Sub-contract and assignment
Prepared by: Dr. Sr Mohd Suhaimi Mohd Danuri
General Principles
Contractor must carry out all the works contract out
to him by the employer.
In the course of carrying out the works the
contractor may sub-contract or assign all or some of
the works unless there is an express prohibition in
the contract against sub-contract or assignment.
Sub-contract is widely practiced in most
construction work because contractors do not have
the resources to carry out the whole of the works
themselves.
Definitions
Sub-contract means carrying out the whole or
part of the contractual obligations by a person
not party to the contract.
Assignment means transferring the whole or
part of rights, interest or benefits under the
contract to another party who then signs
another contract with the employer.
What are the requirements
to sub-contract?
JKR 203 Clause 47.1-47.3 and PAM 2006 Clause 17.3:
The contractor shall not sub-contract wholly or substantially
any work or design work without written consent of the
SO/Architect.
Cl. 17.3 of PAM2006 sub-contracts labour only to carry any
portion of the works, shall not constitute within the meaning
of sub-contracting.
If being given the written consent shall not relieve the
contractor from any liability or obligations under the contract
and shall be responsible for any acts, defaults, neglects,
breach of contract of any sub-contract made.
What happen if the Contractors
employment is terminated?
Cl. 47.4 of JKR: It shall be a condition in any
sub-contract which has been consented to by
the Government that upon termination of the
Contractor's employment under the contract,
the employment of the sub-contractor under the
sub-contract shall terminate immediately. No
claim whatsoever shall be made by the
Contractor and /or sub-contractor against the
Government for any work done or materials or
goods supplied.
What happen if the sub-contract is
made without getting prior written
consent?
Cl. 47.5 of JKR: If the Contractor sub-contracts the
works, in whole or in part without getting prior written
consent of the S.O, the S.O. shall have the right to
instruct the contractor to terminate such sub-contract
and the Contractor shall be liable for all cost and
expense relating to such termination.
Cl. 51.1(a)(vii) & (b) of JKR and 25.1(e) of PAM2006
If the Contractor sub-contracts the works, without
getting prior written consent, the employer/goverment
may determine the contractors employment
What are the requirements to
assign?
Cl. 47.6 of JKR: The contractor shall not assign
the contract or any part, or any benefit or
interest, otherwise than by way of assignment in
favour of the contractors banker or any financial
institution or corporation of any monies due to or
to become due under this contract without prior
written consent of the S.O.
Similar clause is provided in PAM2006 under Cl.
17.1 and 17.2.
PRIME COST SUMS
In JKR 203A Cl. 1.1(k): Prime Cost Sum or P.C.
Sum is a sum provided for work to be executed by
a nominated sub-contractor or for the supplying of
goods or materials by a nominated supplier.
Refer also to Cl. 34.1 of JKR203. Similar provision
in PAM2006 Cl. 27.1 and 28.1.
The MC is entitled to a certain amount of the P.C.
Sum in the form of profit and/or attendance.
P.C. Sum for which the Contractor
is permitted to tender
In JKR 203 Clause 34.4 and PAM 2006 Clause
27.14.
Contractor may carry out works under P.C. Sum if
the work is covered by the contractor in ordinary
course of business, provided that the SO/Architect
is willing to allow the contractor to submit tender for
the work covered under the P.C. Sum.
Provisional Sum
In JKR 203A Clause 1.1 (l) defines Provisional Sum
as a sum of work or for the supply of goods or
materials which cannot be defined or detailed at the
time the tender documents are issued.
Cl. 34.3 of JKR provides that the Provisional Sum
may be expended at such times, and amount as the
S.O. may direct.
Conversion of Provisional to PC
Sum
In JKR 203 Clause 34.3 provides that the S.O. may
convert any work/material/good under provisional sum to
be converted into P.C. Sum.
Cl. 11.4 of PAM2006 the A.I shall be issued by the
Architect in regard to the expenditure of Prov. Sums.
NOMINATED SUB-CONTRACTOR
AND NOMINATED SUPPLIER
JKR forms
[JKR 203 Clause 59, 60, 61 & 62]
PAM2006
NSC: Clause 27 , NS: Clause 28
Nominations
[JKR 203 Clause 59.1 & PAM 2006 Clause 27.1]
The SO/Architect makes the nomination and instructs
the main contractor to enter into a sub-contract with the
nominated sub-contractor in respect of P.C. Sum or
Provisional Sum
Under PAM2006 if alt. design is proposed by the
Nom. Sub-Contractor or as may be required by the subcontract, the Nom. Sub-Contractor shall be responsible
to ensure the sub-contract works are fit for its purpose.
Objection to Nomination
[JKR 203 Clause 60.2(a),(b)&(c) & PAM 2006 Clause
27.2 & 27.3]
Basically, SO/Architect shall not nominate a subcontractor/supplier if:
the contractor makes reasonable objection; or
the sub-contractor/supplier refuses to enter into a
contract or agree with the terms and conditions in the
nominated sub-contract agreement.
the sub-contractor refuses to provide the government
such an indemnity letter
Contractors objection must be
reasonable what does it means?
In PAM 27.3: reasonable objection based on
available know facts and documented evidence
that the financial standing or solvency or
technical competence of the Nom. SubContractor is such that a prudent contractor,
having regard to the scope of sub-contracts work
would be justified in rejecting the nomination
Similar provision in 28.3 (Nom. Supplier)
Powers following Objection
In JKR 203 Cl. 60.3 expressly provides that if the MC
reasonably objects to a nomination or the subcontractor/supplier refuses to agree with the terms and
conditions in respect of Cl. 60.2(a),(b)&(c), SO shall do
one or more of the following, to:
nominate alternative sub-contractor/supplier;
instruct that the works to be omitted, either to be
carried out concurrently with the Works or at some
other date, and the contractor shall not be entitled to
claim for any losses; or
In accordance with clause 34.4, arrange for the MC
to tender and perform the works or supply the
materials/goods.
Powers following Objection (contd)
In PAM2006 Cl. 27.4 provides that:
The architect may either issue further written
instructions to remove the objection so that the
contractor can enter into the sub-contract; or
cancel such nomination instruction and issue an
instruction to omit the said sub-contract work; or
renominate another sub-contractor for the subcontract work
Similar provision in Clause 28.4 for Nom. Supplier
Liability of government/employer
to NSC/NS
In JKR
In PAM 2006
Payment to NSC/NS
In JKR 203 Clause 61 direct payment by
the government to the NSC/NS
In PAM 2006 Clause 27.5/28.6 the
contractor shall pay the amount in any
interim payment stated as amount due to the
NSC/NS within 7 days after the Period of
Honouring Certificates
Failure of the Contractor to pay
NSC/NS
PAM2006 Cl. 27.6
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 1:
NWMHB v TA Bickerton & Sons Ltd [1970] 1 All ER 1039
Fact:
The Architect nominated S Ltd as a sub-contractor to undertake the
installation of a heating system. S Ltd entered into a sub-contract
with the MC but thereafter S went into liquidation. MC asked the
employer to issue a variation order postponing the work until a new
SC was appointed. There is no provision was made in the contract
requiring the Architect to re-nominate SC if an original nominee fail
to perform the sub-contract. The Architect refused to issue a VO or
to re-nominate a SC, and called on the MC to complete the
contract.
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 1 (Contd):
NWMHB v TA Bickerton & Sons Ltd [1970] 1 All ER 1039
Fact (Contd):
Subsequently, the contractor agreed to do so without
prejudice to his legal rights. The contractor claimed that the
work had cost substantially more than the sub-contract price,
but the employer refused to pay more than the original subcontract price.
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 1 (Contd):
NWMHB v TA Bickerton & Sons Ltd [1970] 1 All ER 1039
Held:
The relevant conditions of the contract must be construed as
placing an obligation on the architect to re-nominate a SC in the
event that the NSC repudiated the sub-contract. The architect has
no right to instruct the MC to undertake the NSCs work.
On the failure of the architect to re-nominate a NSC and when the
architect instructed the MC to do the NSCs work, the MC was not
restricted to sub-contract price as consideration for undertaking the
NSCs work.
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 2:
Percy Bilton Ltd v Greater London Council (1982) 20 BLR 1
Fact:
On 28 July 1978, a nominated sub-contractor for the mechanical
services went into liquidation and was already some 40 weeks
behind program. On 14 September 1978, a sub-contractor
nominated as a replacement but on 16 October the sub-contractor
withdrew before starting work. On 31 October 1978 MC was
instructed to enter into a sub-contract with a SC, which was
concluded on 22 December 1978 whereby the sub-contractors
completion date was later than the MCs completion date.
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 2 (Contd):
Percy Bilton Ltd v Greater London Council (1982) 20 BLR 1
Held:
MC was entitled to an EOT due to the delay in making nomination of
the new sub-contractor.
MC was not entitled to an EOT due to the delay caused by the
departure of a nominated sub-contractor.
MC was stuck with the new NSC because the MC did not persist in
taking objection when the MC knew that the NSCs work program is
incompatible with the MCs program.
Therefore, if the NSCs work program is incompatible with the MCs
program, the MC could take it as a reasonable reason for making an
objection on the nomination.
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 3:
Fairclough Building Ltd v Rhuddlan Borough Council (1987) 30 BLR
25
Fact:
In September 1977 a nominated sub-contractor stopped work and
repudiated its sub-contract, which was then terminated by the MC.
At that time, the sub-contractor was already 8 weeks late. The
contractor required the Architect to nominate a substitute SC to
complete the work. The Architect only issued instruction to
nominate a new SC on 24 February 1978 and the re-nomination did
not cover remedial work of the previous NSC.
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 3 (Contd):
Fairclough Building Ltd v Rhuddlan Borough Council (1987) 30 BLR
25
Fact (Contd):
The contractor challenged the validity of that instruction on the
ground that the new SC gave 27 weeks to complete the subcontract works which therefore over-ran the then date for
completion.
The contractor also challenged the validity of another instruction
requiring the contractor to carry out remedial work of the previous
NSC.
What happens if the NSC/NS repudiates
and/or abandons the sub-contract?
Case 3 (Contd):
Fairclough Building Ltd v Rhuddlan Borough Council (1987) 30 BLR 25
Held that:
The Architects instruction nominating sub-contractors who could not
complete within the time allowed under the main contract was invalid and
the contractor is entitled to object on the nomination.
The instruction for nominating a new SC was also invalid because the
proposed sub-contract did not include remedial work. The employer
could not charge the contractor with the remedial cost as the overall
intention of a NSC is that the MC shall not be liable to perform any part of
the NSCs work. (Perhaps, this is another ground for making a
reasonable objection on a nomination)
The contractor was not entitled to an EOT for the delay caused by the
previous NSC before the NSC withdrew.
Determination of NSCs employment
in PAM2006
Determination of NSCs employment
in PAM2006 (Contd)
Determination of NSCs employment
in PAM2006 (Contd)
Implication of determination of NSCs
employment in PAM2006
Therefore, in PAM 2006, if the NSC/NS repudiates and/or
abandons the sub-contract (provided that the determination is done
with the written consent of the Architect under Cl. 27.8, and the
NSCs determination is not due to the contractors negligence,
default or breach under Cl. 27.12), the architect has no power to
direct the MC to take over the NSC/NS works but is obliged to renominate another NSC/NS subject to the contractors right to
object to a nomination as provided by clause 27.11. The employer
may also give EOT to the MC due to the delay in making nomination
but not for the loss and expense or any damages. The employer
may also include the remedial cost to the new NSC and shall
recover it back from the original NSC as provided under Cl. 27.13
Determination of NSCs
employment in JKR (Contd)
Implication of determination of
NSCs employment in JKR
Therefore in JKR 203, the significant difference is
that the MC may be required to complete the NSCs
works by himself.
The MC can recover damages or loss and expense
due to the repudiation of sub-contract as may be
provided by the Nominated Sub-Contract
Agreement.
