JBCC: understanding the variances between nominated and selected subcontractors

These are defined as ‘nominated’ and ‘selected’ subcontractors agreements, and are separate, although interrelated, agreements from the PBA.

The employer appoints the principal agent and together they appoint the contractor. The contractor, subject to consultation with the principal agent, is entitled to appoint further contractors – nominated subcontractors or selected subcontractors – to carry out portions of the works.

The allocation of risk, responsibilities and consequences of termination vary depending on the nature of the subcontract.

Appointment of subcontractors

Nominated subcontractors are nominated by the principal agent for appointment where there has been compliance with the tender requirements and a contract instruction is issued to the contractor to appoint a subcontractor.

The contractor may refuse to appoint a nominated subcontractor against whom it has a reasonable objection or where the subcontractor fails to sign the contract or otherwise fails to comply with the tender requirements. In the event of the termination of a nominated subcontract – whether due to default or insolvency of the subcontractor or default by the employer or any of its agents - the employer will be liable for any variations in the costs of completing the subcontract works.

However, where termination arises due to the default of insolvency of the contractor, the contractor will be liable for any variations in the costs of completing the subcontract works.

Selected subcontractors are those selected by the contractor - in consultation with the principal agent - from compliant tenders received and in accordance with a contract instruction received from the principal agent. In the event of the termination of a selected subcontract due to the default of the employer or its agents, the employer will also be liable for any variations in the costs of completing the subcontract works.

However, unlike with the nominated subcontractor, the contractor is liable for any variations in the costs of completing the contracts works in the event of the termination of a selected subcontractor due to a default by the subcontractor. Importantly, in this form of subcontracting, the decision to terminate due to a default of the subcontractor lies with the contractor.

Additionally, there is no privity of contract between the employer and a subcontractor. This means that the subcontractor has no direct recourse against the employer where it has claims against the contractor under the subcontract which remain unsatisfied.

General subcontractor responsibilities and duties

Generally, a subcontractor has no obligations or interactions with the employer unless it is through the contractor in the performance of its functions.

For example, a subcontractor is not responsible for the design of subcontract works except for temporary works. Where, however, the subcontractor is appointed to design, supply and install an element of the works, the subcontractor submits the design documentation to the contractor for review by the principal agent or the relevant agent for conformity with the subcontract agreement and PBA and further indemnifies the contractor for consequences of the design and automatically cedes indemnities, warranties and other rights to the employer.

All contractual and other rights which the contractor has against the subcontractor from design responsibility are ceded to the employer at final completion or upon termination.

Under the subcontract agreement, subcontractors take full responsibility for the subcontract works until the issue of the interim completion or deemed achievement of the works. The risk in works passes to the contractor upon termination.

The subcontractor may be liable for loss or damage in respect of physical loss and damage to the subcontract works and the cost of additional professional services. Importantly, however, the subcontractor’s liability cannot exceed the value of the contract works insurance.

Much like the contractor, the subcontractor must provide guarantees within a specified time from acceptance of a tender. These are guarantees for construction which can be fixed or variable, and a guarantee for advance payment where required. In turn, the contractor provides the subcontractor a guarantee for payment.

It is the contractor, rather than the subcontractor, which is required to achieve practical completion. However, the subcontractor has an obligation to timeously remedy portions of the subcontract works which are listed on the list for practical completion under the PBA to assist the contractor in achieving practical completion. This extends to the defects list during the defects liability period.

For both nominated and selected subcontractors, where the contractor fails to provide proof of payment to a subcontractor within five working days of a notice by the principal agent, the employer may instruct the principal agent to certify direct payment to the subcontractor and recover that amount from the contractor.

Although procured through slightly different means, nominated and selected subcontractors have very similar obligations and duties. However, the variance of the risk allocation between the subcontractor, contractor and the employer depending on the type of subcontract used is an important consideration in these relationships.