Show me your contract

Updated: Nov 18

To ensure fair resolution of claims emanating from subcontractors, the Head Contractor must be transparent with the Principal about Subcontract Terms, transparent with subcontractor’s about Head Contract Terms and the Engineer to the Contract cannot advocate but must maintain a filter of objectivity. Is the Principal, Engineer to the Contract or Head Contractor discombobulating when responding to your claims?

The Subcontract Jurisdiction Juxtaposition

QUESTION. Does the Head Contractor, subcontract out works, on the basis the subcontractor’s rights and obligations is back to back with the Principal and visa versa?

ANSWER. The simple answer is YES. The whole construction contracting model is predicated on the subcontractor being back-to-back with the Head Contract.

The real answer is a little more complicated. The subcontractor is always back-to-back with the Head Contract AND the Principal is always back-to-back with the Subcontractor principally to sublet risk, but…

The exception occurs when there is divergence of terms between subcontract and head contract, owing to the predisposition for each party to want terms common to all their contracts irrespective of contrary terms of any particular Head Contract. The Principal, is typically blind to the actual subcontract agreement terms and so has the right to ask the Head Contractor to verify they are liable for the costs ‘claimed’ against them, emanating from the Head Contractor’s subcontractor.

The question simply is, are you liable for these costs?

The Subcontract Jurisdiction Discombobulation

The new twist in the old strategy to cause something to be in a state of confusion, to upset, disorient, invent new ways to discombobulate the old order, is for the Principal (or their representative) to deny that the Head Contractors claim, emanating from the subcontractor, is back to back with the Principal, and then for the Head Contractor to then deny their own liability to the subcontractor, because the subcontractor cannot hold the Principal directly liable. Doesn’t make any sense, right? It’s not supposed to. That is Discombobulation. If it works against you, you have been bamboozled.

Engineer to the Contract’s Three Hats

[1] The Engineer’s role in advising the Principal 6.2.1 (a) is a strictly private matter between Engineer and Principal.

[2] The Engineer’s role in giving the Principal’s directions to the Contractor 6.2.1 (a) must be understood to represent the Principal’s requirements and NOT the opinion of the Engineer to the Contract. As Principal adviser, it is not for the Engineer to defend, advocate or express any opinion whatsoever to the Contractor about Principal Directions. The Engineer is just a postman when acting as the Principal’s agent, communicating the Principal’s requirements. Except where…

[3] The Engineers role to independently, fairly and impartially make decisions, means any opinion expressed by the Engineer is done so, in their capacity as Engineer to the Contract 6.2.1 (b). The Contractor and the Subcontractor can only interpret ‘every word’ of the Engineer through the filter that only lets the Engineer’s honestly held objective view of the contract pass. That filter can only be applied by the Engineer, who knows full well, everyone presumes it has been applied. It can’t be seen, so we ALL have to trust the Engineer to the Contract.

Any initial Engineers decision, left unchallenged, eventually times out to be a final and binding decision. Great care must be taken to make good first-round decisions.

It’s not a game, but it has become one

The right to question a decision by the engineer is intended to allow for good decision making at the lowest level of inefficiency as possible, by correcting a bad decision. If the Engineer cannot get it right first time, all the resources brought to bear, to fix it up are an additional cost to the project, paid for by the customer at the expense of our standing in the community as producers of quality products. Yet we feel no shame.

The game to promote bad decision making by the Engineer is evil. Engineers should not fear their client or the contractor. A good Engineer to the contract, that faithfully executes their duties efficiently, will be in high demand. The rest should go back to selling ice creams.

Contract Interpretation Principals

To interpret a contract, is to determine what a reasonable person understands, the common intentions of the parties to be, by objectively reading the contract as a whole, giving preference to the written words from all that the parties have written, said or done, pre and post contract, in context with the relevant background facts, giving words their ordinary meaning, except where there is;

[1] an obvious ambiguity; or

[2] the ordinary meaning is patently not what was intended; or

[3] obvious words must be added because they go without saying or provide necessary business efficacy; and

[4] a need to uphold any common misinterpretation or waiver, by the parties, to prevent an injustice.

Interpretating our way to accord

Claim = Head Contractor advances a claim emanating from the Subcontractor.

Defence #1 = Subcontractor has no right to claim from Head Contractor.

Action = Interpret Subcontract agreement.

Defence #2 = subcontractor has a right to claim from Head Contractor but the Head Contractor has no right to claim from the Principal.

Action = Interpret Subcontract agreement and Head Contract agreement as a whole.

Defence #3 The Head Contract rules trump the subcontract rules and disentitle the subcontractor.

Action = Interpret Subcontract agreement and Head Contract agreement as a whole.

For each defence above the Principal needs to sight a subcontract agreement before it can rightly deny a Head Contractor’s claim emanating from a subcontractors claim on the Head Contractor.

If the Principal presents defence #2 or #3, the Head Contractor must disclose their contract terms with the Principal to the subcontractor to verify the position taken.

Being transparent about contractual arrangements and objective when interpreting these, solves almost all claims without any fuss. Show me your contract, so we can objectively reach agreement, please?

“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”

By Matthew Ensoll


Editor New Zealand Building Economist.

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