The Law and Management of Building Subcontracts · Contents Deﬁnitions xi Preface xiii 1 Tenders 1 Introduction 1 Contract of tender 2 Obligation post-tender 3 Nature of the tender

The Law andManagement ofBuilding Subcontracts

Second edition

John McGuinness BSc, MSc, FCIOB

The Law and Management of Building Subcontracts

The Law andManagement ofBuilding Subcontracts

Second edition

John McGuinness BSc, MSc, FCIOB

© John McGuinness 2004, 2007

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First edition published 2004 by Athena PressSecond edition published 2007 by Blackwell Publishing Ltd

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Library of Congress Cataloging-in-Publication Data

McGuinness, John.The law and management of building subcontracts / John McGuinness.

– 2nd ed.p. cm.Includes bibliographical references and index.ISBN-13: 978-1-4051-6102-2 (hardback : alk. paper)ISBN-10: 1-4051-6102-7 (hardback : alk. paper)1. Construction contracts–England. 2. Subcontracting–England.

3. Construction contracts–Wales. 4. Subcontracting–Wales. 5. Construction industry–Management. I. Title.KD1641.M39 2007346.4202’2–dc22

2006029934

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Permission to reproduce relevant conditions from the following are acknowledged: General Conditions ofContract (MF/1), Form of Sub-contract, by The Institution of Engineering and Technology; CIC NovationAgreement, by The Construction Industry Council; and CLL Standard Form of Novation, by the City of

London Law Society.

Contents

Definitions xiPreface xiii

1 Tenders 1Introduction 1Contract of tender 2Obligation post-tender 3Nature of the tender 6Amended tenders and other pre-contract requests 7

2 Contract 10Formation 10Work contracted for 10Discrepancies between documents 17Conclusion of a contract 18Acceptance by signature 20Acceptance by conduct 21Letters of intent 24Subject to contract 33Capped price or expenditure 35Incorporation of terms – general principles 41Incorporation of terms – contractor’s proposals 58Waiver 60New terms 63Terms arising in the course of dealing 64Failure to make express provision within an agreement 66Failure to conclude an agreement 67When terms are left to be agreed 72Unconscionable behaviour 83

3 Subcontractors Selected by a Third Party 89Introduction 89Pre-tender discussions 90Specified subcontractor 91Novation 93Naming and nomination 98Difficulties in third party selection 103

4 Programming of the Subcontract Work 105Programme for work 105Programming differing trades 107Programming off-site or pre-site works 111

v

Programme changes and amendments 114Alternative arrangements 116Programme where the subcontract period is not defined 117Programming following delay 118Subcontractor’s programme 120Extensions of time 121Financial planning 125Extensions of time under other subcontract arrangements 126Coordination 126

5 Organisation and Management of the Subcontract 127Introduction 127Enquiry and tender 128Post-tender, pre-subcontract 129The subcontract 132Pre-site and off-site works 133On-site work 137Payment 141Completion of the works 143

6 Design Development 146General considerations 146The right to develop the design 147Limit of responsibility 149Design changes by the specifier 153Interface of design responsibilities 154Construction Design and Management Regulations 155Aims and objectives of the subcontractor’s designer 156Subcontractor’s design under JCT 157Further design information 158Programming design development 160Contractor’s Design Submission Procedures 161Payment for design 162Shop or fabrication drawings 162Supports and fixings 163Temporary works 164Consultant designers as subcontractors 166Finalisation of the Sub-Contract Agreement 168

7 Instructions and Variations 170The right to change 170Nature of change 171Instructions outside the subcontractor’s competence 173Pre-priced variations 173Nature of instructions 176Types of instruction 177Who may instruct 178Post-contract instructions 178Instructions relating to subcontractor design 180Instructions to vary programme 183

vi Contents

The effect of instructions 183Implementation of instructions 184Instructions requiring a change to work already carried out 184Necessary instructions 185Instructions resulting from discrepancies within the documents 187Timing of instructions 188Instructions other than in writing 190Instructions by third party 193Directions to cease work 194Duty to warn that instructions may give rise to defective work 196Duty to install to manufacturer’s instructions 197Instructions where there is no provision within the subcontract 199Acceleration agreements 200Instruction to omit the remaining work 203Instruction to use supplementary labour 204

8 Valuation of the Works 206Introduction 206Valuation of variations 209Contractor’s directions 222Pre-priced variations 223Enhanced rates 225Loss and/or expense 226Prolongation 233Underutilised resources 234Delay 236Acceleration 237Global claims 240Quantum meruit 244Pre-valued prolongation costs 246Works carried out by others 247Costs arising out of the preparation of an account 248Costs in pricing variations 249

9 Payment 251Requirements of the HGCRA 251Application of the HGCRA in practice 252Payment mechanism 254Sum due to the subcontractor 259Specific provisions in the SBCSub and ICSub forms 260Specific provisions under other standard forms 268Retention 270Discounts 275Capped price or expenditure 279Withholding payment 281Repayment of sums overpaid 287Works carried out off site 287Settlement 288Payments under several subcontracts 294Pay-when-certified clauses 295

Contents vii

Pay-when-paid 298Interest 301Financing costs 308Payment of an adjudicator’s decision 312

10 Completion 319General principles 319The effect of completion 320Completion of the subcontract works 321Practical completion 324Sectional completion and partial possession 327Beneficial use or occupation 329Notification of completion 330Special cases 331Failure to complete on time 332Guarantees 334

11 Breach of Contract 336General principles 336The subcontractor’s obligations for quality 336The subcontractor’s obligations by reason of the specification 339The subcontractor’s obligations for time 341Loss and/or expense 346Establishing the obligation 352Temporary disconformity 353Contractor’s right to rectify the subcontractor’s defects 359Differing obligations 362Interruption to the progress of subcontract works 363Obligations of the contractor 364Valuation and payment by the contractor 364Omission of work to enable it to be done by another 365

12 Determination of the Subcontract 367Introduction 367Determination by agreement 368Determination under the subcontract 368Determination by the contractor 369Determination by the subcontractor 380Determination because of the contractor’s failure to pay 383Determination on the grounds that progress is insufficient 385Determination when time is of the essence 389Determination by way of a term incorporated from another contract 390Determination at common law 392Wrongful and invalid determination 396Suspension 397

13 Damages 401General 401Reasonable performance 402The burden of proof 403

viii Contents

Where neither party is at fault 404Damages from and to the subcontractor 405Settlement between contractor and employer 406Delay to the subcontractor’s work 411Damages when delay due to two or more subcontractors 415Undervaluation of the work 419The measure of damages 420Pre-ascertained damages 423Failure to pay by the final date for payment 426Damages where no agreed subcontract sum 428Timing of entitlement 429Damages for latent defects 432Costs of an expert’s report 433Recovery of preliminary costs 435Contribution to head office overheads 440Exclusion and limitation clauses 442Loss of overheads and profit 445

14 Sub-subcontracts 447Introduction 447Incorporation of terms 447The subcontractor’s obligations 448The sub-subcontractor’s obligations 449Instructions and variations 450Payment 451Determination 452Disputes 452Extension of time 452

15 Works Contracts under Management Contracting Arrangements 454Introduction 454Management contracting 454Loss and/or expense by works contractor 455Loss and/or expense by management contractor 458Extension of time 459Dispute resolution 460Name borrowing 462Adjudication/arbitration under the name borrowing provisions 468Rights of third parties 468

16 The Legal Approach 470Introduction 470Construction of the subcontract 471Obligations of the parties 474

17 Dispute Resolution 475Nature of a dispute 475What is a dispute 476When does a claim become a dispute? 476Claim or counterclaim 478

Contents ix

Presenting a claim 480Contractor’s difficulties – combining disputes under

differing contracts 483Methods of dispute resolution 487

18 Adjudication 490Introduction 490The process 490Nature of adjudication 491Matters that may be referred 492The parties to the adjudication 493The referral 494Notice of adjudication 496Appointment of an adjudicator 498Jurisdiction of the adjudicator 499The response to the referral 501Replies and further details 501Costs of adjudication 502The decision 503Enforcement 504

19 Statutes 514Introduction 514The Housing Grants, Construction and Regeneration Act 1996, Part II 514The Late Payment of Commercial Debts (Interest) Act 1998 522Contracts (Rights of Third Parties) Act 1999 526

Table of cases 528Index 538

x Contents

Definitions

Contractor employing contractor or subcontractorEmployer ultimate employer under the head contractEmployer’s agent any person named in the main contract to represent the

employerHead contract contract between the ultimate contractor and the

employerMain contract contract between the contractor and anotherSubcontract contract between the contractor and the subcontractorSubcontractor employed party

CDM Construction (Design and Management) Regulations 1994CECA/6th Civil Engineering Contractors Association Form of

Subcontract July 1998CIC/Nov Agr Construction Industry Council Novation Agreement, for use

where the appointment of a consultant is to be novated from an employer to a design and build contractor

CLL City of London Law Society standard novation agreementDBSub/A JCT Design and Build Sub-Contract AgreementDBSub/C JCT Design and Build Sub-Contract ConditionsDOM/1 The subcontract conditions for use with the Domestic

subcontract DOM/1 Articles of AgreementGC/Works/1 General Conditions of Government Contracts for Building

and Civil Engineering WorksHGCRA Housing Grants, Construction and Regeneration Act 1996IC Intermediate Building Contract for works of simple content,

issued by the Joint Contracts Tribunal LtdICSub/A Intermediate Sub-Contract AgreementICSub/C Intermediate Sub-Contract ConditionsICSub/D/A Intermediate Sub-Contract with subcontractor’s design

AgreementICSub/D/C Intermediate Subcontract with subcontractor’s design

ConditionsICSub/NAM/A Intermediate Named Sub-Contract AgreementICSub/NAM/C Intermediate Named Sub-Contract ConditionsICSub/NAM/IT Intermediate Named Sub-Contract Invitation to TenderICSub/NAM/T Intermediate Named Sub-Contract TenderJCT The Joint Contracts Tribunal LimitedLADs Liquidated and ascertained damagesLPCDIA Late Payment of Commercial Debts (Interest) Act 1998MF/1 Model Form of General Conditions of Contract, issued by

the Joint IMechE/IEE Committee

xi

NEC/Sub The Engineering and Construction Sub-ContractRTPA Contracts (Rights of Third Parties) Act 1995SBC Standard Building Contract, issued by the Joint Contracts

Tribunal LtdSBCSub/A JCT Standard Building Sub-Contract AgreementSBCSub/C JCT Standard Building Sub-Contract ConditionsSBCSub/D/A JCT Standard Building Sub-Contract with Sub-Contractor’s

Design AgreementSBCSub/D/C JCT Standard Building Sub-Contract with Sub-Contractor’s

Design ConditionsSCDP Sub-Contractor’s Design PortionScheme Scheme for Construction Contracts (England and Wales)

RegulationsShortSub JCT Short Form of Sub-ContractSub/MPF04 Major Project Form of Sub-ContractSub/Sub JCT Standard Form of Sub-subcontractWorks Contract/1 The Standard Form of Works Contract for Works

ContractorsSection 1 Invitation to TenderSection 2 Tender by Works ContractorSection 3 Articles of AgreementWorks Contract/2 The Standard Form of Works Contract for Works

Contractors with whom the Management Contractor contracts in accordance with clause 8.2.1 of the JCT Management Contract 1998 Edition

xii Definitions

Preface

This book has been written to be of interest to all those professionally concernedwith the subcontracting of building work. It has not therefore been written aboutspecific forms of subcontract, but about the wider issues of subcontracting in theindustry. It does, however, relate the more general issues to the specific terms ofthe subcontract for use with the JCT Standard Building Contract, SBCSub, andsimilar forms for use on projects of differing size and complexity.

While the primary aim of this book is to set out good practice for those procuring and carrying out subcontract work, whether working as general contractors or for a specialist trade contractor, the secondary objective has been to identify practical difficulties, which the author has personally encountered over several decades of professional involvement, and present solutions as regardsboth the practical and legal issues. Inevitably this book challenges many estab-lished perceptions, and in particular those incorporated from main contract prac-tice, which on examination have been found to be inappropriate to the subcontractsituation.

On a conservative estimate there are probably 20 to 25 subcontracts for eachmajor building contract. However, relatively few books explore the problems par-ticular to the relationship between the contractor and its subcontractors. What ismore, the number of decided cases relating to subcontract issues is equally dis-proportionate to those concerning main construction contracts. As a result, in theauthor’s view, this lack of authority and commentary on subcontracts has led to afailure by those preparing both standard and non-standard forms of subcontract,as well as those compiling Sub-Contract Documents and formal agreements, tocreate workable subcontract arrangements.

One of the consequences of the statutory provision for adjudication is that independent third parties are deciding a much larger number of contractor/subcontractor disputes, as a means of resolving differences on construction projects. At the same time the courts are deciding fewer disputes and as a conse-quence the law is not developing alongside the cases being decided.

Historically it has been predominantly main contractor and employer disputesthat have been decided by the courts, and such decisions may or may not be rele-vant to the contractor/subcontractor relationship. While certain issues, such as theprovision for liquidated damages, may not be generally applicable to subcontract-ing, other issues such as the obligation as to time, and issues concerning the com-pletion of the work, require a different approach from that under the StandardBuilding Contract.

A major purpose of reporting the decided cases of the courts has been to ensureconsistency of approach between judges. One consequence of the lack of publishedrecords of disputes decided by adjudicators, and indeed arbitrators, is a failure tohave a consistent approach. One aim of this book is to develop a common under-standing of subcontracting issues by discussing the most common matters that lead

xiii

to disputes between contractors and subcontractors and by identifying the relevantlaw, thereby leading to a common approach.

Traditionally, subcontracts have been considered and written to reflect the oblig-ations of the contractor under the main contract so as to be a ‘minor’ or ‘secondary’version of it, with the aim of creating ‘back to back’ obligations. However, the con-tractual relationship between a contractor and a subcontractor, with the associatedintegration of the work of a number of individual subcontractors, is significantlymore complex than exists in a main contract. This is because, in a normal contrac-tual situation, there is only one party who supplies goods and services to another,with no associated contractor interfaces. However, for many building subcontrac-tors, in addition to having an on-site interface with other trades, there may be asignificant amount of their work performed off-site, both of which restrict the sub-contractor’s freedom of operation.

The results of these differences are discussed following the experiences of theauthor over many years of working in the construction process and in a largenumber of disputes referred to adjudication and other dispute resolution processes.

In preparing this edition I have considered and referred to material in my pos-session in the summer of 2006.

xiv Preface

Chapter 1Tenders

Introduction

A tender for subcontracted work will normally be initiated by a request from thecontractor for such an offer. Rarely in subcontracting will the concept of an openoffer, such as commonly arises for the supply of materials, apply. An open offer isone where, for example, a supplier advises a number of prospective clients that itcan supply materials of a certain type for a specific price or under certain termsand conditions. A specific exception may be the offer to subcontract for the supplyof labour and/or plant and equipment on an hourly rate basis.

Tenders for the supply of labour and materials will normally be job specific andwill be offered following a request to tender from the contractor. Such requests mayarise either when the contractor itself is tendering for work or after the award ofthe main contract. The method of enquiry may be very formal, with a letter oftender to be completed by the tenderer and accompanied by forms of contract,amendments, health and safety plans, drawings, specification, outline programmeand other documents. Or the request may be very informal, requiring a price fora simple schedule of work or for work of specific nature shown on a drawing ordrawings.

However the enquiry may be set out, the offer is only what it is said to be in thetenderer’s response or offer. The terms of enquiry will only be incorporated intothe offer if the offer expressly says so. If A is asked to price for building in bricksbut prices to build in blocks and says so, then he has made an offer to build inblocks and not bricks.

In theory, a subcontractor’s offer is open for acceptance at any time unless it hasa time restriction on it or is withdrawn before acceptance. Many requests to tenderwill require the offer to be open for acceptance for a specific period and generallytenderers will be happy to comply. However, in the event that a tenderer wishesto withdraw its offer at any time before acceptance, it will normally be able to doso without sanction. For example, if it discovers an error in its tender, then a tenderer can withdraw its offer either entirely or withdraw it and replace it with a revised bid.

Many offers may be made in such a way that they do not in fact comprise a trueoffer open to acceptance without further discussion and/or agreement. A tendermade in the form ‘If this tender is of interest we would wish to discuss further. . .’ is not an offer that is capable of acceptance, or if accepted it will leave suchmatters undecided and liable to conflict. Alternatively, the offer may state that ithas not complied with all the conditions of the enquiry. Common exclusions mayrelate to a requirement for the subcontractor to have visited the site, considered theterms of the main contract, etc. The offer may be made subject to a visit to site,

1

review of the main contract requirements, etc. Such offers enable a subcontractorto price a project with the minimum of effort and leave matters not easily valuedfor consideration only if its bid is otherwise attractive.

Contract of tender

Generally, subcontractors tendering for work under English law will not have anyentitlement to be paid for their work in preparing a tender. The common law doeshowever provide the subcontractor with some rights to have its offer properly con-sidered. In the Court of Appeal case of Blackpool & Fylde Aero Club Ltd v. BlackpoolBorough Council [1990] 3 All ER 25, CA, Lord Justice Bingham said:

‘A tendering procedure of this kind is, in many respects, heavily weighted in favour ofthe invitor. He can invite tenders from as many or as few parties as he chooses. He neednot tell any of them who else, or how many others, he has invited. The invitee may often,although not here, be put to considerable labour and expense in preparing a tender, orig-inally without recompense if he is unsuccessful. The invitation to tender may itself, in acomplex case, although again not here, involve time and expense to prepare, but theinvitor does not commit himself to proceed with the project, whatever it is; he need notaccept the highest tender; he need not accept any tender; he need not give reasons to justifyhis acceptance or rejection of any tender received. The risk to which the tenderer isexposed does not end with the risk that his tender may not be the highest (or as the casemay be, lowest). But where, as here, tenders are solicited from selected parties all of themknown to the invitor, and where a local authority’s invitation prescribes a clear, orderlyand familiar procedure (draft contract conditions available for inspection and plainly notopen to negotiation, a prescribed common form of tender, the supply of envelopesdesigned to preserve the absolute anonymity of tenderers and clearly to identify the tenderin question and an absolute deadline) the invitee is in my judgment protected at least tothis extent: if he submits a conforming tender before the deadline he is entitled, not as amatter of mere expectation but of contractual right, to be sure that his tender will after thedeadline be opened and considered in conjunction with all other conforming tenders orat least that his tender will be considered if others are. Had the club, before tendering,enquired of the Council whether it could rely on any timely and conforming tender beingconsidered along with others, I feel quite sure that the answer would have been “ofcourse”. The law would, I think, be defective if it did not give effect to that.’

European competition tendering law applies to public bodies and therefore doesnot directly refer to subcontracts. However, as it is likely that subcontractors willbe required to tender on the basis that they have knowledge of, and accept, theterms of the main contract, it could be argued that there is implied into the invi-tation to tender to the subcontractor, the principles of the European competitivetendering rules. Further, on many large and/or prestigious projects, significantsubcontract packages may be procured by some procedure involving the employer,when it is likely that the public procurement directive may either apply or beimplied into the procedures.

Specialist contractors’ tenders, frequently by their nature, make competitive tendering on a price-only basis unsuitable. Such tenders may involve patented orlicensed products, which unless they are preselected by competition, will require

2 The Law and Management of Building Subcontracts

selection on merit as well as cost. In the case of Harmon CFEM Facades (UK) Ltd v.The Corporate Officer of the House of Commons (2000) 67 Con LR 1, the correctness ofthe selection of the cladding contractor for Portcullis House, the new building forMembers of Parliament, was considered in a very lengthy judgment.

The body inviting tenders needed to balance the requirement for confidentialityand for fairness by advising all tenderers as to the priorities for selection, and thoserequirements were derived from an implied contract within the tendering process.Judge Humphrey Lloyd said:

‘In my judgment, even though all tenderers accepted that they would not be entitled to see alternatives of detail which were considered to be commercially confidential to agiven tenderer, the House of Commons, in soliciting new or revised tenders under theEuropean public works regime, impliedly undertook towards any tenderer which sub-mitted a tender that its submission would be treated as an acceptance of that offer orundertaking and:

(a) that the alternative submitted by any tenderer would be considered alongside a com-pliant revised tender from that tenderer; and:

(b) that any alternative would be one of detail and not design;(c) that tenderers who responded to that invitation would be treated equally and fairly.

These contractual obligations derive from a contract to be implied from the procurementregime required by European directives, as interpreted by the European Court, wherebythe principles of fairness and equality form part of a preliminary contract of the kind thatI have indicated. Emery [author of Administration Law] shows that such a contract mayexist at common law against a statutory background which might otherwise provide theexclusive remedy. I consider that it is now clear in English law that in the public sectorwhere competitive tenders are sought and responded to, a contract comes into existencewhereby the prospective employer impliedly agrees to consider all tenderers fairly.’

Later the judge considered the necessary requirements for fairness in making theselection on a basis of ‘overall value for money’ or that which is ‘most economi-cally advantageous’ and put his decision in these words:

‘The principles of transparency and fairness require a tenderer to know, without doubt,what objective criteria are going to be applied and, as Regulation 20 makes clear, their order of importance. All the criteria have to be stated – this is obvious but it is nowmade clear by Article 30(2) of Directive 93/97 – and to be identifiable as such, eitherbecause they are grouped in the same place or because they are clearly marked out.Indeed, the requirement that they should be stated in descending order of importance isperhaps the most significant pointer to the need for the criteria to be clearly identifiableas such.’

Obligation post-tender

In certain circumstances there may be an agreement, either express or implied, asto the binding nature of a quotation. There is no reason why a major subcontrac-tor, or indeed other subcontractors, may not agree to be bound by their offer to acontractor, if at tender stage, as suitable consideration, it is agreed that the sub-contractor’s offer will be accepted if the contractor is awarded the main contract.

Tenders 3

While this is not a situation that often exists in the British contracting industry itappears to be common in Canada.

The case of Northern Construction Co Ltd v. Gloge Heating & Plumbing Ltd (1984)6 DLR (4th) 450, although phrased by the judge as being about ‘how may accep-tance become communicated so as to be binding upon the tenderer’, is about thepotentially binding nature of a quotation when offered. In that case the subcon-tractor wished to avoid the subcontract because it had underpriced the work, but,it is submitted, the principle would have been the same had the contractor soughtto use a cheaper price from another bidder. Among the facts found by the judge,at page 452, was that:

‘It was agreed that the custom of the industry would then dictate that any subcontractorinterested in bidding to the general contractor would arrange with the owner to procurea set of plans, specifications and tender documents from which it would prepare its pricesand make up its bid. It would also know from the documents how long the owner had toaccept a bid after tenders had been opened.

It was acceptable practice in the industry for some subcontractors to hold back bids untilthe last possible moment and that the general contractor would not make up its finaltender price and tender until a matter of an hour or less before the closing time.

The supposed rationale behind it was the fear on the part of some subcontractors thatif they submitted their bids earlier, there was a risk that somehow their competitors wouldfind out the numbers and adjust their later bids accordingly. The practice was referred toas “bid shopping”.’

Under this procedure Gloge submitted a low bid shortly before the closing time.Northern then challenged Gloge to confirm their bid, which the judge recorded, atpage 453, as follows:

‘Bernard [Estimator for Northern, contractor] said that he then called Simons [estimator for Gloge, subcontractor] back on the telephone and informed him of these facts withoutmentioning specific figures. He also asked Simons if he had used the same figures in Gloge’sbids to other general contractors and, if so, was he prepared to commit Gloge to the figuressubmitted. It is Bernard’s clear recollection that Simons said yes to both questions.’

The tender acceptance procedure was found by the judge to be:

‘According to the tender documents, the Department of Transport had 30 days after theopening of tenders to scrutinise the tenders for the purpose of ensuring that the low bidwas indeed lowest and that everything else was in order. During this period and one 30-day extension allowed, the Department of Transport was entitled to hold all tenders openfor acceptance and would then confirm in writing that a particular tender was accepted.Upon acceptance, the general contractor would then confirm the contract with its subcontractors.’

The judge then reviewed a number of Canadian cases covering the law of bothmistake and offer and acceptance, citing the decision in The Queen in right of Ontarioet al. v. Ron Engineering & Construction Eastern Ltd [1981] 1 SCR 111, which con-sidered that under the tendering arrangements used between those parties therewas a two-stage contractual agreement which the judge, at page 461, described as follows:


‘First, contract A comes into being upon the submission of a bid in response to an invitation to tender. Contract A is a contract collateral to contract B, the formal construc-tion contract. Under contract A, the tenderer agrees to the terms and conditions set out in the call for tenders and undertakes to keep his tender open for the period of time set in that call. Contract B is a formal document consistent with the terms worked out incontract A.’

What Northern Construction shows is that contrary to normal English practice itis possible, by agreement, to conclude a binding subcontract at some stage in themain contract tendering process, which binds the contractor and subcontractorwithout further negotiation. Such an agreement might make the subcontractor’soffer binding either on the submission of the contractor’s own offer or at the timethe contractor could no longer withdraw its offer. Any such arrangements shouldbe reciprocal but need not be so.

Another form of tender agreement may relate to the availability of productioncapacity. In such circumstances a specialist subcontractor is given the opportunityto tender on an undertaking that the necessary factory capacity will be held openuntil the result of the tender for the main contract is known.

A major factor in post-tender negotiations may involve the availability of pro-duction capacity. A specialist subcontractor with spare capacity may be preparedto offer a very competitive price on the basis that production will be carried out ina specified period, which either becomes a condition of the subcontract or may beconsidered as a reason for damages if the work is not made available until laterthan anticipated.

Conversely a specialist subcontractor negotiating with several contractors, inconnection with different projects may, before negotiations are concluded, fill itscapacity and have either to advise the contractor that its offer is no longer open orthat, owing to changed circumstances, it must increase its price to cover for over-time working and/or extend the delivery time.

Many specialist subcontractors are dependent on the availability of materialsand/or subcomponents from others. In some cases late procurement may meanthat the materials are no longer available within the required time-scale, while inother situations they only become available through stockists at premium rates. Itis for the subcontractor to qualify its tender as necessary to safeguard its position.

Specialist trades know the specific difficulties of their branch of the industry andshould make their bid safeguarding, as far as possible, the risks set out above. Itwill be for the contractor to recognise these and plan its procurement with theseproblems in mind.

Where the employer, or the employer’s design consultant, wishes to make aselection as to a subcontractor to carry out specific parts of the contract Works, hemay, either before the appointment of the main contractor or shortly after, invitetenders from the proposed subcontractor or prospective subcontractors. The inten-tion here is that the selected subcontractor will become a subcontractor of the con-tractor, either by assignment, by novation or under specific arrangements such asnomination or naming under the ICSub/NAM form.

Under the ICSub/NAM form the subcontractor, by way of its offer and by com-pleting form ICSub/NAM/T, undertakes, depending on the circumstances at thetime of tender, to conclude a subcontract with the contractor, either on notificationthat the employer and the contractor have entered into the main contract or on

Tenders 5

receipt of a copy of the architect/contract administrator’s instruction in relation tothe relevant provisional sum.

Under these arrangements both the contractor and the subcontractor makeundertakings to the employer that they will conclude a subcontract on termsdefined by the employer with the company selected by the employer to be con-tractor and subcontractor. Only by reason of any specific terms of their offers willeither party not be bound, in the event of their offer being accepted by theemployer, to contract with the other.

Nature of the tender

Where a contractor sends out a detailed enquiry stating the obligations it requiresthe prospective subcontractor to price and allow for in its offer, including theundertaking to enter into a formal agreement in stated terms, then in the absenceof any statement to the contrary it is likely that any tender submitted in responseto such an enquiry will be deemed to incorporate the requirements of the enquiry.

Exceptions to this general presumption may include agreement to any particu-larly onerous or unusual terms not expressly drawn to the tenderer’s attention, the incorporation of documents which are not in general use and not provided tothe subcontractor, and matters where the law requires the express agreement of theparties.

Conversely, where the prospective subcontractor’s tender refers to other terms and conditions, then those terms and conditions will be the basis of that offer. Complications will however arise where the tenderer incorporates orexcludes from its offer certain matters either listed or referred to in the enquiry orprovided by the subcontractor within its offer, but makes no reference to the otherdocuments or conditions within the enquiry. It will be for the courts or other tri-bunal to decide whether and to what extent other terms can be incorporated byreference. The most likely situation will be that, where the offer is stated to be basedon express provisions this will be the limit of the express terms, while where the offer makes exclusions the remainder of those matters in the tender enquirywill stand.

Defining the extent of work included within an enquiry and/or offer is muchmore problematic than it appears. Phrases such as ‘everything necessary for theinstallation’ or ‘necessary for the proper functioning and operation’ of the sub-contract works, will in practice frequently not create the certainty sought. Wherethe design is complete prior to the enquiry and/or offer, then reference to specificcomponents shown on detail drawings will normally fully define the scope of thesubcontract work. However, such details are often not available at the time of thesubcontractor’s offer; as many specialist subcontractors will have a design ordetailing function, there will only be outline or schematic drawings available at thetime of tender.

Subcontractors and/or contractors frequently seek to clarify the scope of workby listing either the items expressly included or excluded in the enquiry or offer.While such lists may help to clarify matters, a list may be deemed to be completeand in the case of exclusions to suggest that everything else is included. Inevitablythe construction of the resultant subcontract will be defined by the particular circumstances and express words of the offer and/or enquiry.


Reference is frequently made to the case of Williams v. Fitzmaurice (1858) 3 H &N 844, where the judge had to consider the meaning of the requirement of the spec-ification that the house should be ‘completed dry and fit for occupation’. The courtfound that, despite there being no reference to fitting floor boards in the specifica-tion, floor boards were necessary for the house to be occupied and were thereforenot to be considered an extra to the contract. The judge said, at page 849:

‘The main question in this case is whether the plaintiff was bound by the contract to putin the floors. He contracted that for [£1,100] the house should be “completed dry and fitfor occupation by the 1st of August, 1858”. It is clear that the house would not be complete or fit for occupation without floors.’

While this decision may be of assistance in deciding whether the subcontract hasor has not included subcomponents, it is less useful in deciding interface activities,which can be a major cause of dispute. Such items as the supply and installationof cover flashings or movement joints between components are frequently illdefined in subcontracts. The supply and installation of building services can leadto a wide range of disputes including the extent of building work, such as theforming and making good of holes and chases and/or the provision of fixings andsupports for both plant and distribution pipes and ducts.

Amended tenders and other pre-contract requests

Specialist subcontractors and suppliers are often approached either to provideassistance and guidance on the basis that they will ultimately be invited to tenderfor the work involved, or post-tender are requested to provide alternative samples,proposals and tenders on the expectation that they will be given the subcontractfor the work. Generally such work will not be extensive and the prospective sub-contractor will be content to provide it on a gratuitous basis.

While the law recognises that where an offer is made in response to an enquiryto carry out construction work, it will be presumed that such offer is made withoutcharge, in other circumstances where there is a request to perform a service, it willbe presumed that on completion of that service the party will be entitled to a rea-sonable sum for carrying it out. Where such service is provided on the under-standing that the party will be given the opportunity to tender, or post-tender thereis an indication that it will be awarded the subcontract for the work, then it maybe considered that payment for such further work will be recovered from the anticipated profit that the subcontractor will make from the work.

This situation was considered in the case of William Lacey (Hounslow) Ltd v. Davis[1957] 1 WLR 932. While this case to an extent reflected the unusual circumstancesof post-war reconstruction and the requirements of the War Damage Commission,the judge held that, in the expectation of being given the contract for building work,the builder had at considerable expense provided a number of revised tenders andother details for various schemes for the same development. Mr Justice Barry said,at page 934:

‘Mr Daniel [Counsel for William Lacey] rightly conceded that if a builder is invited totender for certain work, either in competition or otherwise, there is no implication that he

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will be paid for the work – sometimes the very considerable amount of work – involvedin arriving at his price: he undertakes this work as a gamble, and its cost is part of theoverhead expenses of his business which he hopes will be met out of the profits of suchcontracts as are made as a result of tenders which prove to be successful. This generallyaccepted usage may also – and I think does also – apply to amendments of the originaltender necessitated by bona fide alterations in the specification and plans . . . It may alsohappen – as it certainly did happen in the present case – that when a builder is told thathis tender is the lowest and led to believe that the building contract is to be given to him,he, the builder, is prepared to perform other incidental services at the request of the build-ing owner without any intention of charging for them as such. He is not – [Counsel forWilliam Lacey] suggests – rendering these services gratuitously, but is content to be rec-ompensed for them out of the profit which he will make under the contract.’

And at page 935:

‘Now, on this evidence, I am quite satisfied that the whole of the work covered by theschedule fell right outside the normal work which a builder, by custom and usage, normally performs gratuitously, when invited to tender for the erection of a building.’

The judge made it clear that the contractor’s entitlement to payment was largelybecause it had been led to believe that the contract would be awarded to it, andthat it could expect to recover its costs via the contract sum, at page 939:

‘I am unable to see any valid distinction between work done which was to be paid forunder the terms of a contract erroneously believed to be in existence, and work done whichwas to be paid for out of the proceeds of a contract which both parties erroneously believedwas about to be made. In neither case was the work to be done gratuitously, and in bothcases the party from whom payment was sought requested the work and obtained thebenefit of it. In neither case did the parties actually intend to pay for the work otherwisethan under the supposed contract, or as part of the total price which would becomepayable when the expected contract was made. In both cases, when the beliefs of theparties were falsified, the law implied an obligation – and, in this case, I think the lawshould imply an obligation – to pay a reasonable price for the services which had beenobtained . . . In my judgment, the proper inference from the facts proved in this case is notthat this work was done in the hope that this building might possibly be reconstructedand that the plaintiff company might obtain the contract, but that it was done under amutual belief and understanding that this building was being reconstructed and that theplaintiff company was obtaining the contract.’

The judge concluded with the words, at page 940:

‘The old-fashioned purpose of an estimate may become an almost subsidiary one, andbuilders may be called upon to perform all kinds of services and provide all kinds of infor-mation quite unconnected with the submission of a tender. I find it difficult to think thatany injustice will result if building owners, who obtain the benefit of all these servicesupon the understanding that a contract is to be given, should be required to make somepayment for them, if they subsequently decide that the contract is withheld.’

Where subcontractors are being requested to carry out alternative pricing and/orprovide details for consideration by the contractor, they should make it clear to the


contractor the basis on which such work is being carried out and the likely timingfor provision of such information, together with any requirement for payment inthe event that they are not given a subcontract for the work. Likewise, a contrac-tor seeking alternative offers should make it clear when it requires such furtherinformation and should obtain agreement that the timetable will be met. It mustbe acknowledged that specialist subcontractors become increasingly reluctant toprovide unpaid information, and a contractor may find it beneficial to have a for-malised agreement with consideration for the provision of such additional details.

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Chapter 2Contract

Formation

A contract can be said to exist where there has been an offer from one party, whichhas been accepted by the other, provided there is provision for consideration fromthe one party to the other for the benefit obtained. The contract must also bebetween parties legally capable of forming a contract, who having reached anagreement intended to create a legally binding arrangement.

A binding contract need not be in writing to be enforceable, but in the event ofa dispute a decision may be difficult without any suitable written evidence. Wherework is carried out at the request of one party and/or with its knowledge, the otherparty may be granted the value of the service in restitution.

The Housing Grants, Construction and Regeneration Act (HGCRA) applies onlyto construction contracts in writing. The HGCRA sets out at section 104 what ismeant by a construction contract, and at section 105 the definition of ‘constructionoperations’ and a list of operations not ‘construction operations’. Section 106 makesthe HGCRA not applicable to construction contracts with residential occupiers, butit will apply to subcontractors to such contracts. Section 107 defines a contract inwriting for the purposes of the HGCRA. For full details of these sections seeChapter 19, on statutes.

The definitions of contracts in writing, as defined in section 107 (2) to (5), showthat these may include situations where there is not strictly a contract at law. Theprovisions of this section have been tested in the courts in the cases referred to inthe section ‘Failure to conclude an agreement’ later in this chapter.

Work contracted for

The subcontractor, by giving a ‘quotation’ or ‘estimate’, makes an offer in which itsets out what it is prepared to provide and the price it requires for doing so. Suchan offer will generally result from a request from the contractor, which may requirethe offer to comply with a substantial and detailed set of enquiry documents.Unless specifically stated to comply with these documents, the subcontractor’soffer will be for whatever it says it is for and under the terms and conditions statedin that offer.

A period of negotiation will often follow, during which the detailed arrange-ments of the subcontract will be negotiated between the parties until full agree-ment is reached, or in the absence of full agreement until some other action createsa contractual situation.

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Agreement between the parties may be recorded either by an acceptance letteror by articles of agreement signed by both parties. Either way the agreement willlist the relevant documents comprising that agreement.

SBCSub/C at clause 2.1 sets out the subcontractor’s obligations and requires itto carry out and complete the subcontract works in compliance with the Sub-Contract Documents, and specifically refers to the health and safety plan and statu-tory requirements. In addition, the subcontractor is to conform to all directions and reasonable requirements of the contractor that regulate the carrying out of the main contract. The works are to be carried out in a proper and workmanlikemanner. Finally, the subcontractor is to give all statutory notices relevant to thesubcontract work.

ICSub/C incorporates an identical clause, and SBCSub/D/C, ICSub/D/C andDBSub/C all contain additional sections outlining the subcontractor’s obligationsfor design, to the effect that the subcontractor is to comply with instructions fromthe contractor for the integration of the subcontractor’s design with the design ofthe main contract Works.

The documents are annexed to the Sub-Contract Agreement (SBCSub/A) andscheduled at section 15 of the Sub-Contract Particulars. It must be stressed that theSBCSub/C Conditions do not in themselves define the obligations of the parties;without the clear incorporation of other documents, which define matters such asscope of works, specification, price and time, these essential elements of the sub-contract will be uncertain.

Under SBCSub/C clause 2.4, quality and workmanship depend on the type andstandards described in the Sub-Contract Documents, so far as procurable and tothe reasonable satisfaction of the architect/contract administrator, or of a standardappropriate to the Sub-Contract Works. Clause 2.4 has five sub-clauses defining therequirements for the quality of the works:

1. The materials and goods for the subcontract works are to be as described withinthe Sub-Contract Documents, but this requirement is qualified as being ‘so faras procurable’. However, there is provision for the subcontractor to seek consentfrom the contractor to substitute other goods and materials.

2. Workmanship is also to be of the standard described in the Sub-Contract Documents.

3. Goods, materials and workmanship are required to be to the reasonable satis-faction of the architect where described as being to his approval. Where there isno standard specified, then the quality is to be ‘appropriate’ to the subcontractworks.

4. The contractor may require, and the subcontractor is to provide, reasonableproof that the materials and goods used are compliant with the subcontract.

5. The subcontractor is also required to take positive action to encourage itsemployees to be qualified under the Construction Skills Certification Scheme.

ICSub/C and ICSub/D/C incorporate at clauses 2.3.1 and 2.3.2 the same provi-sions as SBCSub/C clauses 2.4.3 and 2.4.5. There is no obvious reason for omittingthe other three clauses, especially the requirements of clauses 2.4.1 and 2.4.2, unlessit is considered that they contain an implied obligation in which case there is noneed for an express provision within SBCSub/C.

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Sub/MPF04 sets out the subcontractor’s general obligations at clause 1, whichhas two sub-clauses:

1. A general obligation to carry out the completion of the design work and the con-struction work in accordance with the subcontract.

2. The subcontractor undertakes that it has the competence to do the work andwill provide the necessary resources, including design staff to satisfy the require-ments of the CDM Regulations.

Sub/MPF04, by the use of the phrase ‘in accordance with the Sub-Contract’,places more reliance on the Sub-Contract Documents than either the SBCSub orICSub forms.

In contrast, ShortSub has a list of six short sub-clauses under the general headingof ‘Subcontractor’s obligations’. Sub-clauses 1 to 3 can be compared with clauses2.4.1 to 2.4.3 and 2.4.5 of SBCSub/C. These sub-clauses provide that:

1. The subcontractor is to use due diligence and carry out the work in a good andworkmanlike manner to completion.

2. As with SBCSub, the goods, materials and workmanship are to be to the stan-dard stated, and where none is stated they are to be of satisfactory quality.

3. Again as with SBCSub, the subcontractor is to encourage its employees to obtainqualifications under the Construction Skills Certification Scheme.

Contractors frequently rely on the details of their enquiry documents and seekto relate the subcontractor’s tender to those. As mentioned above, the subcontrac-tor’s tender or offer will be for what it says it is, regardless of what the contractorhas requested or what the subcontractor has priced for and/or incorporated in itssum. Thus, where the subcontractor’s offer is for ‘all work as necessary’ or ‘asdetailed on the drawings and in the specification’, the subcontractor will beunlikely to be able to claim additional sums if, at a later date, it finds it has failedto allow for certain items covered by such a description. On the other hand, wherethe subcontractor’s tender includes a detailed schedule of the work and it is sub-sequently found that certain work, required by the contractor, has not beenincluded in that schedule, then the subcontractor will be entitled to payment forsuch work as an addition.

In the Court of Appeal case of Boynton and Another v. Willers [2003] EWCA Civ904, it was found that the contractor’s quotation listed a number of items of workwith prices against each. It was claimed that the contractor had not included forthe bay windows, which were not separately listed. Further, although the contrac-tor constructed the bays it failed to include them in its invoices, which the employersuggested implied that they were not in fact additional work. Lord Justice Potter,rejecting the appeal, said at paragraph 28:

‘28. Assuming that the finding was justified on the evidence (and, despite encouragementto the defendants at the stage leave to appeal was granted, no transcript of the relevantparts of the evidence has been obtained) it sounds the death knell to Mr Smith’s [Counselfor Boynton’s] submission upon construction. Even if the evidence did not justify a findingof actual agreement, i.e. a common subjective contractual intention that the bays beexcluded from the quotation, the judge was in my view right to conclude that the absence


of any reference to such construction of the bays in the quotation, viewed against the con-tractual background, meant that they were indeed excluded. So far as that backgroundwas concerned, the judge found that, in contrast to his view of the defendants, the claimantwas in all respects an honest, reasonable and accurate historian. It was the claimant’s evi-dence that, at the time the quotation was given, the parties had not decided upon theprecise type of detailing of the bays to be constructed, in which circumstance it is clearthat accurate assessment of the costs of the bays would have been impossible. Given thatthey were a major item in respect of which the necessity for a quoted price would havebeen apparent in the interests of both parties, and given that not even a p.c. [prime cost]sum was provided for in the quotation, the reasonable and businesslike construction ofthe quotation was that it did not cover the construction of the bays.’

In the subcontract situation it will normally be for the contractor to define thework to be carried out by specific subcontractors. Even where there is no uncer-tainty in the contractor’s invitation to tender as to the work it requires the sub-contractor to price, the subcontractor’s offer will only include for the work that itsoffer states is included.

In post-tender negotiations the contractor may seek to obtain agreement fromthe subcontractor that its offer has included for the work identified within theenquiry document. It will require very clear evidence that the subcontractor hasagreed to provide for work excluded from its accepted offer if there has been noconsequential increase in the subcontract sum. Such a situation existed in the Courtof Appeal case of Carillion Construction Limited (trading as Crown House Engineering)v. Ballast plc (formerly Ballast Wiltshire plc) [2001] EWCA Civ 1098, where Lord JusticeAldous said, at paragraph 39:

‘39. I will come to the evidence as to what happened at the meeting on 8 November, butit seems improbable that Crown House would warrant that their works, set out in therevised specification, were the same in extent as that required by the employer. They knewthat they were not and that [representative of employer] had suggested that the two didnot equate. Further, it seems highly unlikely that Crown House would agree to completeall the employer’s requirements for the price tendered for carrying out the works in therevised specification. The whole purpose of the revised specification was to indicate theworks they would do for the price quoted. Their estimators had worked upon the basisof the revised specification and to agree to different works for the same price withoutdetailed consideration would appear unlikely.’

In this he was supporting the judge at first instance, who he quoted at paragraph51, as follows:

‘I preferred the evidence of Mr Fox [an employee of Carillion] of the claimant becausehaving very carefully priced their tender on a specific basis, it seemed to me whollyimplausible that experienced and competent businessmen such as those representing theclaimant would already [readily] alter the basis of their written tender without any cor-responding alterations, or recalculation or [of] price. I was not impressed with the evi-dence of Mr Peat [employee of Ballast] for the defendants on this point, which, as I havesaid, was repetitive on the subject of employer’s requirements and whose evidencesmacked of the benefit of hindsight.’

In situations such as this, contractors often rely on phrases such as ‘the work willcomply with the employer’s requirements’ or ‘as specified’. Such phrases are often

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held by the contractor to mean that the subcontractor will undertake all the workrequired by the employer. Without clear wording it is more likely that such a phrasewill only mean that the work priced will be to the employer’s requirements or to the specification, and not that the scope of the works is for more than stated inthe offer.

In the Carillion case, the subcontractor had defined in its offer the work it wasprepared to undertake, and had stated:

‘Only those systems and services described in the foregoing paragraphs have beenincluded in our tender.’

In his judgment in Carillion Lord Justice Aldous makes this distinction, at paragraph 37:

‘37. The documents make it quite clear that as of 22 October Crown House’s tender wasbased on carrying out work set out in the revised specification subject to the exclusionsthat they had pointed out. No doubt their work had to be carried out to the standardrequired under the main contract. However, they were not agreeing to carry out all theelectrical and mechanical work required by the employers.’

Further difficulties can arise where the subcontract is let under a design andbuild contract and the contractor has the job of completing the design producedby the employer’s design consultants. During the design development it may befound that components have been underdesigned or that a saving made in oneelement leads to increased costs in another. Similarly, coordination of different ele-ments such as services may require a change in a component size or in its routingthrough the building. It will require express wording in the subcontract to relievethe contractor from the obligation to pay for such changes. In general terms, theliability or benefit for any change in cost will rest with the party making the change.

In the Scottish case of Miller Construction Ltd v. Trent Concrete Cladding Ltd (4August 1995, unreported), Trent had contracted to design a reinforced concretestructure that incorporated precast elements which Trent were to supply andinstall, and in situ concrete work the design and construction of which they sub-contracted to Miller. This concrete work included the structural topping to theprecast double-T floor slabs.

A number of interface disputes arose for which Miller sought additionalpayment by way of variations to their subcontract. These areas included the con-nection between the in situ stair and service cores and the treatment given to thedouble-T slabs prior to the concrete topping. Lord Penrose had to consider Trent’sbasic argument that where there was an obligation to design and build, the oblig-ation was to do all that was necessary to provide a complete structure. As LordPenrose put it, at page 86:

‘The defender’s argument relied, in the first place, on the proposition, vouched by Hudson[author of Hudson’s Building and Engineering Contracts], that a contractor may be obligedto carry out, within a lump sum contract price, work which is not mentioned specificallyin any of the technical documents incorporated in the contract but which the generaldescription of the scope of the works nevertheless indicates must have been contemplatedby the contract as part of those works.’
