Nominated Subcontractors and Contractors Risk under FIDIC Conditions of Contract 1987 Red Book 4th Edition
What is Nomination ?
Nomination is the process by which the Employer nominates, selects or approves who will perform a subcontract or specialist trade role which is referred to as a Nominated Sub-Contractor (“NSC”). The NSC then enters into a subcontract agreement with the Contractor (“MC”). It is a means for the Employer to retain some control over the selection of specialist contractor or supplier without necessarily becoming directly involved in detailed contractual arrangements with the specialist.
Where as a “domestic subcontractor” is one in whose selection and appointment the Employer traditionally plays no part other than simply giving consent when that is required under the terms of the main contract. The appointment of the subcontractor is treated as something entirely for the benefit of MC (a “domestic matter”)
Although MC delegates performance of a part of the works to his domestic subcontractors, MC nonetheless remains fully responsible to the Employer with respect to these works. The Employer in no way underwrites the risk of subcontractor default. MC also is directly responsible to the domestic subcontractor for payment and for their fundamental co-operation.
Why Nominate ?
Nomination is used because there are benefits for the Employer in using the system. The key benefit for the Employer is control over the choice of, and performance required from, NSC. Above all, the Employer reserves to itself the choice of subcontractor.
An NSC may offer the lowest bid or highest quality design input or some combination of price and quality benefits. NSC’s may have a proven track record for good work. The Employer may have developed a long-term business relationship with an NSC. The Employer may wish to use a proprietary system offered by the NSC.
Further, the Employer can, if he wishes, control the terms of the subcontract, including the price and scope of NSC’s work.
Another benefit is the potential for reduced procurement times. Some specialist subcontract work requires a longer lead time than the construction programme would allow such work must be started before MC has been chosen. Nomination allows for continuity when a specialist subcontractor has been selected before the MC is in place.
In FIDIC’s Conditions of Contract for Works of Civil Engineering Construction (4th ed. 1987) (“Red Book 4th”), it recognises that the failure of NSC to perform can have serious consequences for both MC and the Employer. Therefore, it is important to ensure that MC approves of the subcontractor and is prepared to collaborate with him. Thus, MC need not employ just any NSC.
He need not employ an NSC:
1 against whom he has reasonable objection; or
2 who refuses to enter into a subcontract which:
2a is back-to-back with the main contract; and
2b which indemnifies MC in respect of NSC’s breaches and against the negligence of his workmen and misuse of any Temporary Works.
These rights of veto are crucial, and MC’s generally must not feel reluctant to exercise these rights.
Thus, MC can refuse the nomination if he has reasonable grounds for so doing. What is “reasonable” must take account of the importance of the timing of the nomination, the effect a post-contract nomination may have on MC’s programme, and NSC’s preparedness to commit to completion of its works on a date that melds with the programme.
Where, however, NSC has been appointed in advance of the Contract date, the right to object may be more limited, provided that appointment was notified to MC beforehand and no objection was made or highlighted as a likely reaction to formal nomination. Indeed the MC agreed to the use of the NSC by entering into a contract in which the NSC was specifically named thus to raise an object at nomination stage would be a breach unless circumstances in respect of the NSC had changed post contract execution.
If MC declines to enter into a subcontract with NSC, the Engineer will have several alternative lines of action open to him. He can:
1 Nominate an alternative NSC to whom the MC would not object.
2 Omit the work that is the subject of the nomination from the main contract and have it carried out by an independent Contractor. There may be claim consequences.
3 Seek to negotiate more favourable subcontract terms with the NSC.
4 Subject to MC’s consent, allow the Employer to indemnify the MC against any liability he might suffer from contracting with NSC on the terms NSC will accept.
5 Direct the MC to carry out the work or arrange for the supply of the goods himself through a variation under Clause 51. This also can have claim consequences in the event the Main Contractor raised objections.
Contractors Risks and their Mitigation
The MC under the provisions of the Red Book 4th Edition may be faced with insufficient description of NSC Works, other than perhaps the inclusion of a Provisional Sum in the Bill of Quantities.
The true nature of the NSC Works and its effect on programming often is only made apparent once the nomination occurs, which may be late on in the MC’s own Works and certainly after the terms of the Main Contract have been settled. more