision will need to bind all parties. This must be in a particular way that is present and consistent across both contracts.
Key Takeaways
To make back-to-back contracts work effectively, both head contractors and subcontractors need to be acutely aware of their respective obligations and liabilities. These obligations should be properly passed down from the head contract and clearly stated in the relevant subcontract.
If you need assistance drafting or reviewing your back-to-back contracts, our experienced construction lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Back-to-back contracts ensure that the head contractor can pass down relevant obligations and liabilities to subcontractors, reducing the risk and potential liability solely held by the head contractor.
A subcontract should include relevant obligations, liabilities, rights of the subcontractor, and dispute resolution clauses that mirror those in the head contract. It may also include additional clauses specific to the relationship between the head contractor and the subcontractor.
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