When a spade's not a spade

When any contractor receives a package of tender documents, it comes as no surprise to see a schedule of amendments to one of the standard forms of building contract. One amendment that comes up time and again states that all subcontractors engaged by the main contractor are to be classified as domestic subcontractors. The purpose of this amendment is to prevent the main contractor raising the argument that subcontractors were nominated by the employer.

The difference between the classification of a subcontractor as domestic or nominated can have significant consequences. For example, in the JCT Standard Forms, where a subcontractor is nominated by the employer and is responsible for delay, the main contractor will be entitled to an extension of time (but not loss and expense). Clearly where a project is delayed as a result of the performance of a subcontractor and the main contractor is facing liquidated damages, being able to argue that the subcontractor is nominated, irrespective of the label attached to this subcontractor in the contract, is an attractive proposition. Further, classification of a subcontractor as nominated can have favourable consequences for valuation purposes (in claiming for attendances, overheads and profit).

When might a main contractor be able to argue that a subcontractor should properly be classified as nominated rather than domestic? There is remarkably little case law dealing directly with this issue. But one case is that of St Modwen Developments Limited vs Bowmer & Kirkland Limited (1996). Here the contract between the parties stipulated a fairly standard procedure for the procurement of domestic subcontractors:

• the main contractor could choose whichever subcontractor it wished; or
  
• a list of potential subcontractors may be inserted into the Bills of Quantities by the employer and the main contractor may at its sole discretion choose a subcontractor from that list.

The procedure was not followed. "The general practice was for the architect or engineer on behalf of St Modwen Developments to obtain quotations from specialist subcontractors for design supply and installation of the specialist work. When the appropriate subcontractor was identified by the design team, an instruction was given by Bowmer & Kirkland [B&K] to expend the relevant provisional sum by placing an order with the specialist subcontractor chosen exclusively by the design team."

The judge did not go so far as to say that they were actually nominated subcontractors, but the procedure used meant that they were treated as though they were. For B&K, this meant that they were entitled, pursuant to the valuation provisions, to claim for attendances, overheads and profit.

Given this case and general legal principles, the label attached to a particular subcontractor will not necessarily determine that subcontractor's status. What will be of greater significance is the actual procedure used in the procurement process. The key question is the level of control the main contractor was able to exercise in relation to the choice of subcontractor. If the main contractor is allowed to make an unfettered decision, then any subcontractor engaged will properly be a domestic subcontractor.

However, the waters become muddied where:

• a list is provided consisting of fewer than three potential subcontractors
  
• the employer interferes with the main contractor's choice
  
• the employer interferes with the procurement process, and/or
  
• the employer ignores objections from the main contractor as to the engagement of a particular subcontractor.

In the above scenarios, the main contractor's control over the selection and subsequent performance of particular subcontractors is lessened and it becomes more difficult to justify placing responsibility on the main contractor for the performance of the subcontractor. Given the decision in Bowmer & Kirkland, and the general principle that a spade doesn't become a shovel by calling it a shovel, the circumstances leading to the appointment of any subcontractor will be as important, if not more so, than the actual label attached to the subcontractor.

Despite increasingly clever amendments to the standard forms of contract, an employer still can't call a nominated subcontractor a domestic subcontractor. Contractors should be wary of simply accepting the labels attached to particular subcontractors, particularly given the potentially significant benefits of challenging that label.