The JBCC nominated/selected subcontractor regime

The JBCC Principal Building Agreement (PBA) has always been popular for its extensive nominated/selected subcontractor regime. The latest iteration of the PBA, dated May 2018 (edition 6.2), continues this regime, together with the accompanying Nominated/Selected Subcontractor Agreement (N/SA) edition 6.2.

Despite the various amendments to the PBA and N/SA, the JBCC nominated/selected subcontractor regime has largely remained the same. Although the majority of changes have improved the regime, various fundamental issues have not been addressed - most notably in relation to the subcontractor's design responsibility. However, it can be expected that these agreements will remain as popular as ever.

The JBCC Principal Building Agreement

The PBA differentiates between 'nominated' subcontractors and 'selected' subcontractors. A subcontractor under the PBA is assumed to fall under one of these categories and to have been appointed under the terms of the JBCC N/SA – something which should be borne in mind when attempting to appoint a subcontractor under a bespoke or other form of contract where the main agreement is the PBA.

Nominated subcontractors (Cl. 14.0) are those nominated by the principal agent(s) for appointment by the contractor. This follows a tender process in which the contractor is given the opportunity to consult with the principal agent during the scrutinising of tenders. The contractor may refuse to appoint a nominated subcontractor where the contractor makes a "reasonable objection"; or where the subcontractor refuses or fails to enter into a subcontract agreement or provide the requisite security to the contractor (Cl. 14.2). Only the latter two grounds are applicable in relation to the contractor's refusal to appoint a selected subcontractor (Cl. 15.2).

Selected subcontractors (Cl. 15.0) are those selected by the principal agent together with the contractor. The contractor remains involved in scrutinising subcontractor tenders, but must also choose the successful tenderer to be appointed in consultation with the principal agent.

This additional involvement entirely changes the risk the contractor takes in relation to the subcontractor. The contractor is entitled to terminate a selected subcontractor's appointment for the subcontractor's default of a material term (Cl. 15.6), but the exercise of this right to terminate in relation to a nominated subcontractor is subject to the principal agent's instructions (Cl. 14.6). In addition, whereas the employer takes the risk in relation to termination of a nominated subcontractor on the basis of default, the contractor takes this risk in relation to the termination of a selected subcontractor (unless the selected subcontractor's default is attributable to the employer or its agents).

The nominated/selected subcontractor regime also provides for the principal agent to request proof of payment to subcontractors from the contractor (Cl. 14.5 & 15.5); failing which the principal agent may certify direct payment to the subcontractors and recover the amount from the contractor in the next interim payment certificate.

Despite the provisions above, the PBA makes clear that there are no contractual rights or obligations between the employer and any subcontractor appointed by the contractor (Cl. 14.8 & 15.8). However, any design responsibility undertaken by a subcontractor is not borne by the contractor, other than in relation to the subcontractors' temporary works (Cl. 7.2). Instead, the PBA provides for the automatic cession to the employer of all "contractual or other rights" which the contractor has against the subcontractor in relation to design responsibility, on the earlier of the date of final completion or the date of termination of the agreement (Cl. 21.11).

Where a subcontractor's defects liability period extends beyond that of the contractor, the contractor's obligations and liability in respect of subcontractor defects ends on the date of issue of the certificate of final completion. The remaining portion of the subcontractor's defects liability period cedes to the employer on that date (Cl. 21.11).

Although this regime is quite extensive, it is not without its flaws. Notably, the regime does not expressly address the consequences of either the contractor or principal agent's failure to comply with a procedural pre-requisite for the appointment of a nominated/selected subcontract. In addition, it does not provide an appropriate mechanism by which the employer may address any damage or defects in the works arising from a subcontractor's design responsibility before the date for final completion.

These issues with the regime remain unaddressed in the latest iteration of the PBA. Instead, the most notable amendments include:

• an additional basis upon which the contractor can refuse to appoint a selected subcontractor ("[a]gainst whom the contractor makes a reasonable objection where circumstances have changed", Cl. 15.2.3). This provision is unclear. It also results in closer alignment between the nominated and selected subcontractor regimes in relation to objections – albeit the 'reasonable objection' wording is further qualified in the selected subcontractor regime - thereby, to an extent, eroding an important distinction between the two;
• an extension of the basis upon which the contractor is entitled to a revision to the date of practical completion. Instead of merely being on account of a delay caused by the "insolvency" of a nominated subcontractor, this entitlement now arises where there is a delay caused by "insolvency or termination" (Cl. 23.2.10). This change aligns with the intent of the nominated subcontractor regime, and should therefore not in itself be concerning to employers given the principal agent's involvement in the termination of such an appointment;
• an express provision requiring that the contractor notifies all subcontractors where a certificate of practical completion or final completion has been issued by the principal agent. This provision is likely to be welcomed by subcontractors, who are often left in the dark about the extent of their obligations in the absence of this knowledge; and
• a 'joinder' provision, in terms of which the employer consents to the joining of any subcontractor with the contractor as a party to any proceedings.

The JBCC Nominated/Selected Subcontractor Agreement

The N/SA is a fundamental aspect of the JBCC nominated/selected subcontractor regime. Given the alignment between the two agreements, the latest iteration of the N/SA is the preferred subcontracted form for use with the PBA. As the name implies, it can be used for either type of subcontractor relationship.

The N/SA provides that, where a subcontractor is appointed to design, supply and install an element of the subcontracted works and the principal agent remains responsible for the coordination of design elements (Cl. 7.2.2), the subcontractor identifies the contractor for the consequences of its design and cedes any guarantee, warranty or indemnity to the employer on the date of issue of the certificate of final completion (Cl. 7.2.3).

Moreover, the N/SA contains various provisions which are, practically, for information purposes only. For example, the provisions related to the contractor's appointment of nominated and selected subcontractors are largely there for information purposes, as the obligations are mainly those of the contractor under the PBA (Cl. 14 & 15).

The N/SA also prescribes certain functions to be undertaken by the principal agent appointed in terms of the PBA. For example, the principal agent is responsible for coordinating the design elements of the subcontract works, and determines the value of adjustments to the subcontract value. However, unlike under the PBA, it is the contractor and not the principal agent that certifies the relevant stage of completion - interim completion - and adjudicates the subcontractor's claims for revisions to the date for interim completion (Cl. 18.3).

The subcontractor takes full responsibility for the works under the subcontract until interim completion (Cl. 8.1). Interim completion is the state of completion where the subcontract works, or a section thereof, are substantially complete as certified by the contractor. Interim completion occurs before practical completion, which is the state of completion referred to under the PBA when risk transfers to the employer (Cl. 8.1). The subcontractor also has an obligation to make good physical loss and repair damage to the subcontract works caused by its acts or omissions arising before practical completion (Cl. 8.2).

Interestingly, the subcontractor receives a dual indemnity - from both the contractor and the employer - against all claims for damages, expense or loss arising from various events listed in the N/SA. Moreover, while the employer is entitled to penalties for the contractor's failure to achieve practical completion by the date for practical completion in the PBA, the contractor is not entitled to any measure of liquidated damages under the N/SA for the subcontractor's failure to achieve interim completion by the date for interim completion. Instead, the subcontractor is liable to the contractor for damages for this default (Cl. 24). This is an important distinction which means the contractor must be able to prove a claim against the subcontractor before being entitled to damages for late completion under the N/SA.

Reflecting the relevant provisions of the PBA, the N/SA provides that where the subcontractor's defects liability period extents beyond that of the contractor, the contractor's obligations and liability concerning the subcontractor's defects end of the date of issue of the certificate of final completion. The remaining portion of the subcontractor's defects liability period is ceded to the employer on that date (Cl. 21.10).

The fundamental concerns with the N/SA are similar to those highlighted in relation to the PBA itself, given the similarity between the two. This includes the manner in which the agreement deals with indemnities, employer's risks, termination and programming. Despite this, the latest iteration of the N/SA adequately reflects the concepts and principles set out in the PBA in setting out the subcontractor's obligations, with the appropriate amendments.

Notable amendments in the latest iteration of the N/SA include:

• the introduction of a definition of 'damages', as "[p]roven expense and/or loss that may be recovered by the contractor or vice versa" (Cl. 1.1). This amendment now expressly sets out the existing position and will prevent any contractor from contending in future that damages are analogous to 'penalties' under the PBA;
• an additional limit on the subcontractor's liability for the cost of making good physical loss and repairing damage to the subcontract works. The subcontractor will not be responsible for the costs of undertaking these works where the damage arose from "the use or occupation of any part of the works" (Cl. 8.5.4). This is a sensible amendment, given that the subcontractor is already indemnified where the cause is the use or occupation of any part of the subcontract works by the employer or its agents; and
• an additional indemnity, provided jointly by the contractor and employer, indemnifying the subcontractor against all claims for damages, expense or loss arising from physical loss or damage to the works where a certificate of practical completion has been issued or practical completion has been deemed to be achieved (Cl. 9.2.9). This change does not align with the structure of the N/SA, given that the subcontractor only takes responsibility for the subcontract works until interim completion (which will always occur before practical completion). 

Written by Themba Chauke of Pinsent Masons