Subcontracts, assignment, novation, waiver and estoppel

AuthorJulian Bailey
Introduction 1530
Subcontracts 1531
(i) Denition 1531
(ii) Privity of contract 1531
(iii) Liberty to subcontract 1534
Subcontract terms 1537
(i) “Back-to-back” rights and obligations 1537
(ii) Symmetry of liability 1539
(iii) Arbitration 1540
(iv) Automatic termination of the subcontract 1544
Nominated subcontractor 1544
(i) Generally 1544
(ii) Allocation of risk 1546
(iii) Termination of a subcontract with a nominated subcontractor 1547
Payment to subcontractors 1548
(i) Generally 1548
(ii) “Pay-when-paid” clauses 1548
(iii) Nominated subcontractors 1548
(iv) Direct payment by owner to subcontractor 1549
(v) Trust in favour of subcontractor 1553
(vi) Statutory charge 1553
(vii) Statutory right to withhold payment 1553
(viii) Statutory right of employee of subcontractor to payment 1554
Collateral warranties provided by subcontractors 1554
Assignment 1554
(i) Introduction 1554
(ii) Assignment of contractual rights and debts 1554
(iii) Legal and equitable assignments 1555
(iv) Form of notice of assignment 1557
(v) Future or contingent rights 1558
(vi) Assignment of the benet of a collateral warranty 1558
(vii) Assignment of a cause of action 1559
(viii) Assignment of right to arbitrate 1560
(ix) Statutory assignment 1561
(x) Joinder of parties 1561
(xi) Restrictions on assignment 1562
(xii) Assignment subject to equities 1565
Novation 1566
Waiver, election and estoppel 1568
(i) Introduction 1568
(ii) Waiver 1569
(iii) Election 1572
(iv) Estoppel 1573
(v) Eect of contractual provisions 1576
20.01 A construction contract is a compact of rights and obligations. e right of a
party to a contract is usually the expectation that the other party will conduct itself in a
particular way. Where an owner engages a contractor to perform certain work, the owner
is entitled to expect the contractor to perform the work in question, and the contractor
is entitled to look to the owner for payment for that work. e mutual expectations of
each party represent rights, the ipside of which are obligations on the other party to do
what it has promised to do (or not do that which it promised not to do). e allocation
of risk and responsibility as between the parties to a contract is essentially a matter to be
worked out between themselves.
20.02 e law does, however, in general permit parties to a construction contract to
take steps to transfer (whether legally, economically or both) the rights and obligations
associated with a contract. A contractor may, for instance, seek to delegate the perfor-
mance of its obligations to subcontractors or suppliers who may have particular skills or
resources that the contractor does not possess.1 A contractor may usually do this because
there is, as we shall see, no general obligation under English, Australian, Hong Kong or
Singapore law for a contractor personally to perform all of the work it has promised to
perform. Furthermore, either party to a contract may be able to transfer its rights under
the contract to another person (by way of an assignment), with the consequence that it
can realise its interest in a construction or engineering project before completion of the
project. But if a party wishes to divest itself legally of its obligations under a construction
contract it cannot do so unilaterally. It may only do so by way of a novation, which
requires the mutual consent of all parties to the transfer of obligations. Finally, there
are circumstances where a party to a contract will be taken to have given up its rights
under the contract, for example where that party is taken to have waived its rights, or is
otherwise prevented in law (ie, is estopped) from asserting its contractual rights. Each of
these topics is discussed in this chapter.
1 One of the potential advantages to a main contractor of subcontracting some part or all of its works is that it does
not incur obligations vis-à-vis the subcontractor’s workers that it would do if it employed those workers directly:
Leighton Contractors Pty Ltd v Fox [2009] HCA 35 at [21]. As to an employer’s duty of care to its workers (and
other construction operatives), see Chapter 21.
(i) Denition
20.03 A subcontract is an agreement between a main contractor and a subcontractor2
for the performance of works that, substantially or wholly, are the same as some or
all of the works that the main contractor itself is required to perform for the benet
of the owner. A subcontract may be entered into even if the main contractor has not
concluded a contract with the owner.3 It is, however, not uncommon for the creation of
a subcontract to be made conditional on the award of the main contract, or for it to be
a term of any subcontract that the subcontract is to terminate should the main contract
not be awarded or be terminated if it is awarded. As a subsidiary and parasitic agreement,
a subcontract serves no commercial purpose if the main contract to which it relates was
never proceeded with or has ceased to operate.
20.04 In sophisticated contractual arrangements, the general legal relationships of the
parties involved in a construction or engineering project will usually be clear. ere will
be an owner who enters into a written contract with a main contractor, who in turn
enters into a written contract with a subcontractor (or subcontractors). In less formal
arrangements it may not be clear as to who has engaged whom, for example whether
a tradesman has been engaged by the main contractor, or whether the owner has (by
its conduct) engaged the tradesman directly. In such cases, the totality of the parties’
relationship must be considered to ascertain its legal eect.4
(ii) Privity of contract
20.05 Although a subcontract is an agreement that, in a practical sense, is derivative
upon the contract between an owner and a main contractor, a subcontract is a stand-
alone agreement, the existence and operation of which is not, in law, dependent upon
the existence of the main contract. A subcontract creates rights and obligations between
a main contractor and a subcontractor. It does not, however, create rights as between the
subcontractor and the owner, even though the owner is the ultimate beneciary of the
subcontractor’s performance.5 In the language of the law, there is no privity of contract
2 “Subcontractor” may, however, be a term of some breadth, at least if literally interpreted: Union Camp Chemicals
Ltd v ACE Insurance SA-NV [2001] CLC 1609 at 1620 [47], per HHJ ornton QC.
3 Durabella Ltd v J Jarvis & Sons Ltd (2001) 83 Con LR 145 at 151 [9], per HHJ LLoyd QC.
4 e fact that a tradesman has presented himself expressly as a “subcontractor” may be indicative of his status:
see, eg, Devine v O’Hare [1997] EWCA Civ 1471 per Sir Patrick Russell: “I am of the opinion that there would
have to be very strong evidence before the court could be justied in nding that the employer/property owner in
a case such as this was in a direct contractual relationship with the subcontractor. e very title ‘subcontractor’, to
my mind, denotes a contractual relationship between the main contractor and the specialist tradesman. It is plainly
desirable that the main contractor should be answerable to the employer and, by the same token, that the specialist
tradesman should be answerable to the main contractor.” See also Henderick Engineering v Kansai Paint Singapore
Pte Ltd [1992] SGHC 184; Electrotec Services Ltd v Issa Nicholas (Grenada) Ltd [1998] UKPC 7.
5 e fact that the owner, main contractor and subcontractor agree that the main contractor’s obligations may be
“carried out” by a subcontractor does not give rise to any contractual relationship between the owner and the sub-
contractor, so as to permit the owner to sue the subcontractor for non-performance: see, eg, WJ Harte Construction
Ltd v Scottish Homes 1992 SLT 948.

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