Do You Use Subcontractors? Do You Know What Happens When You Shouldn’t? Answer: You Might Not Get Paid

By 21 February 2020Litigation

Some contracts contain a term that specifically requires personal performance of the work under the contract by a party to that contract. What happens if, despite this term, the person or company supposed to carry out the work instead engages subcontractors to do it?

This question was recently considered by the New South Wales Court of Appeal in the case of Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd [2019] NSWCA 270 (5 November 2019).

In that case, under its contract, Advanced agreed to perform commercial cleaning services for Daintree’s clients, and the contract expressly prohibited the use of subcontractors by Advanced unless approved by Daintree in writing. Despite this, Advanced used subcontractors without obtaining Daintree’s consent for approximately 90% of the cleaning services carried out.

When Daintree discovered that unauthorised subcontractors had been engaged, Daintree terminated its contract with Advanced. Advanced then sued Daintree for $368,876, being the amount it claimed was owed for the cleaning work carried out.

The important question before the Court was whether the $368,876 had been “earned” by Advanced at the time the contract was terminated by Daintree.

The Court decided that Advanced did not earn the bulk of the $368,876 because Advanced had not performed the cleaning services itself. The specific obligation on Advanced to “perform the cleaning services” itself was crucial in the Court determining that Advanced was personally obliged to carry out the contract.

The Court also decided that a breach of the term of the contract by Advance prohibiting the use of subcontractors without the written approval of Daintree was a fundamental breach of the contract, entitling Daintree to terminate the contract as it did.

The Court found that Advanced had not earned the $368,876 claimed, and was only entitled to no more than $47,660, being an amount that reflected the cleaning services Advanced had performed itself.

As Advanced would have had an obligation to pay its subcontractors to carry out the cleaning services leaving them out of pocket this may seem unfair to Advanced, but the Court determined that the contract was framed in terms that made it clear that Advanced was to perform the cleaning services personally, or only use subcontractors if Daintree agreed. Neither occurred, save for the work valued at $47,660.

Given the decision of the Court in this case, it is important that a contract requiring personal performance is judiciously drafted. A contractor should review the contract carefully before engaging subcontractors to ensure it is permitted, failure to do so may result in significant financial loss.

If you would like more information or advice about this issue, please contact the team at Murdoch Lawyers on 1300 068 736.

This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.