Issues in drafting PPP subcontracts
MARTIN PRESTON* considers some of the key issues to be addressed in drafting subcontracts for PPP projects.
01 October 2012
WHEN advising the sponsors on a public-private partnership (PPP) project, part of Norton Rose’s role is to draft the subcontracts under which the project company’s obligations under the concession agreement are passed down to the subcontractors responsible for the construction and operation of the infrastructure/facility.
The key issue in drafting these subcontracts is to ensure that the subcontractor’s obligations are “back-to-back” with the relevant obligations of the contractor. Often, the parties seek to achieve this by simply stating that the subcontractor’s obligations are back-to-back with those of the contractor.
However, this approach is clumsy at best and may not be adequate to reflect accurately the agreement of the parties. For example, it is unlikely that the subcontractor will be performing all the obligations of the contractor (not least because this is prohibited by most forms of contract, including the Fidic forms). Consequently, a statement of this type does not define with any degree of certainty exactly what it is that the subcontractor has to do.
A contractor should ensure that all relevant obligations are passed down to the subcontractor, including any requirements in relation to the timing of the performance of those obligations and any liabilities if those requirements are not met. For example, if the subcontract works have to be completed by a certain date either because there is a specific requirement in the main contract or because they are on the critical path, then the subcontract needs to state clearly this obligation and the liquidated damages (or other liabilities) that will result if this date is not achieved.
A prudent contractor would, if practical, require the subcontractor to complete such works prior to the date by which they have to be completed under the main contract to minimise the risk of any liability crystallising under the main contract (although there is a danger with this approach that any liquidated damages levied under the subcontract before the contractor incurs any liability to pay liquidated damages under the main contract could be held to be penal and unenforceable if the clause is not properly drafted). If there are any delays to this date that entitle the contractor to an extension of time under the main contract, then any such entitlements should be passed down to the subcontractor.
Additionally, if the contractor itself is responsible for a delay, there needs to be a mechanism to grant the subcontractor an extension of time in relation to such delay even if the contractor’s culpability means that it is not entitled to a corresponding extension of time from the employer. Otherwise, the completion date and liquidated damages under the subcontract may be unenforceable and the subcontractor’s obligation replaced by one to complete within a reasonable time.
Of course, the different values of the contract and the subcontract are likely to mean that the quantum of liquidated damages under the subcontract (and, indeed the overall cap on the subcontractor’s liability) is less than the corresponding liability of the contractor to the employer but, at least, by considering and addressing these issues the contractor is able to mitigate these risks.
A practical issue to be considered is the timing of notices and/or actions by either the contractor or the subcontractor. For example, if the contractor is required to provide information to the employer within, say, 30 days, and some of that information is to be provided by the subcontractor, it would be prudent for the contractor to impose a shorter period for provision of that information under the subcontract to give the contractor the opportunity to review the information before it is submitted to the employer.
Another area where the contractor will want to seek a shorter period under the subcontract than is contained in the main contract is in relation to termination. If the contractor is in breach of its contract due to the failings of a subcontractor, it will want to have the option to terminate that subcontractor’s employment and appoint a replacement subcontractor to cure the default (or seek to cure it itself) before the employer exercises its rights to terminate the contractor’s employment under the main contract.
In relation to payment, the contractor is likely to want the time periods under the subcontract to be longer than those in the main contract, as it is likely to want to receive payment from the employer before it has to pay the subcontractor. The ideal position for the contractor in relation to payment would be to incorporate a “pay when paid” clause so that the subcontractor is not entitled to payment unless the contractor has received payment from the subcontractor. Needless to say, such clauses are not popular with subcontractors who generally argue that they should be paid for work done irrespective of whether or not the employer has made the equivalent payment to the contractor, and such clauses have been prohibited by statute in the UK.
Other key areas to ensure consistency between the main contract and the subcontracts are termination events and consequences, what constitutes force majeure and the implications of the occurrence of a force majeure event. This is particularly so in relation to termination for prolonged force majeure. The contractor will not want to be in a position where its contract with the employer is terminated for prolonged force majeure and it has to terminate the subcontract for convenience because it does not have a corresponding right under the subcontract, as the payment on termination for each of these events is likely to, or at least should be, different.
Finally, dispute resolution needs to be considered. The contractor should seek joinder of disputes arising out of the same or similar facts under the main contract and its subcontracts so that it is not at risk of inconsistent decisions under different contracts.
* Martin Preston is partner at Norton Rose (Middle East) LLP Dubai office. Norton Rose Group is a leading international legal practice with offices in Europe, Asia Pacific, Canada, Africa and the Middle East, and Latin America and Central Asia.
With a combined team located in the Abu Dhabi, Bahrain and Dubai offices, Norton Rose (Middle East) LLP is able to provide both contentious and non-contentious support to financiers, developers, contractors and specialist contractors in the region.
Legal queries can be addressed to Norton Rose (Middle East) LLP through Gulf Construction magazine at editor@gulfconstructionworldwide.com.
