How not to do it

Anyone who has read a typical construction sub-contract will be familiar with a clause which seeks to incorporate the terms of the main contract into the subcontract. From the main contractor’s perspective, such clauses are important to ensure that there are no gaps in its liability. In other words, if something goes wrong, the main contractor wants to make sure that the sub-contractor foots the entire bill.

Such arrangements are common, however, poor drafting can mean they may not have the intended effect and the recent case of Imtech Inviron Ltd (Imtech) vs Loppingdale Plant Ltd (LPL) is a prime example.

LPL entered into a framework agreement for works to be carried out at Stansted Airport. The works were instructed via a series of task orders and a series of purchase orders were then used to sub-contract certain of the works to Imtech. The framework agreement contained an adjudication clause which required the adjudicator to be one of three named persons. The purchase orders given to Imtech contained a clause which, at least on a first reading, appeared to pass down all the terms in the framework agreement.

A payment dispute arose between the parties and Imtech commenced an adjudication but did not use any of the three named adjudicators. Imtech was awarded over £640,000, however, at the subsequent enforcement proceedings, LPL argued that the adjudicator lacked jurisdiction as he hadn’t been appointed in accordance with the adjudication provision in the framework agreement. Imtech argued that this provision did not bite.

The important point here, as is so often the case in contract disputes, is that clarity is key

The relevant clause in the purchase orders provided that “The subcontractor shall perform and assume, as part of its obligations under this contract, LPL’s obligations, liabilities and risks contained within the [framework agreement] that relate to the carrying out of the task order and/or purchase order as if they were expressly referred to in the subcontract”.

Now, as I say, on a first reading one might believe that this brings in all the framework agreement provisions lock stock and barrel. However, now let’s look at it through the microscope of a lawyer and particularly at the phrase ‘that relate to the carrying out of the task order’ and you might see the difficulty in LPL’s case. What exactly is an obligation, liability or risk that relates to the carrying out of the task orders and/or purchase order?

The court found that it meant primary obligations which related specifically to the work to be carried out. This would cover clauses like materials and workmanship obligations but not “secondary obligations” such as procedural provisions like the adjudication clause. This interpretation was supported by a further clause in the purchase orders which referred to certain “secondary obligations” namely insurance and certain indemnity provisions (but not dispute resolution clauses) which were to be incorporated in the purchase orders.

The important point here, as is so often the case in contract disputes, is that clarity is key. The easiest way to pass down terms from a main contract to a sub-contract is to list out the terms which are to be incorporated so as to leave no room for ambiguity. Simply referring to the main contract in such general terms may not deliver the consequences that the drafter intended. In this instance, the decision was upheld but on another day, and with some different or more nuanced drafting, the court may have taken a different view.

Steven Carey is partner in the real estate, construction and engineering team at Charles Russell Speechlys