2 March 2023

The implementation of large-scale construction projects is invariably accompanied by an extensive set of contractual documents. Some of these contain thousands of contractually relevant data points that may be of fundamental importance for the establishment and enforcement of contractual claims, as well as for the proper and timely application of contractual compensation mechanisms. Ignorance of the contract is no excuse.

In practice, the question has arisen as to whether the Employer, or respectively the Engineer, is entitled – on the basis of the relevant provisions of the FIDIC Red Book Conditions of Contract (Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer, as amended by the Particular Conditions) – to inspect the wording of the Contractor’s subcontracting agreements and to make excerpts, transcripts, or copies thereof; in other words, whether the Employer or the Engineer is entitled to unrestricted access to the Contractor’s contractual documentation vis-à-vis Subcontractors. This naturally leads to the related question of whether the Contractor is obliged to conclude subcontracting agreements exclusively in written form.

1. As a general matter, a contract for work (contract for services/work) is based on a very simple principle: the Contractor performs the work for the Employer, and the Employer pays the agreed price. The essential elements (essentialia negotii) of a contract for work under Section 2586(1) of Act No. 89/2012 Coll., the Civil Code, as amended (the “Civil Code”), may be defined as follows:

(i) the obligation of the Contractor to perform the work at its own expense;
(ii) the obligation of the Contractor to perform the work at its own risk;
(iii) the obligation of the Employer to accept the work; and
(iv) the obligation of the Employer to pay the price for the work.

2. The law does not require a written form for a contract for work; that is, the Employer and the Contractor may conclude such a contract orally. The same applies to any amendments by which the contract (or its individual provisions) is modified or terminated, unless the contracting parties have agreed special conditions for novation.

3. However, a contract for work whose object is the execution of a large construction project (hereinafter also the “Works”) cannot, by its very nature, be concluded otherwise than in written form, inter alia with regard to the relevant provisions of Act No. 134/2016 Coll., on Public Procurement, as amended, or Act No. 340/2015 Coll., on the Special Conditions for the Effectiveness of Certain Contracts, the Publication of Such Contracts and the Register of Contracts, as amended, as well as other applicable legislation.

4. In practice, the Contractor, acting as the general contractor of the works (vis-à-vis the Employer as a public contracting authority), executes the Works through a large number of partial performances carried out by Subcontractors, on the basis of a relatively complex set of interlinked contracts for work. In the course of the execution of the Works, dozens or even hundreds of such contracts may be concluded. It is precisely these subcontracting contracts for work that may be created, amended, or terminated in a wholly informal manner, i.e. without regard to the will of the Employer (as the public contracting authority), unless the Contractor has previously undertaken to submit matters relating to its subcontracting arrangements to the Employer for approval.

5. As indicated above, in current practice the contracting parties typically agree, as an integral part of the contract for the Works, the Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer, as amended by the Particular Conditions (hereinafter the “General/Particular Conditions” or “GC/PC”). Although, within the hierarchy of contractual documents, these are ranked only fourth or fifth, they are in fact of absolutely key importance, as the contracting parties are required to proceed in accordance with their individual provisions throughout all phases of the execution of the Works.

6. According to the provisions specifically examined herein, Sub-Clause 4.4, second paragraph, of the GC/PC provides as follows:

The Contractor shall be responsible to the Employer for the acts or defaults of any Subcontractor, his agents or employees, as if they were the acts or defaults of the Contractor.[1] Unless otherwise stated in the Particular Conditions:

a) the Contractor shall not be required to obtain consent for suppliers of Materials or for a subcontract for which the Subcontractor is named in the Contract;

b) the Contractor shall obtain the prior consent of the Engineer for other proposed Subcontractors;

c) the Contractor shall give the Engineer not less than 28 days’ notice of the intended date of commencement of each Subcontractor’s work and of the commencement of such work on the Site; and

d) each subcontract shall include provisions which would entitle the Employer to require the subcontract to be assigned to the Employer under Sub-Clause 4.5 or in the event of termination under Sub-Clause 15.1.

7. Unfortunately, it is evident that many provisions of the GC/PC suffer from significant drafting and stylistic deficiencies, which may ultimately lead to misunderstandings. For example, with regard to sub-paragraph (a) of the cited sub-clause, it is by no means clear whose consent the Contractor is not required to obtain “for suppliers of Materials or for a subcontract for which the Subcontractor is named in the Contract”; in other words, it is unclear whether the consent referred to is that of the Employer or of the Engineer.[2] Based on sub-paragraph (b), one may infer that it is most likely the consent of the Engineer; however, an equally acceptable conclusion is that it refers to the consent of the Employer (regardless of the Engineer’s position), as it is primarily the prerogative of the contracting authority, i.e. the Employer, to decide which qualification requirements must be met by individual Subcontractors. With regard to the principle of contra proferentem, it appears equitable for the relevant provision of the GC/PC to be interpreted in favour of the Contractor – namely, that unless otherwise stipulated in the Particular Conditions, the Contractor is not obliged to obtain consent from either the Engineer or the Employer for suppliers of Materials or for a subcontract for which the Subcontractor is named in the Contract.

8. As already mentioned, under Sub-Clause 4.4, second paragraph, sub-paragraph (d) of the GC/PC, unless otherwise stated in the Particular Conditions, each subcontract must include provisions entitling the Employer to require the assignment of the subcontract to the Employer pursuant to Sub-Clause 4.5 of the GC/PC, or in the event of termination pursuant to Sub-Clause 15.1 of the GC/PC. Although the wording of Sub-Clause 4.4, second paragraph, sub-paragraph (d) of the GC/PC is again somewhat peculiar, it must be understood as an express undertaking of the Contractor to incorporate, into the wording of all (!) subcontracting agreements (relating to the execution of the Works for the benefit of the Employer) to which no exception under the Particular Conditions applies, an obligation of the Subcontractor to grant a third party—namely, the Employer—the rights arising from Sub-Clause 4.5 of the GC/PC, or Sub-Clause 15.1 of the GC/PC. In practice, it is hardly conceivable that the Contractor could demonstrate compliance with this contractual obligation to the Employer or the Engineer by reference to a subcontract concluded orally; nor – unsurprisingly – can any form of affidavit or declaration of honour by the Contractor regarding the creation of obligations on the part of the Subcontractor under Sub-Clause 4.5 or Sub-Clause 15.1 of the GC/PC be accepted.

Conclusion

From the brief overview of the above facts, it follows that under the GC/PC the Contractor is obliged to conclude virtually all subcontracting agreements in written form, except in cases where the Particular Conditions permit the conclusion of an oral contract. The Employer has the right to inspect the Contractor’s contractual documentation where it demonstrates a legal interest vis-à-vis the Contractor. However, it cannot be accepted without qualification that the Employer enjoys an unrestricted right to inspect all of the Contractor’s contractual documentation within the framework of the executed project. This, however, shall be addressed on another occasion.

Georgi Margaritov
construction lawyer and consultant