INSIGHT

When performance is personal – the hazards of subcontracting without consent

By Leighton O'Brien, Luisa Uriarte, Emily I'Ons
Infrastructure Manufacturing & Construction Property & Development

In brief 4 min read

A recent NSW Court of Appeal decision emphasises the importance of contractors complying with contractual requirements to obtain the principal's approval before subcontracting services or works. Failure to do so may disentitle the contractor from claiming payment for services that the unauthorised subcontractors have provided. However, the case leaves open whether it may be possible for a contractor to recover the cost of unauthorised subcontracted services in restitution based on a quantum meruit claim, or on the basis of an unenforceable penalty.

Key takeaways

  • For principalsAdvanced National Services Pty Ltd v Daintree Contractors Pty Ltd [2019] NSWCA 270 provides comfort that courts will honour contractual provisions making personal performance by the contractor fundamental to the agreement. The case also identifies drafting that principals can use in their contracts to support an intended requirement for personal performance.
  • For contractors who rely on subcontracting arrangements – contract administrators should review head contracts, to ensure compliance with any contractual preconditions to subcontracting. Non-compliance may result in the contractor being unable to claim payment under the head contract for the subcontracted services, and may entitle the principal to terminate the contract.
  • Contractors might also consider negotiating out broad standard prohibitions on subcontracting, especially where subcontracting is anticipated at the outset (as is commonly the case).

What happened?

The facts

Advanced National Services Pty Ltd entered into a contract with Daintree Contractors Pty Ltd, to provide commercial cleaning services for Daintree's landlord clients.

Clause 4.5 of the contract expressly prohibited Advanced from subcontracting any aspect of these obligations without Daintree's prior written consent. That prohibition is fairly standard. However, the clause also stipulated any breach of the provision would constitute 'a fundamental breach of the Contract', such that Daintree could 'terminate the Contract immediately without notice' without any 'obligation to compensate the Contractor from that date'. That aspect is not standard and does give a helpful gloss to the proper interpretation of the clause in this case.

Daintree terminated the agreement after becoming aware of Advanced's use of unauthorised subcontractors to fulfil its obligations. Advanced brought proceedings against Daintree to recover the amount of unpaid invoices, claiming a liquidated contract debt of $368 876.90 or the same amount in damages for contractual breach.

The primary decision

At trial, both parties agreed that unauthorised subcontractors had undertaken 90% of the work Advanced had performed.

The primary judge rejected Advanced's contention that Daintree had acquiesced to its use of subcontractors, noting that clause 4.5 required written, rather than informal, consent to use subcontractors.

Consequently, the primary judge held Advanced had breached an express clause of the contract prohibiting unauthorised subcontracting, and found it was only entitled to $47,660 – the amount corresponding to those cleaning services Advanced had performed itself, plus interest.

The appeal

Advanced appealed to the NSW Court of Appeal, concerning two aspects of contractual construction:

  • whether Advanced had earned the amount stipulated in the contract before termination; and
  • if so, whether any accumulated entitlement to that amount would continue unaffected after Daintree validly terminated the contract, or whether such an entitlement was excluded.

Advanced submitted that the contract was merely intended to produce a result: specifically, the provision of a cleaning service at a number of sites. By contrast, Daintree argued the agreement could not be performed vicariously, and that personal performance was required for Advanced to 'earn' the fee for the performance of the cleaning services.

It was common ground in this case that the cleaning services did not require any particular skill.

However, Justice Gleeson (with Justices White and Barrett agreeing) drew attention to the express requirements for personal completion that clause 4.5 stipulated, as well as other provisions that placed significance on the particular manner and conditions of performance. In particular, they noted:

  • These latter provisions had been carefully put in place to ensure workers would receive public liability and workers compensation insurance, while also meeting the cleaning requirements for several of the sites. As such, they represented important protection for Daintree.
  • The use of the verb 'perform' to describe the performance obligation, rather than a more general expression such as 'provide' or 'supply' cleaning services, indicated that the performance obligation was personal. This focus provides cold comfort to contract drafters whose thesaurus might suggest these expressions are interchangeable.

Advanced also argued that Daintree's construction of the contract gave rise to an uncommercial result and that Daintree obtained a windfall. The court observed that a reasonable person in the position of the parties could envisage commercial reasons for why Advanced would not earn the contract price if it used unauthorised subcontractors. This included Daintree's potential exposure to claims from its clients as to underpayment of award wages to persons who unauthorised subcontractors had engaged and the consequential reputational damage.

The court did note that there may be other grounds upon which the 'windfall' complaint could have been argued, such as a claim in restitution based on a quantum meruit or an 'unenforceable penalty' argument. However, as such arguments had not been raised at trial, it was unnecessary for the court to address them.

Ultimately, the court agreed with Daintree's construction of the contract in dismissing the appeal, finding:

  • the cleaning services under the contract could not be performed vicariously; and
  • Advanced had not earned the contract price for the cleaning services that unauthorised subcontractors had provided.