Warning Shots from the Courts to Ensure Contractual Obligations are Performed by the Proper Parties
The role of subcontractors in the successful delivery of projects within the building and construction industry is vital. Allowing head contractors to utilise specialist expertise and equipment as required, subcontracting provides flexibility when completing large or complex projects to deliver the best possible results.
However, if the subcontract is not properly executed and managed, subcontracting can also present a series of risks for the parties involved, particularly when it comes to the contractual obligations owed by the head contractor to the principal and the necessity for strict compliance with contractual terms agreed between parties.
Earlier this month, the New South Wales Court of Appeal handed down the decision of Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd  NSWCA 270 which serves as a sharp warning for contractors, regardless of the industry in which they operate, to think twice before subcontracting out their duties under a contract. The case also serves to highlight the risks faced by sub-contractors when the principal contractor has not complied with their contractual obligations.
Although this case did not relate to a building and construction contract, it bears relevance to all commercial contracts entered into, as it was the form of the contract itself and not the subject matter of the duties within the contract to which the Court turned its attention.
The facts of the case are relatively clear and did not form a part of the dispute before the Court. Advanced National Services Pty Ltd (Advanced) carried on the business of providing commercial cleaning services. In May of 2016 Advanced entered into a contract with Daintree Contractors Pty Ltd (Daintree) to provide cleaning services at several Mastercare Property Services (NSW) Pty Ltd (‘Mastercare’) locations throughout the state. The Mastercare properties included some high-profile brands including Dan Murphy’s and Woolworths retail locations.
In meeting their obligations, Advanced went on to engage subcontractors who would perform about 90% of the work required from Advanced under the terms of the contract with Daintree. Advanced had not obtained the express written approval of Daintree to engage the subcontractors to perform the work.
Daintree terminated the contract and declined to pay a series of invoices raised by Advanced under the contract for the work performed by the unapproved subcontractors, for the sum of approximately $369,000. It was not in dispute that Daintree had received adequate cleaning services.
Advanced commenced proceedings in the District Court of New South Wales seeking to recover those sums of money on the basis that, regardless of who performed the cleaning services, Daintree had received the benefit of cleaning services for which it had not paid. Advanced, in the first instance claimed for monies owed under a contract, and in the alternative, claimed damages for breach of contract.
Terms of the Contract
Relevantly, the terms of the construction contract provided:
• Any person engaged by Advanced under the Contract would abide by the terms and conditions of the contract in the performance of their duties.
• Performance of the Contract by Advanced would comply with all relevant legislative and contractual obligations
• Advanced would not, without the prior written approval of Daintree, assign or subcontract any portion of the Contract.
• Subcontracting without the prior written consent of Daintree, would be considered a fundamental breach of the Contract resulting in termination of the Contract.
• Payment to Advanced by Daintree would be made on a monthly basis for services performed by Advanced under the Contract.
The decision of the District Court, and the subject of the current appeal, was that although the cleaning services had been provided, Advanced would only be entitled to payment for the work performed by Advanced in accordance with the terms of the Contract, being about 10% of the total services rendered.
Issues in Dispute on Appeal
Advanced appealed the decision of the District Court, and placed the following two issues in dispute before the Court of Appeal:
1. As at the date of the termination of the Contract, had Advanced ‘earned’ the sum it claimed for cleaning services provided; and
2. If so, whether the terms of the Contract affected the right of Advanced to receive the contract price after Daintree terminated the Contract.
In the appeal, Advanced argued before the Court that the Contract between the parties was effectively, a contract for Advanced to produce a result for Daintree, and that it should not matter whether Advanced had personally performed the duties or if they had engaged subcontractors on their behalf.
Advanced also argued that the decision to allow Daintree to receive cleaning services without payment for them was an uncommercial position for the Court and parties to maintain.
The primary counter argument put forward by Daintree was that the Contract agreed between the parties was not simply to produce a result, and that they, as the head contractor, were specifically concerned with who was executing the performance of the Contract. Daintree pointed to possible public relations issues if the sub-contractors did not have appropriate working rights, or public liability and workers compensation insurance and something went wrong. Particular attention was drawn to the high-profile brands they were representing.
Advanced was unsuccessful on both grounds. The Court of Appeal upheld the decision of the District Court of New South Wales, and Advanced was required to pay Daintree’s costs of the appeal.
The Court of Appeal found that the subject matter of the Contract was not necessarily the provision of cleaning services, but ultimately, was a contract for the performance of services by Advanced, in a particular manner as dictated by Daintree.
The Court maintained that, when read in its entirety, the Contract was clear the parties were not indifferent as to how Advanced discharged their duties under the Contract, and the conditions under which they were engaged. In handing down the decision, the Court raised three key issues which had determined their opinion.
First, and perhaps most importantly, the Contract itself had specifically prohibited Advanced from engaging a subcontractor in the absence of an express written approval from Daintree, which met their requirements. On this basis it is reasonably clear Daintree intended for Advanced to perform the Contract itself, and to have some control over how the Contract was performed.
Secondly, the Court of Appeal was of the view that the use of the verb ‘perform’ throughout the Contract, emphasised the element of specific personal service by Advanced. The Court contrasted this with the examples of contracts using more generalised language, such as to ‘provide’ or ‘supply’ services, which would have given strength to the argument raised by Advanced, that the Contract was simply to produce a result for Daintree.
Finally, as the Contract had itself provided for the way in which subcontracting by Advanced would be managed, including the rights of Daintree to audit subcontractors, it could not be assumed that Daintree would be indifferent to who performed the duties under the Contract.
How Does this Affect Building and Construction Contracts?
Although the case concerned the provision of cleaning services, it is relevant to all who engage sub-contractors to fulfil obligations under a the terms of a head contract, providing a sharp reminder that the Court will bind parties, quite strictly, to the terms that are agreed in the contracts signed.
Ultimately, it was the unapproved sub-contractors who performed the 90% of the work and were not paid. The case highlights the risks faced by sub-contractors where the head contractor fails to comply with the terms of the head-contract, i.e. (in this instance) subcontractors performing work for which they received no payment with limited options for recourse.
Considering this decision, it is recommended that parties double check their duties and obligations under head contracts, prior to sub-contracting out their obligations under such agreements, to ensure they are acting within their rights.
The case serves as a reminder to all commercial entities that the Court will not engage in redrafting contracts entered by parties to make them ‘fairer’. This is so even where it leads to a harsh or uncommercial result wherein one party has received the benefit of works performed and services rendered for which it has not paid where contractual terms have not been complied with.
Subcontracting is a commonplace practice and plays a vital role within the building and construction industry. However, the process is risky for all parties involved and the parties cannot rely on the Court to change the terms of a contract simply because it produces a ‘harsh’ result on one party. Both the head contractor and prospective sub-contractor should review the terms and conditions carefully before signing the agreement to ensure they are sufficiently protected.
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