How protected are contractors for the work of their subcontractors?

While the law provides considerable protection to consumers for faulty and substandard building work, the law is less inclined to protect contractors for the work of their subcontractors.

Accordingly, it is imperative that contractors protect themselves with robust written agreements with their subcontractors before building work begins.

The Building Act 2004 and the Consumer Guarantees Act 1993 are unlikely to step in and protect the contractor with warranties and guarantees in most building work agreements with subcontractors. This is primarily because the contractor is not the ‘end-user’ consumer, and is often resupplying the subcontractor’s building work to the client in trade.

We note that the Fair Trading Act 1986 may provide some protection to contractors where the subcontractor has engaged in misleading and deceptive conduct or provided false or misleading representations in relation to the quality or standard of their work.

Accordingly, to avoid situations where the contractor has no recourse against the subcontractor for their faulty building work, a robust contract with the subcontractor is needed with sufficient warranties, indemnities and protections in relation to the work provided.

For example, the following terms could be included into building work contracts to improve the contractor’s protection:

• A clear work programme, including start dates, construction sequences and completion dates. In situations where the contractor is under a head agreement with a client, the contract should reflect the head agreement’s work programme.
• Warranties on the quality and standard of the building work and materials. These warranties may include the timeliness of the work, standard of work, compliance with building consents, compliance with plans and specifications, standard of materials used, and end-product fit for purpose. In situations where the contractor is under a head agreement with a client, the contract should reflect the head agreement’s warranties, rights and obligations.
• Deduction scheme allowing the contractor to deduct payments to the subcontractor that are necessary to rectify deficiencies in the subcontractor’s building work or performance.
• Early termination rights for the contractor where, for example, the subcontractor fails to perform its duties and refuses or is unable provide an adequate remedy. Where the contractor is under a head agreement with a client, the contract should reflect circumstances where the head agreement is terminated.
• Indemnities in favour of the contractor for all losses and expenses arising out of the subcontractor’s building work.

Further, we suggest that building work contracts with subcontractors are agreed in writing so both parties clearly understand their rights and obligations before work begins.

We note that the above terms are examples and not an exhaustive list. Additionally, the Construction Contracts Act 2002 may impose further requirements for construction contracts that are not covered above.