Nominated sub-contracting

And the nominations are...

Employers sometimes wish to exert influence over the subcontractors employed on their project. Most standard forms of building contract enable the Employer to select a subcontractor, who is subsequently employed by the Contractor, via a "nomination" procedure. Employers may want this for a number of reasons, not least the peace of mind of working with a subcontractor with whom the Employer is familiar, and knowing that subcontractor is experienced, dependable, and, most importantly, solvent.

The key contractual difference between "nominated" and "domestic" subcontractors is that with domestic subcontractors the Contractor has the freedom of choice over which subcontractors to employ and the terms on which they are employed. Nominated subcontractors are selected by the Employer and the Employer negotiates the terms of the subcontract with the subcontractors and instructs the Contractor to employ that particular subcontractor. Employers should remember however that there are distinct disadvantages to nomination. For example, nomination relieves the Contractor of liability for design, compliance with performance specifications, subcontractor delay and selection of kinds of goods and materials (but the Contractor retains liability for poor workmanship and defects due to goods and materials being of poor quality). These disadvantages are discussed in more detail below.

In deciding whether a subcontractor is domestic or nominated, consideration should be given to whether the Employer provided the Contractor with a list of suitable subcontractors and how many subcontractors were on the list. The lower the number, the more likely is the court to find that the subcontractor was nominated. If the Contractor objected to one or more of the subcontractors on the list but that subcontractor was selected, this will add weight to the argument that the subcontractor was nominated.

Where a domestic subcontractor causes delay to the project the Contractor will bear the cost of that delay because the Contractor is deemed to have accepted responsibility for that subcontractor. If the subcontractor is nominated the Contractor will be entitled to an extension of time (for example under Clause 25.4.7 of the JCT Standard Form of Building Contract). This is because the Contractor has less control over the subcontractor's selection and therefore, performance.

A crucial feature of nomination is the extent to which a Contractor may be held liable for defective work carried out by a subcontractor. In the case of a nominated subcontractor the Contractor may be able to argue that he should not be held liable to the Employer for any defects in design, quality of materials or workmanship. On the other hand, a Contractor retains responsibility for the work of a domestic subcontractor as if no subcontracting had taken place.

The level of control exercised by the Contractor in the selection and employment of the subcontractor will also be a significant factor in deciding whether a subcontractor is nominated or not. If the Employer was directly involved in the negotiation of the subcontract, the argument that such a subcontractor is nominated has much greater force. It is important, therefore to consider not only what the building contract states, but also how that building contract was procured.

One method used by Employers to enable them to select subcontractors without the associated risks of nomination is to categorise all subcontractors as domestic subcontractor. This point was illustrated in the case of St Modwen Developments Limited v Bowmer & Kirkland Limited [1996], which concerned questions of valuation but in which the Court decided to look behind the label of "domestic subcontractor" and address the reality of the procurement process.

This case involved items of work for which provisional sums were included in the building contract. These items of work were stated 'to be undertaken by the subcontractors who are to be employed as domestic subcontractors.' The method of procurement for these subcontractors gave the Contractor a certain amount of freedom to select subcontractors similar to the procedure set out in the JCT Standard Form of Building Contract.

However, the procedure was not followed in this case. Instead the engineer on behalf of St Modwen Developments, ("the Employer") obtained quotations from specialist subcontractors for design, supply and installation of the specialist work and the Contractor was given an instruction to place an order with the chosen subcontractor. This, the court found, was an abuse of the procurement process and was nomination in all but name. The Judge did not actually state that the subcontractor was nominated, but for the purposes of the Contractor's final account he treated the subcontractor as nominated allowing the Contractor to claim for attendances, overheads and profit.

The important point to note from this case is that it is not necessarily sufficient to simply call a subcontractor "domestic", when in fact the subcontractor has been nominated. Of far greater importance is the level of influence and control that the Contractor is able to exercise to the choice of the subcontractor. Whilst labelling all subcontractors as "domestic" may show what the parties intended at the time of entering into the building contract, the court may look behind the words of the building contract and at the reality of the situation in which the building contract was carried out.

The recent Scottish case of Mowlem v Inverclyde Council [2003] however suggests that Employers may be able to have the benefit of choosing a subcontractor without the disadvantages of nomination in certain circumstances. This case involved a cladding subcontract that provided for "the design supply and installation of curtain walling…using Structal (UK) Ltd systems throughout." The Employer stated that the curtain walling was to be carried out by one of four short-listed subcontractors, even though the specification of Structal systems effectively meant that Structal was the only subcontractor able to tender, a fact borne out by the failure of the other three short listed subcontractors to tender for the works.

The building contract however provided that certain work was to be carried out by one of at least three subcontractors named by the Employer. If less than three of these subcontractors were willing and able to carry out the work, either the Employer or Contractor would add names of other subcontractors to ensure that the list of subcontractors always remained above three.

Structal subsequently withdrew its tender and the Employer's contract administrator started negotiations with another subcontractor, Nelson Tectonics, about the supply and installation of a different curtain walling system, Schuco. The contract administrator asked Nelson Tectonics to submit its price to the Contractor, which Nelson Tectonics did, advising the Contractor that the price had been agreed with the contract administrator. The quantity surveyor issued a revised tender which took account of Nelson Tectonics' contract price and which the Contractor agreed. An architect's instruction was issued to the Contractor removing the words "Structal (UK) Ltd systems" from the specification.

The Contractor argued that as Structal had withdrawn its tender, and the contract administrator had effectively negotiated a contract, including the contract price, with Nelson Tectonics, that Nelson Tectonics was a nominated subcontractor. In the first instance, the arbitrator agreed on the basis that the contract administrator, by making specific reference to Nelson Tectonics, had nominated the subcontractor.

The court, on the other hand, disagreed. Although Nelson Tectonics had been identified, it had not been "named" because "the naming of a subcontractor does not simply mean the identification or proposal of a particular subcontractor as happened in the case of Nelson, but the naming of a subcontractor with a view to its becoming a nominated subcontractor." The court found that whilst Structal was the only subcontractor capable of carrying out the design and manufacture of Structal system curtain walling that alone was not sufficient to make Structal a nominated subcontractor. Furthermore, the court found that the contract administrator had not required the Contractor to enter into a subcontract with Nelson Tectonics alone; the Contractor had been free to propose or subcontract with other subcontractors other than Nelson Tectonics. As Nelson Tectonics was not named as a subcontractor in the building contract, and the revised tender amount was not an instruction to the Contractor to accept Nelson Tectonics' tender, Nelson Tectonics could not be a nominated subcontractor.

This case was decided in the Scottish Court of Session in early October 2003 and takes an entirely different view to the earlier case of St Modwen Developments Limited v Bowmer & Kirkland Limited. It appears, at face value, that the Scottish Court will assist an Employer who wishes to take an active role in the selection of subcontractors but who does not want to accept the risks associated with it.

For further information contact Graham Cheeseman at [email protected]