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Are your subcontracting arrangements as loose as a goose?

14 August 2012

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​The importance of clear and careful subcontracting arrangements has been underscored by two recent High Court decisions.

We look briefly at the cases and draw some practical advice from them.  This is particularly timely given the Christchurch rebuild.

The subbie who escaped liquidated damages

Waiotahi Contractors Limited had the head contract with the Whakatane District Council to build a pump station.  The successful tender was based on a quotation from Concrete Structures (NZ) Limited (CSL) for the design of the concrete work and related physical works. Before being awarded the subcontract CSL had suggested that "the subcontract agreement will probably end up in the bin" and sure enough, after winning the job CSL sent Waiotahi's proposed standard form back unsigned.

The project was late being completed and the Council imposed liquidated damages on Waiotahi of $47,500.  Waiotahi sued CSL, blaming it for the delay and claiming it was an implied term of the subcontract that CSL would be bound by the terms of the head contract, including the liquidated damages clause. 

On appeal, the High Court rejected the claim.  It applied the well known test that a term can be implied into a contract only when it is so obviously the (unexpressed) intention of the parties that it “goes without saying”. 

Here, CSL clearly had no intention of being bound by the terms of the head contract, including the liquidated damages term.  It might well have been possible to imply a more general term, that the works would be performed in a sufficiently timely and complete fashion to enable Waiotahi to complete on time, but no such general term had been pleaded and argued at trial.  As a result, the appeal failed and the opportunity to claim general, as opposed to liquidated, damages was lost.

The subbie who was gazumped

Leighton Works (a joint venture between Leighton Contractors Pty Limited and Downer EDI Works Limited) contracted with Transit New Zealand (now NZTA) to build a four lane motorway in Manukau linking SH1 to SH20.  The head contract included enabling works for the Manukau rail link.  In May 2009 Leighton Works sent a “request for tenders” to several subcontractors for substantial piling works.

GHP Piling (GHP) was the lead bidder.  However, in the quest for “best value for money”, Leighton Works later sent the request document to Brian Perry Civil and despite GHP submitting a considerably reduced price, Brian Perry won the job with a final tender price of $7.46 million. 

GHP Piling claimed that the request for tenders was the offer in the preliminary contract and that its tender submission was acceptance, resulting in a preliminary or “process” contract.  It claimed that the preliminary contract included implied terms that Leighton Works would act “fairly and equally” in its decision as to which party would be awarded the tender, that only conforming tenders would be considered and that Leighton Works was bound by the tender evaluation process they had proposed.  The claim failed.

Factors which were influential in the Court’s decision that there was no process contract included:

  • the absence of any registration requirement
  • the absence of a requirement for a deposit from tenders
  • the absence of a requirement for a formal tender procedure
  • the lack of detail in the tender documents regarding the conditions of the ultimate construction contract (tenderers did not even know what standard conditions would apply)
  • the absence of contract works specifications
  • the use of negotiation language
  • the lack of definition of important terms
  • the failure to specify what tender evaluation method would be adopted, and
  • the fact that there was no commitment to accept the tender that best complied with any criteria.

Chapman Tripp comments   

Do you need to review the looseness of your subcontracting arrangements?  In particular, are the terms on which you seek or respond to tenders always clear and do you pin down how the terms of the head contract and the subcontract interact?  Subcontracting arrangements tend to be less formal but the stakes can be high. 

When seeking tenders, why be shy of clarity?  Either expressly create a contractual tender process (for example to create enforceable obligations and limits on liability) or expressly state that there is no such contract. 

The “two contract analysis”, which sees the creation of a tender process contract followed by a substantive contract with the successful tenderer is well established and has had a reasonably high profile in the construction industry since the decision of the Court of Appeal in Transit New Zealand v Pratt Contractors Ltd. So too has the direct approach to denying any preliminary contract in Schelde v AG. Chapman Tripp acted for the successful parties in both these cases. 

These cases, however, provide a useful reminder of the benefits of not just knowing the legal principles but of making clear decisions about how to implement them in practice.

For further information, please contact the lawyers featured. 

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