By Richard Kok,
Rhiza & Richard
The Back-to-Back Principle
In complex construction projects, there are
numerous project participants with different roles
and responsibilities. Subcontracting is a common
practice. Whilst the contractual arrangements
are complex and the contractual chains are long,
it is very common for sub-contracts and supply
agreements to be back-to-back with the main
contract provisions.
The back-to-back principle means that all or
part of the obligations of the main contractor
under the main contract are replicated in the
sub-contracts; all or part of the obligations of the
main contract and sub-contracts are replicated
in the sub-sub-contracts and so on, down the
contractual chain.
On one hand, the main contractors could
avoid gaps in obligations and liabilities among
the various project participants. On the other
hand, it is commercially justifiable as it ensures
consistency of the work throughout the whole
construction project.
Whilst the back-to-back principle is rather
straightforward, problems often arise in practice
from the way in which the various different
contracts are documented. Poorly drafted
contracts can be difficult to interpret, leading
to disputes. The problem is further aggravated
if the main contracts are not available to the
sub-contractors despite contractual provisions
providing otherwise. Hence, the reality is that the
sub-contractors may not have sighted the main
contract at all until a dispute arises.
The main contracts would certainly contain a
dispute resolution clause to resolve any disputes
arising by way of mediation, expert determination,
arbitration, a combination of dispute resolutions,
etc.
However, sub-contractors who had not sighted
the main contracts would not have known that
legally they are taken to have “agreed” to such
an arbitration clause, due to the back-to-back
arrangement. This will eventually take away their
right to resolving any differences in the courts
against the contractor on the tier above.
Meaning of Arbitration
The term “arbitration” if looked up on the Internet
would inter alia simply mean “the hearing
and determining of a dispute or the settling of
differences between parties by a person or
persons chosen or agreed to by them”. It does
not say one will lose the option of pursuing their
case in court if they have agreed to arbitration.
For contractors who had no experience in dispute
resolution, even if they had taken the effort to
look up the meaning of arbitration, they may
not be aware of the legal effect of an inclusion
of such clause in their contracts, more so when
such clauses are ‘included’ via a back-to-back
arrangement.
Section 9(1) Arbitration Act 2005 defines
“arbitration agreement” as;
“In this Act, “arbitration agreement”
means an agreement by the parties to
submit to arbitration all or certain disputes
which have arisen or which may arise
between them in respect of a defined legal
relationship, whether contractual or not.”
13
Making Dispute Resolutions
Arbitrary: Arbitration
Clauses Buried Under
Construction Contracts