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Back-to-Back Contracts

27 August 2019

This weekend I decided to take a visit to the recently opened Fourways Mall, a mall that has been years in the making and is now the largest shopping centre in Africa. Looking around this spectacular mall got me thinking just how many different skills were required to put it together. The lawyer in me immediately wondered how the contractual relationships between so many different parties were managed.

Large projects like these require many capabilities to complete them – i.e. a number of specialist contractors (think HVAC, fire detection and prevention systems, electrical installations, plumbing etc). Employers will avoid contracting with so many individuals. They’ll choose a main contractor and then leave it up to them to manage all the specialist subcontractors.

Having assumed this responsibility, the main contractor will seek to pass its obligations with the employer onto each subcontractor. One of the easiest ways of doing so is to make the subcontract “back-to-back” with the main contract.

But what does this concept actually mean? It contemplates incorporating appropriately tailored terms from the main contract into the subcontract expressly. Doing so obviously takes time and effort. Therefore, many contractors adopt a short-cut approach – including a vague introductory statement into the subcontract such as, “This subcontract is back to back with the main contract” or not even drafting a subcontract and stating in the form of agreement something like, “All references to Employer in the main contract shall mean reference to the Contractor under the subcontract and all references to Contractor in the main contract shall mean reference to the Subcontractor under the subcontract”.

Although this short-cut approach may seem like the most cost effective at the time, its vagueness means that there is no certainty as to the parties’ obligations and vagueness leads to disputes. A contractor may think that he is passing down all his obligations by stating that the whole of the main contract applies to the subcontract, but in fact, all he is doing is providing a cause for dispute.

When such a dispute arises, whether certain main contract terms apply to the subcontractor will be a question of interpretation on a case-by-case basis. An adjudicator / arbitrator will look to factors such as what the parties intended the contractual arrangement to be, what is fair and what makes the most commercial sense.

An example that pops up a lot from our clients is the applicability of the penalties under the main contract to the subcontract. A contractor may think it has managed to get out of paying penalties by stating that the subcontractor is liable for penalties as provided under the main contract but, the principles of fairness and contract law, as well as the provisions of the Conventional Penalties Act, may not allow it in the circumstances. An adjudicator / arbitrator should consider these arguments in assessing whether the subcontractor is liable.

The short-cut approach isn’t sounding so cost effective anymore is it? Lengthy and expensive disputes in a contractor / subcontractor relationship can be avoided by drafting a subcontract that reads alongside the main contract, expressly incorporating terms that are applicable. If parties truly do not have the time or resources to do so, ensure that the most fundamental terms of the contractual relationship read together or make use of a standard form of contract that has a subcontract that works with it.

Author is Kelly Stannard, Associate