In a parallel universe there is possibly a place where nothing goes wrong and we are, at all times, in complete understanding. The construction sector is not such a place. Multiparty disputes are a staple of New Zealand construction law.

It’s in the nature of projects to have multiple different players involved, each playing their part in the life cycle of a project. Who do you look to, then, when something goes wrong and the project has multiple players?

The main contractor is the obvious target. The main contractor is the glue that holds together the project. The principal relies on them to coordinate the various trades and specialists involved in a project. It’s not surprising, then, that if something goes wrong the principal will look their way, even if the failing lies in a subcontractor’s work.

Sometimes a subcontractor as well as the main contractor will be named in proceedings by the principal.

But in the context of a construction contract, it can be less clear  what  rights and obligations exist between subcontractor and owner or principal, in the absence of a contractual connection.

This is why it’s common for a principal to name only the main contractor either for breach of contract, as the main contractor is ultimately responsible for all subcontractors’ work or for a breach of a duty of care . It will be up to the main contractor to decide whether and how to proceed against the subcontractor.

In a perfect world, there will be no liability gaps between the contract between the principal and main contractor, and the contract between the main-contractor and subcontractor. The contractor will be able to recover against the subcontractor under an indemnity clause.

This can be achieved through back-to-back contracts which involves aligning key terms from the head contract with the subcontract. A key part of this exercise is to ensure the indemnity clauses line up for the subcontract works. This avoids the hazard where, in respect of the subcontract works, the contractor’s indemnity to the principal might be more expansive than the indemnity the subcontractor provides the contractor. If this ‘gap’ were to arise, the contractor would have to recover the difference by establishing liability against the subcontractor in breach of contract and/or tort. That can often be more difficult than a claim under the indemnity.

It’s possible for the contractor to join the subcontractor to the proceedings by filing a third party claim against the subcontractor in breach of contract, or in tort or a claim for the subcontractor to contribute to the loss, but what’s possible will not always be the position in reality.  There can be many barriers to recovery against a subcontractor, particularly these three:

1. The subcontractor is no longer trading. There are some limited scenarios in which a court will pierce the corporate veil and depart from the well-established principle that the company is a separate legal entity with limited liability. But short of some sort of assumption of responsibility, a personal claim against the director will be difficult.
   
   
2. There may be limitation issues against the subcontractor but not against the main contractor. There is precedent for the idea that a subcontractor goes ‘off-task’ at the completion of the subcontract works, not necessarily when CCC is issued. The situation could arise where the claim is not time barred against the main contractor but is time barred against the subcontractor. The recent case law on time limits for contribution claims will be relevant to this issue. The law is currently conflicted on whether the 10 year limitation period in the Building Act applies to contribution claims or whether time runs for two years from the date of the primary judgment quantifying the loss. If it is the latter, the door remains open beyond 10 years for main contractors to pursue a contribution claim against the subcontractor once liability on the part of the main contractor has been established by judgment, settlement or the like (provided that contribution claim is filed within 2 years of liability being established). This would mean that the problem of a subcontractor having a limitation argument but a principal’s claim against the main contractor being within time would be avoided because the time would not start running for a contribution claim until the main contractor’s liability to the principal is quantified. The Court of Appeal will hopefully shortly break this gridlock and provide clarity on the law in this area.
   
   
3. The forum of the dispute. Generally, bringing a subcontractor into a dispute involves bringing a third party claim against the subcontractor which effectively joins the subcontractor to the court proceedings. Where a matter is in arbitration, however, this can be difficult. A court has inherent jurisdiction whereas an arbitral tribunal gains its jurisdiction over the parties from the arbitration agreement or clause. This means a subcontractor will only be joined to an arbitration between a principal and main contractor if all the parties agree either upon application for joinder or by pre-agreement in the arbitration clause. This can leave the main contractor in a scenario where it has to file a separate claim against the subcontractor leading to additional cost and time and the risk of obtaining inconsistent decisions. There is the option to consolidate the arbitration proceedings though, again, this requires consent.

Somewhat in the way that steering a car is much harder from the back seat, multi-party defect claims involving subcontractors at some remove can be complicated. This makes it crucial that contracts are aligned at the outset.

Aligning the head contract with subcontracts won’t remove the risk. But this imperfect world when well-oiled machines can come apart, it can provide an avenue to make a complex claim a good deal simpler.