Paying subcontractors directly: stormy waters for employers
By Sarah Leaver & Karen Clarke
A recent Commercial Court decision has considered the ability of an employer to recover payments made directly to subcontractors from its main contractor. The decision raises interesting questions as to the extent to which an employer must prove liability as between the main contractor and subcontractor in order to succeed in recovering such payments. The decision will be of considerable interest to employers faced with deteriorating commercial relationships at subcontract level and who are considering proactive steps by way of direct payment to avoid potential disruption through subcontractor suspension or termination scenarios.
Introduction Employers can sometimes find themselves wishing to make direct payments to subcontractors engaged by their main contractor. This might be the case if a payment dispute arises at subcontract level or if the main contractor suffers cashflow difficulties. Subcontractors may threaten to terminate or suspend work in such circumstances and the employer may feel that direct payments are necessary to keep the project afloat. Although the commercial rationale for such payments is clear, they pose a number of legal issues. The employer will usually wish to recover such payments from the main contractor and may initially seek to set them off against amounts due under the main contract. However, the main contractor is likely to put the employer to proof as to those set-offs and the employer will usually know very little about any disputed claims at subcontract level. It may therefore struggle to prove that the main contractor was liable to pay such sums to the subcontractor. The employer might consider taking an assignment of the subcontractor’s claims and requiring it to lend such assistance as may be required in the proving of those claims against the main contractor. However, the subcontractor may be unwilling to provide such assistance or may not do so in a sufficiently timely or fulsome way. If the employer’s attempt at reimbursement from the main contractor fails, the employer may wish to reclaim the sums paid back from the subcontractor. The subcontractor may resist such attempts and/or may be unable to repay such sums in the absence of any security taken by the employer. Cases dealing with these issues are rare, however, a recent arbitration appeal heard by the Commercial Court provides a good illustration of the legal difficulties faced by employers in such circumstances and potential routes to overcome them. Nobiskrug GmbH v Valla Yachts Ltd Valla Yachts engaged Nobiskrug, a German shipyard, to build a superyacht – one of the largest private sailing vessels in the world. The contract between the parties did not contain provisions governing direct