Ireland: Links In The Chain: Recent Trends In Sub-Contracting

Is a sub-contractor required to proceed 'regularly and diligently' with sub-contract works?

The case of Leander Construction Ltd v Mulalley & Company Ltd [2011] EWHC 3449, heard before the Technology and Construction Court in the United Kingdom, recently considered the question as to whether a sub-contractor is under an implied obligation to a main contractor to proceed 'regularly and diligently' with the sub-contract works. The case provides useful guidance as to when a sub-contractor may be liable to a main contractor for losses suffered as a result of the sub-contractor's delay.

Background

Leander was a sub-contractor engaged by main contractor, Mulalley, to carry out various groundworks at a development site in London. The sub-contract entered into between the parties stated a commencement and completion date, but did not otherwise contain any contractual programme dates or provisions relating to the progress of the sub-contract works. Within approximately eight months it became clear that the sub-contract works were not being progressed in accordance with an activity schedule, which formed part of the sub-contract documents attached to the terms and conditions of the sub-contract.

Mulalley sought to rely upon the activity schedule and argued that Leander was failing to progress the sub-contract works so as to meet the dates within the activity schedule and was thereby allegedly causing delay to the main contract works. Mulalley attempted to set-off from interim payments due to Leander an amount as damages for delay in failing to meet the activity schedule dates. Mulalley issued withholding notices to Leander and Leander subsequently commenced proceedings to challenge the validity of the withholding notices.

Mulalley accepted that the activity schedule was not contractually binding, but maintained that Leander was under an implied obligation to proceed regularly and diligently with the sub-contract works; insofar as Leander was under such an obligation, the activity schedule represented the best way of demonstrating that Leander had failed to proceed with the subcontract works regularly (i.e. it failed to progress the works by the various dates indicated in the activity schedule). Leander denied that there was any such implied term in the subcontract and that it was only under an obligation to complete the sub-contract works by the contractual completion date. Leander further denied that the dates set out in the activity schedule had any contractual force.

Decision Mulalley pointed to the express termination provisions of the sub-contract as the basis for its argument that an implied term to carry out the works regularly and diligently existed. In particular, the termination clause allowed the main contractor to terminate the sub-contract if the sub-contractor: "... fails to proceed with the Sub-Contract Works regularly and diligently...". However the court did not agree with this line of reasoning and decided that just because Mulalley had a right to terminate for failure by Leander to proceed regularly and diligently did not mean there was a separate, stand-alone obligation to proceed with the sub-contract works regularly and diligently (following the decision of GLC v Cleveland Bridge and Engineering). Not every one of the matters identified in the termination provision anticipated a breach of an existing term of the sub-contract. To the contrary, the court thought that the termination provision showed that the parties intended termination to be the sole remedy for delayed progress prior to the sub-contract completion date occurring (liquidated damages were available to Mulalley after the completion date was passed).

The court further decided that it was not necessary to imply a term to proceed regularly and diligently to make the sub-contract workable (i.e. the business efficacy test), as the parties had already dealt with the subject of progress by including a date for completion of the sub-contract works. To imply a further term would be unhelpful and unnecessary. Mulalley was required to pay to Leander the amounts it had previously withheld.

Comment

This case provides useful guidance on a number of points. In the absence of an express, stand-alone provision, a subcontractor is entitled to progress its works as it chooses and may programme works at its discretion provided it completes by the date for completion stated in the subcontract. In order for a main contractor to withhold amounts from a sub-contractor as damages for delay prior to the date for completion having passed, it should make sure it includes an express contractual obligation on the sub-contractor to proceed regularly and diligently. For example, the FIDIC standard form of sub-contract (Conditions of Subcontract for Construction) includes a provision at Clause 8.1 that the sub-contractor proceed "...with due expedition and without delay".

Where a main contractor wishes to fully pass on to a subcontractor the risk of delay to completion of main contract works, it should ensure that any significant programme dates are passed down by inclusion in the sub-contract; either as separate sectional completion dates or as key dates that have contractual force (and include an appropriate extension of time mechanism for such dates). The CIF Conditions of Sub- Contract for use with the Public Works Contracts include an obligation at Clause 4(d) (1) that the sub-contractor "... shall carry out and complete the Sub-Contract Works to meet the requirements of the Main Contract programme...."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.