Subcontracting and international projects: don’t take your eye off the ball

Pictured left to right:Michelle Essen is legal director, James Ignotus is a managing associate and Jessica Tresham is a partner at law firm Womble Bond Dickinson

Contractors are pleased when, after months of responding to tender requests and reworking costs, they receive the good news that their tender submission has been successful. Employers and developers are also pleased to have reached this stage in what has likely been quite a lengthy journey in getting a project off the ground.

At this point, most businesses ask their legal teams to finalise negotiations and contracts so that everything can be signed and completed. Of course, each project will follow a slightly different path. However, this tendering process will be familiar to most in the construction industry, and it is very unlikely that a major project’s key contracts will be agreed without legal review.

“It is often difficult to persuade local contractors with limited experience of international projects to use a foreign legal system”

This is not always the case for subcontracts that are entered into after the main project agreements have been formed. There are often commercial reasons for giving less scrutiny to each and every subcontract made. However, risks and problems can be caused or exacerbated by suboptimal contracts.

International projects involving parties from various countries are particularly vulnerable to these risks and the problems that can arise through inadequate contracting where there is no shared jurisdiction. This can be heightened by the fact that many major international projects require contractors to use a prescribed amount of locally sourced labour or materials.

We could write a book on the potential pitfalls of subcontracting. However, here are a few key issues to be aware of, particularly in the context of international projects:

Risk profile of the subcontract

Certain works might appear to be relatively simple and ideally suited to subcontracting, perhaps with local suppliers. But before subcontracting any works, or even placing orders for materials, you should consider the risk profile of the works being subcontracted.

For example, the construction of a temporary road might seem low risk on the basis that it will not comprise a part of the final project. However, parties should consider the consequences of it failing or being delayed. If this could have a significant impact on the project as a whole, consider whether it is suitable for subcontracting, particularly with untested partners.

Terms of the main contract

Contracts typically contain subcontracting requirements. These might include seeking the employer’s permission to subcontract, ensuring certain terms are adhered to, and providing warranties. Make sure that these conditions are met when entering into a subcontract, and consider which risks and responsibilities should be mirrored or passed down from the main contract into the subcontract.

Governing law

It is usually simplest to have all of a project’s contracts governed by a single legal system, such as the laws of England and Wales. From a legal perspective this means that the agreements can be read consistently and it helps to step down obligations without creating a conflict of laws. It also means that multi-party disputes can be resolved more easily because there is no need to use different legal systems. On a practical level, it also means that fewer lawyers are required to resolve issues.

For international projects, some issues such as property rights and labour law may well be subject to local laws, and it is often difficult to persuade local contractors with limited experience of international projects to use a foreign legal system. However, if this can be agreed where appropriate, it can avoid certain complications in managing disputes once the project is underway.

Dispute resolution

A contractor carrying out works in another jurisdiction is unlikely to want any dispute with a local supplier to be resolved in the supplier’s domestic courts or other domestic dispute resolution forums. Even if there is no suggestion of judicial bias, the complications of having to work with an unknown legal system are potentially time-consuming, costly and might give the local party an advantage in any dispute.

As such, the parties should consider carefully which dispute resolution forum should be included in the contracts (eg the courts of England and Wales, or arbitration). Again, it would make sense where possible for the governing law and dispute resolution forum in the main contract and subcontracts to be consistent.