Subcontracting is commonplace in many sectors, particularly the construction industry. Subcontractors undertake work that a contractor is contractually obliged to perform but cannot – because it requires a specific skill, for instance.
Taking the construction industry as an example, a situation that regularly arises involves Company A (the property developer) contracting with Company B (the construction company), to redevelop a property. The contract obliges Company B to undertake every aspect of the redevelopment. Company B does not have the requisite skill to perform the electrical work, and so subcontracts it to Company C (an electrical subcontractor) to handle on its behalf.
What happens if Company A is unhappy with the electrical work carried out by Company C? Its contract is with Company B, so what, if any, recourse does it have against Company C?
In this edition of Ask the Expert, we explain what rights a company in Company A’s position may have against a subcontractor like Customer C, with whom it has no contractual relationship.
Can Company A sue Company C under contract law?
A fundamental principle of contract law is that you cannot sue a non-party for breach of contract. This is known as ‘privity of contract’. Company A’s contract is with Company B, so they cannot sue Company C for breach, notwithstanding that Company C carried out the unsatisfactory electrical work.
Company B remains liable for performing all of its duties under the main contract, despite having subcontracted the electrical work to Company C. Company A can, therefore, sue Company B for breach of contract, and Company B can, in turn, sue Company C.
Can Company A sue Company C in tort?
A tort is a civil wrong. Tort law imposes liability for a breach of an obligation imposed by law rather than contract.
Torts can be committed whether or not the party's are in a contractual relationship. The most common tort in English law is the tort of negligence. Negligence is the failure to act with the level of care that a reasonably prudent person would have exercised under the same circumstances.
To succeed in a negligence claim, Company A must establish the following facts:
- Company C owed Company A a duty of care.
- Company C breached its duty of care.
- Company C’s breach caused Company A to suffer loss.
- Company A’s losses are recoverable.
In situations involving a network of relationships governed by carefully organised contractual obligations, such as those in large construction projects, the law regarding whether or not subcontractors such as Company C owe a tortious duty of care to employers such as Company A is fairly complex.
As a general rule, the Courts are hesitant to impose a tortious duty of care on party's to contracts who have deliberately established a sophisticated contractual matrix through which the extent of each party’s obligations is clearly established. The Courts are mindful of the fact that the scope of recoverable damages for negligence is, generally, wider than that for breaches of contract. So, if a subcontractor was found liable for negligence, they may be forced to pay a level of damages higher than that anticipated when entering into the relevant contract.
As a result, the Courts approach the issue of a subcontractor’s tortious duty of care with caution. Judges tend to consider that it would not be fair, just and reasonable to impose additional duties in the context of a far-reaching web of contracts.
Having said that, the Court has also stated that, when determining whether a subcontractor owed a duty of care, the pertinent question is whether the subcontractor owed a duty of care sufficient to cover the type of loss sustained, rather than whether they owed a more general duty. It is, therefore, possible, that in certain situations, a subcontractor like Company C could owe a duty of care to employers like Company A.
If Company C is found to owe a duty of care to Company A, Company A would still need to establish the other criteria to succeed in a negligence claim. It would need to demonstrate that Company C breached its duty of care because its work fell below the standard expected of a reasonably competent company operating in Company C’s industry. Company A must then prove that, but for Company C’s poor-quality work, Company A would not have suffered loss. So, if the loss sustained by Company A would have arisen in any event, or if the real cause was something other than the poor-quality work, Company A’s claim will fail. Finally, the losses claimed by Company A must be recoverable. A long-established legal principle dictates that, save in limited circumstances, ‘pure economic loss’ cannot be recovered through a tortious claim. The line between recoverable losses and those that constitute ‘pure economic loss’ can be a fine one. In our case, if Company C cut through an electricity cable and caused physical damage to property owned by Company A, Company A would likely be entitled to recover damages resulting from that physical damage. If, however, the power cut caused project delays which resulted in Company A reopening the premises later than scheduled and losing potential sales, those sales would be deemed ‘pure economic loss’ and irrecoverable.
Under the doctrine of privity of contract, Company A cannot sue Company C for breach of contract. Depending on the circumstances, negligence law might assist, but, if the relationship arises amidst a contractual matrix, it is doubtful that the Court would impose additional duties of care. Even if it does, Company A is unlikely to be able to claim damages arising from ‘pure economic loss’. Accordingly, the only option available to Company A might be to pursue Company B for any losses under the main contract.
Employers like company A can take various measures to avoid the issues discussed above. For example, collateral warranties are widely used in the construction industry as a way of bridging the gap between the employer and subcontractor. Under a Collateral warranty, the subcontractor promises to perform its duties in accordance with the main contract. If it fails to do so, the employer will have a claim for breach of the collateral warranty.
Disputes with subcontractors can be hard-fought, time-consuming and costly. Our dispute resolution solicitors have extensive experience acting for party's on both sides of such disputes. They understand the need to reach a commercial, cost-effective resolution as swiftly as possible, allowing you to concentrate your resources on the continuing success of your business.