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5 More Unfair Subcontract Terms to Be Wary Of
Richard Hildrick
Guidance for Subcontractors - More Examples of Unfair Subcontract Terms
Here is a further selection of Subcontract Terms which we have encountered when reviewing Subcontract Orders for Subcontractors or when helping them to resolve disputes. They range from the unreasonable to the unfair, to the ridiculous - but Subcontractors must reject all such provisions before agreeing any Subcontract.
Note that it is the principles of each of the clauses which is most important - there are many wording/drafting variations out there which follow these 5 themes. More Unfair Terms have been posted on Linkedin already, and more will follow in a later blog.
If you have any issues with Subcontract terms, please call us for a free initial consultation on 01347 811155.
5 More Unfair Sub-Contract Terms for Subcontractors to be Wary of and What To Do About Them
1. PROTRACTED PERIODS FOR REVIEW & PAYMENT OF FINAL ACCOUNTS:
Example of Unfair Subcontract Term :
“The Subcontractor’s Final Payment Application shall be submitted within one month of completion of the Sub-Contract Works. Not later than 8 months after receipt of same the Contractor shall prepare and send to the Sub-Contractor a statement of the Final Sub-Contract Sum. The due date for the final payment of the amount set out in such statement shall be 2 months thereafter”.
• It is now very common to see such protracted final account payment periods, despite the Sub-Contractor being obliged to submit its final account within an often unreasonably short time of completion; the aim being to stop further Sub-Contractor claims being raised post-completion.
• To preserve cashflow entitlement, it is essential therefore that these final payment periods are reduced to the normal monthly payment terms, or alternatively that the interim payment schedule and associated conditions MUST provide for ongoing interim applications and payments throughout the final accounting period.
2. REMEASUREMENT OF LUMP SUM CONTRACTS:
Example of Unfair Subcontract Term :
“Without prejudice to Condition 32.1 (Lump Sum) the Sub-Contract Sum may be re-measured at the sole option of the Contractor who shall have the right to call for re-measure at any time upon notice to the Sub-Contractor and the Sub-Contract Sum may be reduced in accordance with any such re-measure. The Contractor shall be under no duty whether of fairness or otherwise, to elect for a re-measure”.
NEVER ACCEPT SUCH PROVISIONS – THE CONTRACTOR IS TRYING IT BOTH WAYS – I.E. A LUMP SUM WHEN IT SUITS HIM AND A REMEASURE OPTION WHEN THAT SUITS HIM - TO THE SUB-CONTRACTOR’S DETRIMENT
• Where a Sub-Contract Sum is on a Lump Sum basis, then the Sub-Contractor takes the risk AND the reward of any errors in quantification. Unless there are Variations or Loss/Expense, the Sub-Contract Sum is payable in full, without any adjustment.
• Re-Measurement is preferable when the Sub-Contractor has not prepared the quantities or doesn’t wish to take the risk of the quantities. However this must always be a 2-way adjustment i.e. Quantities are adjusted both up and down to reflect the actual amount of works executed.
• Contractor’s QS’ often try to remeasure works under Lump Sum Subcontracts, even when the above clause is not present. They cannot remeasure anything unless there has been a Variation, and this would be only on an ‘add & omit’ basis in respect of the specific change.
3. ATTENDANCES AND NON-AVAILABILITY OF ATTENDANCES:
Example of Unfair Subcontract Term :
“Responsibility for the provision of items of Attendance shall be as set out in Schedule 3. The Sub-Contractor acknowledges and agrees that it shall not be entitled to any extension of time or to any loss and expense and/or damages, arising from any failure on the part of the Contractor to provide any item of Attendance, or due to any loss of continuity of any item of Attendance”.
NEVER ACCEPT SUCH PROVISIONS – THE SUB-CONTRACTOR MUST BE ABLE TO ASSUME THAT ATTENDANCES WILL BE PROVIDED ON A CONTINUOUS BASIS
• Always check the Attendances Schedule carefully – errors and ambiguous entries are very common.
• If the Subcontractor is to provide an attendance item himself, then include the cost in the Sub-Contract Sum – do not have it denoted as an ‘optional extra’. MEWPs are the most common example of this, leading to arguments that the Sub-Contract Sum includes for the quoted weekly rate for the MEWP, for example.
• M&E Subcontractors should pay particular attention to how responsibility for Builder’s Work is allocated and defined.
4. SET-OFF:
Example of Unfair Subcontract Term :
“the Contractor may deduct from any sums due to the Sub-Contractor the amount of any claim/counterclaim for damages, losses, demands, expenses (including legal and other expenses), costs, future liabilities, consequential and indirect costs, which the Contractor may have against the Sub-Contractor under this Subcontract or any other contract between the parties”
NEVER ACCEPT SUCH PROVISIONS WHICH ARE AN ATTEMPT TO WIDEN YOUR LIABILITY SIGNIFICANTLY
• However, this type of provision attempts to widen the S/C’s liability to include the likes of: legal expenses, consequential costs, indirect costs, future liabilities. All of these represent open-ended risks and should always ring alarm bells.
• The above clause is particularly objectionable because it allows set-off of the Contractors claim – as opposed to his actual proven losses. Therefore it is open to abuse.
• The final part of this clause also introduces a cross-contract set-off provision, which allows set-off in relation to claims under other contracts. This should always be rejected.
• Subcontractors should always limit their overall risk by insisting on an overall limitation on their liability, at a % of the Subcontract Sum (excluding liabilities which legally cannot be limited) – even if a Set-Off provision is not in the contract.
5. IMPORTATION OF TERMS FROM OTHER CONTRACTS
Example of Unfair Subcontract Term :
“the terms of the Main Contract and of any agreements between the Contractor and any Third Party (in relation to the Main Contract Works), are hereby incorporated into this Subcontract. The Subcontractor shall be deemed to have reviewed all such documentation and shall observe all duties risks and obligations set out therein mutatis mutandis. The Subcontractor shall issue all early warnings, notices, and the like in sufficient time and detail to enable the Contractor to comply with the Main Contract, and shall indemnify the Contractor for all losses due to any failure to do so”.
• How can any Subcontractor comply with notification requirements which are in another contract that he has never seen – he doesn’t know what those requirements are.
• If the Main Contractor wants to step down any Main Contract provisions, he should expressly spell them out in the Subcontract, so that the SC can assess his risks and any impact upon his pricing or willingness to take the job on.
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The Power of Adjudication in the Right Hands Subcontractors often contact us only after months of wasted time and energy trying to get a Main Contractor to pay them - for Variations, for works completed, for extended prelims, or to release unjustified contra-charges or other deductions. They are usually extremely frustrated and often angry. And rightly so. Many Subcontractors even find that they can no longer even get hold of the Main Contractor’s staff who were previously so keen to talk to them about getting the work done. They are getting nowhere and in the meantime their cash remains in the Main Contractor’s hands. Our Subcontractor Clients tell us that their best decision was to call us rather than make another time-wasting call to the Main Contractor’s QS, who never answers anyway. Main Contractors don’t ignore our correspondence, they know that they can’t, because we have the power of adjudication up our sleeve, to deploy quickly and effectively on behalf of our Subcontractor Clients. And we have the experience required to obtain the best result for Subcontractors, at the minimum cost. A recent case for one of our Clients, a specialist Joinery Subcontractor, successfully addressed his inability to obtain payment of over £200,000 of contra-charge deductions from his account. Before our appointmant, the Main Contractor was adamant that he was entitled to keep all of this money, and wouldn’t entertain any of the Subcontractor’s efforts to resolve matters. However, once the Subcontractor made the wise decision to call RJH, we had his case in Adjudication within a week, and obtained an Adjudication Award for him within just over a month. The Adjudicator awarded our Subcontractor Client every penny of his £200,000+ by the way. The Subcontractor not only recovered his money, but also his valuable time which he can now direct towards running his business. And now he involves us from pre-contract stage to ensure that the risk of this happening again is minimised.
As a Subcontractor in construction, it is highly likely that you are only too familiar with the problem of contra-charges and other unjustified deductions from your account. The Main Contractor just takes your money as he likes and you feel powerless to do much about it. The following short story might resonate with you and also provide you with the answer: Phone a friend.
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Are you aware of the new reverse charge VAT rules coming into force from March 2021? 1st March 2021 will see the new reverse charge VAT rules for the construction industry being brought into force . Please contact Amanda amanda@rjhconsulting.co.uk if you would like us to send you some useful resources to guide you through the process, including: • Flowchart for PAYING A SUBCONTRACTOR • Flowchart for SUBCONTRACTORS • Sales invoice example taken from HMRC’s website NOTE: it is important to add the wording with regards to the reverse charge on your own invoice. What do you need to do? The new legislation has been brought in so that Subcontractors will no longer charge VAT to Contractors who are not end users of the subcontracting services they receive. The rules only apply to work carried out under the construction industry scheme (CIS) where both supplier and buyer are VAT and CIS registered. Are you a Subcontractor (supplier) who is NOT working for an end user? If you are VAT registered and carrying out work for a Building Contractor who is VAT registered and registered under CIS, you will no longer charge any VAT to the Contractor on your sales invoices – neither the labour nor materials. The vital points are that you are: 1. working for a CIS registered Contractor as a Subcontractor; and 2. both you and they are VAT registered. All these conditions must be met for the reverse charge to apply and VAT must no longer be charged. Do you employ sub-contractors under CIS as a contractor (buyer) and are NOT an end user? If you are VAT registered and so are your Subcontractor, they must no longer charge you VAT. Who is an end user? Contractors and Subcontractors will charge VAT as usual to end users, such as a domestic homeowner for whom you are building an extension or a manufacturer for whom you are building a warehouse. The Homeowner is neither a Contractor nor VAT registered, so a normal VAT invoice would be raised. The manufacturer may be VAT registered but is not a Contractor, so a normal VAT sales invoice would be raised. You do not need written notification they are an end user where it is obvious but always ask, just in case. It is possible for an end user to be VAT registered and CIS registered and, in this case, the reverse charge does not apply, VAT must be charged by the Subcontractor. This would occur if the end user employs you as a Subcontractor and there is no onward supply of yours or their building services. An example of an end user who is both CIS and VAT registered might be a housing developer building homes to sell on. You will need some sort of written notification (letter/contract/email) from your customer (the Contractor) to state that this is the case. If they are an end user, you must charge VAT. It is likely that large developers will have a good knowledge of the rules and will automatically guide you on how to bill them appropriately. CIS deductions The new VAT rules do not affect CIS deductions. They remain exactly the same as before with tax deducted from the sales invoice labour amount after VAT has been deducted. Where an invoice has no VAT added to it, the sales invoice total is now obviously the net amount for deductions purposes. Please contact Amanda amanda@rjhconsulting.co.uk if you would like us to send you some useful resources to guide you through the process, including: • Flowchart for PAYING A SUBCONTRACTOR • Flowchart for SUBCONTRACTORS • Sales invoice example taken from HMRC’s website NOTE: it is important to add the wording with regards to the reverse charge on your own invoice. RJH Commercial Consulting is sharing this HMRC information as a guide and for information purposes only, this document does not constitute advice or recommendations, please visit the HMRC website for full details.
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