Completion of the scope of works is obviously a key objective of all sub-contractors. On account of hidden risks, however, this can be difficult to achieve, while various red-flag issues may remain, following take-over.

In this article, we, therefore, shall look at some key pitfalls for sub-contractors to consider in the context of take-over as well as during the defects liability period (DLP).

CONSTRUCTION PERIOD

Before the issue of take-over becomes relevant, the sub-contractor clearly needs to successfully complete its scope of sub- contract work. However, this can be a challenging process, in respect of which various onerous contractual provisions can significantly impact the unwary. For example, the sub-contractor’s scope may not be well, or exhaustively, defined, and/or may vaguely cross-refer to the main contractor’s scope under the main contract.

An ambiguously defined scope of sub-contractor works is dangerous; this can lead to ‘scope creep’, meaning that the sub- contract can be construed to impose additional works than the sub-contractor envisaged – and duly tendered – for the same fixed contract price and time for completion. The ramifications of this can be significant; the subcontractor’s profit margin can be severely diminished while performing additional and unanticipated works, which obviously take time. This, therefore, brings into play the prospect of delay and the spectre of liquidated damages.

Payment issues constitute a further challenge that sub-contractors frequently face. All too frequently, main contractors in the market are experiencing cash-flow difficulties that prevent them from making timely payments to their sub-contractors. Further, unless an express assignment has occurred – which is very seldom the case – a sub-contractor has no legal basis to directly approach the employer for payment.

When a main contractor has competing financial commitments, the issue of priorities inevitably arises, and it is, therefore, important that the sub-contractor has sufficient leverage to secure payment ahead of other creditors. This can be achieved by ensuring that the sub-contractor has included an express right to suspend performance in the event of non-payment.

The prospect of suspension can constitute a powerful incentive to make payment, as the main contractor’s works will be delayed, thus exposing the main contractor to liability under the main contract, if the sub-contractor ceases to perform.

Additionally, the employer may, for the good of the project, be willing to make direct payments to sub-contractors, if the main contractor’s non-payment has triggered the sub-contractor’s right of suspension.

While suspension rights exist at law, it can be arguable as to when such suspension rights can be properly exercised, and the main contractor may allege that rather than legitimately suspending performance, the sub-contractor has actually abandoned the sub- contractor works, thus ‘turning the tables’ on the sub-contractor and exposing the sub-contractor to significant risk.

Pay-when-paid payment mechanisms – that is, the sub-contractor is only entitled to payment once the employer has paid the main contractor for the sub-contractor’s works – are a further difficulty, and such clauses are often insisted upon by main contractors. Notwithstanding the often compulsory nature of pay-when-paid clauses, it can be possible to include drafting that mitigates the potential harshness of such payment mechanisms. Such safeguards may include requiring the main contractor to

substantiate the position regarding payments under the main contract and demonstrating the actions that the main contractor has deployed to recover payment.

Further approaches may be to seek to implement certain thresholds that apply to the pay-when-paid mechanism. For example, it could be commercially agreed that payments of less than a certain amount will fall outside of a pay-when-paid mechanism or that of the pay-when-paid structure, if subject to a longstop date. In other words, it could be agreed that outstanding payments shall become due, even if they have not been received by the main contractor by a certain date.

TAKE-OVER AND DLP

Even though the sub-contractor may have adequately completed its designated scope of sub-contractor works, this may be insufficient for the sub-contract works to be formally accepted and for a taking-over certificate to be duly issued. Indeed, it is not unusual for the sub-contract to provide that the sub-contract works shall only be deemed to have been completed upon acceptance by the employer. In practice, this means that the sub-contract works will not be accepted until the main contract works have been taken over by the employer under the main contract.

Given that it is likely that the main contractor’s scope will take longer – sometimes significantly – to complete than that of a sub- contractor’s scope, the sub-contractor may well be left in a ‘state of limbo’ for quite some time. This situation will be exacerbated and complicated if disputes that may well have nothing to do with the sub-contractor arise between the employer and the main contractor. Issues that flow from this situation can include the need for the sub-contractor to maintain in place its performance security as well as possibly its insurance policies until its works have formally been taken over.

Extending performance security and insurance policies can have a meaningful cost consequence. Additional concerns are that the return of any retention is likely to be delayed while manpower and resources may need to be deployed in maintaining the sub- contract works until the works have been finally taken over.
Once a project has been taken over, it becomes a revenue-generating asset, and the DLP commences. Defects identified at take-over should be set out in the taking-over certificate together with a reasonable timeframe within which such defects in the sub- contractor works are to be remedied.

It is important that the timeframe within which defects are to be corrected is achievable, as the main contractor will typically reserve the express right to correct defects at the sub-contractor’s cost, if the sub-contractor fails to do so within the designated time. Further red-flags include: (a) Sub-contract DLPs that run concurrently with the DLP under the main contactor, in respect of which the aforementioned comments regarding taking over refer to; and (b) ‘Replenishing’ DLPs that are not subject to a long-stop date – that is, the concept that the DLP starts again, in respect of any defects rectified during the DLP.

CONCLUDING COMMENTS
While sub-contracts can be difficult to negotiate, it is nevertheless important that sub-contractors identify key ‘red-flag’ issues, such as the ones identified in this article and ensure that adequate mitigants are in place.

Euan Lloyd, Senior Counsel, Al Tamimi & Company, writes a bi-monthly column on legal issues relating to building construction, exclusively for Climate Control Middle East. He may be contacted at E.Lloyd@tamimi.com