The FIDIC Subcontract for Works and Design & Build Subcontract

1. Introduction

FIDIC has launched a Subcontract for Works in 2011 and a Subcontract for Design & Build in 2019. For those who intend to pass down main contract duties to subcontract back-to-back with the Main Contract these two contract forms are a suitable support.

Naturally a subcontract is an ancillary contract depending on the existence of a main contract. Both contracts, the Main Contract and the Subcontract, are aimed at achieving the same objective or have a common subset of objectives. Subcontracts may be used for a great variety of services, inter alia: the execution and completion of permanent subcontract works, the design and/or the operation or maintenance of the subcontract works as well as mere supply of goods and materials or combined supply and assembly of equipment and plant. The procurement of subcontracts can be done in parallel to the procurement of the main contract but also much later.

From the point of view of main contractors, subcontracts are usually aimed at satisfying two different needs: Firstly, a third person (the subcontractor) will perform either the whole (if allowed) or parts of the works on behalf of the main contractor, being either unable or unwilling to perform the relevant works on its own. In this case, the main contractor remains fully liable to the employer under the main contract for all the actions, inactions or negligence of the subcontractor. Secondly, the subcontractor shall not cause detriment to the main contractor when performing the works and he should not be allowed or be able to claim more additional money and time under the subcontract than the main contractor may recover from the employer under the main contract. This principle is usually referred to as the back-to-back principle. It may be fleshed out by further elements like pay-when-paid clauses (ensuring that the main contractor will be able to finance the subcontractor from the main contract) and clauses ensuring a coherent and consistent dispute management (related disputes will be dealt with at the same time).

From the point of view of subcontractors, subcontracts typically have a limited scope but the subcontract works when completed are required to be fit for purpose under the main contract. Subcontractors are usually paid less than main contractors and frequently subcontractors do not have equal bargaining powers like main contractors when entering into the subcontract. Thus, subcontractors may perceive their engagements being that of a servant of two masters (the main contractor and the employer) for less money.

Subcontracts, like all type of contracts, are embedded in the governing law of the contract. Some legal systems provide definitions of subcontracts and dictate (mandatory) statutory terms which must be applied under subcontracts, like French law and Qatar law.  It is vitally important that users are aware of such statutory terms, when preparing and/or negotiating subcontracts.

In France Law 75-1334[1] provides:

Article 1

Pursuant to this Law, subcontracting shall be understood to mean the process by which a contractor entrusts, by means of a subcontract, and under its responsibility, all or part of the execution of a works contract or public contract concluded with the client to another person known as the subcontractor.

The provisions of this Law shall apply to transport operations, in which case the contractor shall be considered as the client and the co-contractor of the subcontracting transporter carrying out the transport operations shall be considered as the main contractor.

In accordance with French Law 75-1334 the subcontractor may directly claim payment from the employer albeit there is no privity of contract.

Law 22-1994 of Qatar provides:

Article (701)

1. The contractor shall be entitled to delegate the performance of the work, in total or in part to a subcontractor, if not prevented from doing so by a stipulation in the contract or the nature of the work does not require the personality of the contractor to be of regard.
2. Nevertheless the obligations of the original contractor towards the employer shall remain existing, and he shall be liable towards him for the works of the subcontractor.

Article (702)

1. The subcontractor and the workers working for the original contractor in performing the work shall be entitled to claim directly from the employer whatever does not exceed the amount with which he is indebted to the original contractor from the time of raising the law suit, and the workers of the subcontractor shall be entitled to such right against both the original contractor and the employer.
2. The subcontractor and the workers mentioned above shall have, when effecting an attachment with the employer or the original contractor, preference over the amounts due to the original contractor or the subcontractor at the time on which the attachment has been effected, and preference for each of them shall be in proportion to his right and such amounts may be settled to them directly.
3.  The rights of the subcontractor and the workers prescribed for by virtue of this article shall rank ahead of the rights of whoever the contractor has assigned his right to against the employer.

Thus, it is important that users carefully check whether laws, statutes or codes impose constraints on the parties’ contractual freedom under a particular subcontract[2]. For example, French courts have held that law no° 75-1334 (quoted above) belongs to the French international public order and cannot be carved out under any subcontract. If the construction site is located in France, law n° 75-1334 applies to any subcontract regardless of which governing law the parties to the subcontract have agreed to.

 

[1] Amended by Law No 98-69 of 6 February 1998, Article 11, Official Gazette of the French Republic of 7 February 1998.

[2] For example, the European Court of Justice held in Wolff & Muller GmbH & Co. KG v. Jose Filipe Pereira Felix, that national laws providing that a subcontractor is a guarantor for the minimum remuneration of their subcontractors’ employees were not, per se, violative of Directive 96/71 (concerning the employment of workers in the framework of the provision of services).

2. FIDIC Subcontracts

In 2011 FIDIC has published the FIDIC Subcontract for Works which goes back-to-back with the FIDIC Red Book (for Construction). In 2019 FIDIC has launched the FIDIC Conditions of Subcontract for Plant and Design Build. Both are suitable under the FIDIC Rainbow Edition 1999.

This new format shall help Contractors being involved in the construction of a project under the FIDIC Red Book and Yellow Book, 1999 Edition to subcontract parts of the Works to a subcontractor in a way which avoids unnecessary gaps in the chain of liabilities. The Subcontractor accepts to execute the Subcontract Works as if the Main Contractor would carry out the Works. If he fails to provide his servies properly and this results in liablity of the Main Contractor the Subcontractor shall hold harmless the Contractor from such liability. Additionally the Subcontratcor shall enable the Main Contractor to proceed properly under the Main Contract. Sub-Clause 20.1 of the Conditions of Subcontract requires the Subcontractor to give all notices and to Keep all records which are necessary in order to allow the Main Contractor to comply with the claims´ clauses under the Main Contract.

The Subcontract is not easy to read. Users should start to study the Subcontract together with the Main Contract. A typical feature of the Subcontract is that it merely refers to a clause under the Main Contract rather than to provide the reader with a full set of information. The parties to the Subcontract shall then read the Main Contract as if it had been changed for the purposes of the Subcontract, for example whenever the Main Contract uses the term “Contractor” then for the purposes of the Subcontract the “Subcontractor” is meant. Words under the Subcontract are used as defined in the Main Contract. However, there is never a rule without exception. Thus, users should be very careful in reading the Subcontract.

Once the parties to the Subcontract have acquainted themselves with the concepts and the wording they will understand that the General Conditions of Subcontract reflect the Main Contract (Red Book) in terms of the number of Clauses and the numbering of clauses. Thus, the Subcontract incorporates 20 Clauses. The clause headings are similar or the same than under the Main Contract.

3. FIDIC Subcontract Concepts

Some FIDIC concepts have to be emphasized:

(1) The Subcontract assumes that the Subcontractor should not enjoy the benefit of a Taking-Over Certificate before the Main Contratcor has received the Taking-Over Certificate under the Main Contract. Of course the parties may agree otherwise.

(2) Under the Subcontract the Subcontract Defects Notification Period ends when the Main Contract Defects Notification Period ends.

(3) The pay-when-paid principle as adopted under the Subcontract ensures that the Subcontractor will not get paid before the Main Contractor has received the relevant amount of money for the Subcontractor´s Performance under the Main Contract.

(4) The Subcontract provides for a back-to-back Claim procedure aimed to sensure that determinations of claims will be binding on both, the Main Contratcor and the Subcontractor, albeit the Subcontractor may only be entitled to a share of teh Main Contractor´s entitlement under the Main Contract.

(5) The Subcontract requires the Subcontractor to perform special Services, like notice giving, record keeping, etc. though the Subcontractor might even not have a financial or other benefit of it.

Under the FIDIC Subcontract for Works the Subcontractor´s main obligation is clearly specified in Sub-Clauses 2.2 and 4.1: it is to (design, wherever design is required) execute and complete the Subcontract Works and remedy any defects therein in accordance with the terms of the Subcontract.

4. Fitness for Purpose

Under common and civil law this implies that when completed the Subcontract Works shall be fit for the intended purpose[1]. This gives rise to two questions:

• Who defines the purpose of the Subcontract Works?
• Does the nature of the Subcontract, and the context in which it stands within the project, mean that there is an implied requirement that the Subcontract Works are fit for the purpose of the Main Contract Works?

It should be noted that fitness for purpose under the Subcontract does not automatically result in fitness for purpose under the Main Contract. Of course the Main Contractor may require, by expressly stating this in the Subcontract, that the Subcontractor completes the Subcontract Works so that they are fit for the purpose of the Main Contract Works. If the Subcontract includes such express wording it is beyond doubt that the Subcontractor must comply with it. If there are no such express words, does the Subcontract require the Subcontract Works to be fit for the purpose of the Works under the Main Contract … or merely fit for purpose under the Subcontract? Since there is no  express wording in the FIDIC Subcontract for Works as regards fitness for purpose, the question is whether it is to be implied under the Subcontract or under the law applicable to the Subcontract.

In this respect Civil Law and Common Law follow different approaches. While under Civil Law a subcontract has typically the nature of a locatio conductio operis resulting in the relevant legal framework being applicable, under Common Law the judge will have to proceed to derive from the facts whether the Subcontractor owes an implied duty to perform fit for purpose or not. However, regardless of which type of law applies it is recommendable to define the purpose of the Subcontract Works carefully in order to avoid disagreement and dispute with regard to the Subcontract scope of services and the resulting liabilities.

5. Miscellaneous

FIDIC Task Group N° 9 has completed the Design & Build Subcontract in 2019.

Siobhan Fahey (the former Chairwoman of TG 9) and Dr. Sebastian Hök (the current Legal Advisor of TG 9) are conducting FIDIC Subcontract courses on behalf of Nestor Bildungsinstitut and FIDIC in Copenhagen.

Dr. Hök has published a paper on the FIDIC Subcontract in Zeitschrift für deutsches und internationales Bau- und Vergaberecht (ZfBR) 2014, 315 et seq.