It’s common in the construction industry for a head contractor to engage the services of a subcontractor to complete all or part of a particular project for a client. The client usually requires that the head contractor is liable for the full extent of the work for the project. To protect their liability, the head contractor will often seek to have the subcontractor legally responsible for as much of the project as possible. Essentially, this is a back-to-back contract, and it is becoming increasingly standard where a project requires the collaboration of several different entities to complete the full scope of work.
How Does A Back-To-Back Contract Work?
Clients of construction work understand that there may be multiple entities needed to complete their project. However, clients usually engage with only one entity – the party responsible for the delivery of the project referred to as the head contractor. The client is protected this way because there is a single entity who is fully liable for the whole project. It is much easier to deal with a single party with issues of liability and disputes than it is with multiple parties.
However, a head contractor usually cannot complete the work singlehandedly – they may engage several subcontractors to assist. In this case, they want to make sure that they are not directly liable to the client for work one of their subcontractors completed. As such, they will ensure that their contract with the subcontractor mirrors their contract with the client. The key terms affected are usually the head contractor’s obligations including liabilities, the rights of the subcontractor and dispute resolution clauses.
Obligations of the head contractor passed down to the subcontractor may include:
- Responsibility of maintaining the design for the project;
- Specified date for completion of that part of the project; and
- Quality and standard of work.
For a subcontractor, there are also rights that should be passed down from the head contractor, including:
- Entitlements for extension of time to complete the work;
- Where some variation of the work is needed; and
- Right for additional compensation against the head contractor if the head contractor breaches a term of the subcontract.
It can be difficult to ensure that the head contract and the subcontract set out all of the obligations and entitlements required to fully protect the relevant parties. Issues arise where the subcontract does not effectively complement the head contract. Simply citing the same contractual terms between the client and the head contractor may not make sense for some provisions or leaving 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
- The subcontractor’s liability to the head contractor for their delay of work, which also delays the obligations outlined in the head contract.
Ensure that the subcontract includes all the relevant clauses the head contract requires but also those that apply solely to the relationship between the head contractor and subcontractor.
In the Event of a Dispute
In the case of dispute resolution clauses, not properly drafting the subcontract can have a significant impact on the outcome of a dispute between the parties. For example, a factor to consider is whether the subcontractor should be obligated to participate in any dispute resolution process between the head contractor and the client. If the subcontractor has a dispute against the client, it will need to be made clear the extent the head contractor will be obliged to pursue a claim. Finally, if the dispute resolution process involves attending mediation or arbitration, the decision will need to bind all parties in a particular way that is present and consistent across both contracts.
To make back-to-back contracts work effectively, both head contractors and subcontractors need to be acutely aware of their obligations and the extent of their liability. Make sure you draft the contract in such a way to include all relevant considerations and not just refer to the terms of the head contract.
Head contractors should seek the client’s approval to engage subcontractors before seeking to draft back-to-back contracts. Within the contract itself, head contractors should try down pass down liability to the contractor for their portion of the work.
For subcontractors, it is important they understand the obligations that are passed down to them and that they can satisfy these requirements if necessary. Subcontractors should also limit their liability to the particular aspect of the project they are engaged for, and ensure they are not liable for more than their contribution.
An experienced building and construction lawyer should carefully draft and review back-to-back contracts to ensure it includes the important obligations between the parties as well as their rights and entitlements. If you have any questions or need assistance with drafting, get in touch on 1300 544 755.